Lithuania Could Win the Best ICO Regulatory Framework War

Lithuania Could Win the Best ICO Regulatory Framework War

Bitcoin is still very far off from its all-time high and a lot of this was mainly due to the reason that regulators tightened the screw to weed out the scammers from the market - to protect the consumers.

Blockchain, cryptos and regulators is perhaps the most intriguing triangle and we know that regulators have taken a lot of gas out of the crypto rally. Many in this space have accused regulators or central banks for not understanding this. If someone is being very polite, the comment would be central banks are not educated in this space. If they were educated enough, then they could streamline the process for ICOs allowing disruption to really take off. That is the argument out there.

However, the reality is slightly different. Central banks (most of them) are not sitting on their hands or have their head buried in the sand when there is real hush-hush among countries to come up with the best framework for ICOs.

Much of the discussion in the specialist cryptocurrency media has tended to deride central banks and regulators for a slow and confused response to the challenges and opportunities cryptos open up, but Lithuania and the other Baltic republics are strong examples that the opposite can be true, and their practices are easy for other nations to adopt.

Countries like Gibraltar, Malta, Lithuania, Estonia and Switzerland are in a competition with each other to create the most efficient and safest framework for firms to launch ICOs. Before visiting Lithuania, I didn’t think that this jurisdiction has real chance to win this war. Of course, the entire purpose to facilitate these companies is to bring the disruption in the space and make a gold standard for others. Marius Jurgilas, member of the board of the Bank of Lithuania, was kind enough to brief me on the country’s inventive solutions to issues arising in the fintech space, in particular, around reducing barriers to entry.

Lithuania is in an interesting position internationally: it’s population is less than three million, but membership of the EU gives its financial services sector access to a market of 510 million people – a huge opportunity.

One approach from the central bank has been to create what Marius calls a ‘regulatory sandbox’. This is where, I think, the crypto-community needs to be educated because banks are not only taking the initiatives and testing them but also providing a platform for firms to come and test their system. This is a collaborative, rather than confrontational, approach where regulators and innovators work together from a project’s inception in Lithuania.

This activist approach helps deepen understanding on both sides of what in other contexts can be a needlessly antagonistic relationship: experiments can be made, and whether or not they are successful or failed both institutions have deepened their knowledge. It’s also faster: one fintech operation in Lithuania took two years to pass compliance on a new onboarding channel for mobile banking, but with the sandbox structure it could have taken only six months.

This initiative, known as LBChain, is part of a broader effort to create an ecosystem friendly to innovation. One interesting facet is the central bank’s approach to security. The best way of controlling risk is to understand risk , so the central bank actually stimulates attack scenarios, with staff acting as hackers, testing companies consumer protection protocols.

This platform becomes of central importance when it comes to blockchain projects: the public blockchain is irreversible, and hackers have been known to target vulnerable non-blockchain parts of the chain like exchanges, so large amounts have been lost in security breaches. The Bank of Lithuania’s aggressive posture puts the lie to the notion that global authorities have been caught napping by the sudden rise of these kind of crimes.
I believe that the best approach is to get your hands dirty, test it, understand how it works, identify the risks, and then build the tools to minimise that risk. If the regulator is part of this process from day one, the timeline is streamlined.

Existing cryptocurrencies are also being actively explored by the Lithuanians. Ripple, in particular, seems to offer a solution to the challenge of expanding horizons beyond the Eurozone . In a global world, businesses will inevitably need to settle in currencies selected for reasons other than their convenience to the Lithuanian fintech sector, and Ripple’s flexibility seems to offer an off-the-peg solution.

What’s more, it’s a solution the central bank is actively facilitating, rather than resisting or simply ignoring because it’s an effort to grasp the fundamentals. This is a model, governments and regulators around the world would do well to emulate.

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