Legal & Regulatory Layer
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Focus: Adherence to legal requirements and standards.
Objective: Ensure compliance with relevant laws and regulations.
Description: This layer governs the legal aspects of blockchain use and interoperability, including compliance with local and international laws, regulatory requirements, and oversight.
Layer owner: National regulatory bodies, International organizations (e.g., Financial Action Task Force (FATF) for anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations)
Some considerations:
EU DLT Pilot Regime (DLTR) :
Abu Dhabi Global Market (ADGM) DLT Foundations Regime
Legal Entity Identifiers (LEIs)
A ‘Designated Depository’ role is important to satisfy regulatory obligations. Liability and recourse must be clearly addressed for cross-chain transfers. Issuer control & rights
Public blockchains as an underlying settlement layer, how can this be supported in a secure and compliant manner.
Regulatory clarity remains the market’s largest need.
Ownership of an asset must be legally unambiguous at all times in order to ensure events such as interest payments can be correctly processed, making solutions dependent on technical ‘escrow’ functionality or terminology inappropriate
Onboarding of Users: This would be conducted only by Institutions that are regulated entities. All users of the scheme will be KYC’d.
Data Privacy: Records and operations would be conducted in the partition operated by an Institution are intended to be private to that institution. Only the parties involved in a transaction would have transaction visibility.
FATF Recommendations: Payments would include necessary information of the parties involved in the payments chain through the messaging layer that carries the information associated with each settlement.
Sanctions: Participating institutions would sanctions check all transactions according to the applicable lists through the messaging layer.
Anti-Money Laundering: participating institutions would conduct AML monitoring through the messaging layer.
Fraud: All customer instructions would be authenticated using Strong Customer Authentication (SCA) to reduce the likelihood of fraud.
Transaction Limits: These would be maintained by each participating institution and may be enforced through smart contracts.
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Related to tokenization:
Providers take full responsibility for tokenized products, ensure effective record-keeping, and demonstrate operational soundness.
Public-permissionless blockchains cannot be used without proper controls.
Disclosure on whether settlements happen on-chain or off-chain.
Providers must prove ownership of tokens at all times.
Have at least one competent staff member with relevant experience to operate/supervise tokenization arrangements and manage associated risks.
Meet all applicable product authorization requirements for the underlying investment product being tokenized.
Implement additional safeguards to address risks associated with tokenization.
Clearly disclose terms and details of tokenization arrangement to investors.
Comply with all existing regulatory requirements applicable to the underlying product.
Ensure intermediaries meet licensing requirements and are competent in tokenized products.
Conduct proper due diligence on agents distributing tokenized products.
Provide regular training to staff on tokenized products and arrangements.
