National Standard of Canada Standards Proposal - CIO Strategy ...
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National Standard of Canada
Standards Proposal
Proposed Standard Title:
Design and operation of Digital Assets and Non-Fungible-Tokens.
Proposed Scope:
The proposed standard aims to specify minimum requirements for the design and operation of Digital
Assets and Non-fungible Tokens (NFTs) as stores of value, media of exchange of value, investment
vehicles or performing other functions.
The proposed standard is intended to provide a consolidated overview of the taxonomies,
commonalities, differences, and characteristics of different types of digital assets and tokens -
particularly NFTs - to meet crypto/blockchain industry best practices as well as achieve a level of
consistency with the fiat-based financial sector.
Considerations:
- The regulatory frameworks around these digital assets are either absent or ambiguous and
often based on traditional finance rather than a thorough understanding of the underlying
technology. This creates significant risks for the producers, curators, and consumers of these
assets.
- The proposed standard aims to address this disconnect while incorporating existing
compliance requirements such as anti money laundering (AML) and “know your customer”
(KYC). It will act as a key reference document for all stakeholders including digital asset
creators, marketplaces, collectors, investors, regulators and legislators in clearly distinguishing
between different types of assets (e.g., securities vs non-securities), understanding their
minimal viable requirements and defining the parameters needed to govern them.
Strategic Need:
Identify the strategic need of key stakeholders and confirmation expressing the need.
This includes consideration for:
a. The strategic need of key stakeholder (e.g. legislator, industry, government, consumers);
b. The type of standard (international, regional, domestic standards and harmonization need);
c. Addressing up-to-date vs outdated standard to ensure latest innovative/technology/safety features
available for businesses;
d. If the standard is intended to support national/regional/international certification programs;
e. If there is stakeholder intention to transition to different standard;
f. The type of maintenance (periodic, continuous, stabilized, best before date); and
g. The use of “CAN” descriptor.Asset, value and ownership are constructs that are fundamental to any economic framework yet often taken for granted. The exponential growth of digital assets and tokenization mean this can no longer be the case. The paradigm shift that started with the advent of blockchain technology in 2009 is now in full force now and showing no signs of relenting. Unfortunately, the regulatory and legislative circles have adopted a reactive approach. They were caught off-guard during the cryptocurrency bull market of the 2017-18 and fell short of providing timely advice to investors and the public in general. It was only after initial coin offerings (ICOs) became the norm that the Canadian Securities Administrators (CSA), its US counterpart, the Securities and Exchange Commission (SEC), and other national bodies hastened to come up with guidelines on crypto securities. The question of distinguishing between security and utility tokens still elicits conflicting responses from financial experts. The SEC vs Ripple (XRP) lawsuit is a case in point. The situation is even more uncertain when it comes to the so called non-fungible tokens (NFTs). While fungible tokens such as bitcoins are indistinguishable from each other, each NFT represents a unique asset. The origins of this token class trace back to the introduction of coloured bitcoins in 2013-14 and, more famously, to Crypto Kitties’ launch on Ethereum in 2017. The technical specifications have been advanced significantly since by the blockchain and cryptocurrency community, but there has been a hush on regulations and standards development. Even the self-proclaimed digital asset trade organizations like the Chamber of Digital Commerce are yet to produce any NFT guidelines. In addition to disrupting our understanding of what constitutes an asset, NFTs are also redefining the notions of ownership and value. In March 2021, Beeple (Mike Winkelmann) sold an NFT of his artwork "Everydays - The First 5000 Days" for USD 69 million which is the third highest price paid to a living artist. The transaction involved neither the transfer of the physical artwork nor any copyrights. In fact, anyone can freely download the image associated with this NFT. An NFT of a video clip of LeBron James sold for more than USD 200,000 on NBA Top Shot despite not including any IP rights. The Hyperledger Global Forum 2021 features a new class of NFTs called utility NFTs that can implement complex business logic. However, collectors have spent billions on NFTs that can be described as digital equivalents of autographed posters. When recently petitioned to provide clarity on the regulatory status of NFTs, the SEC released a memo on April 12 stating “The issue of when an NFT is a security is unclear… NFTs have tremendous potential to revolutionize industries including, sports, music, and entertainment. However, NFTs do not function as traditional securities and do not fit clearly under the existing regulatory framework.” This poses significant potential risk for digital asset collectors, investors and marketplaces. Wyoming, one of the most progressive jurisdictions for digital assets, defines them as follows: “Digital asset means a representation of economic, proprietary or access rights that is stored in a computer readable format, and includes digital consumer assets, digital securities and virtual currency.” (SF0125 - Digital assets-existing law, Wyoming)
The law goes on to define various kinds of digital assets and is one of the best attempts to-date to
characterize them. However, despite being passed in July 2019, it already feels dated. This can be
attributed to the pace of innovation in the blockchain space as well as not having sufficient
technological input.
Canada is even further behind on legal and regulatory fronts. It is, therefore, imperative that an
adaptive standard is developed for digital assets, particularly NFTs, by involving key stakeholders from
the legal, regulatory, technical and financial communities. The formation of a CIOSC technical
committee provides an ideal vehicle to achieve this goal. With ongoing maintenance, such standards
would provide clarity on the scope of these assets, ownership rights and when they infringe on to
securities regime. The standards developed would form the basis of a national regulatory framework
and potentially ISO certifications for digital assets, NFTs and their marketplaces.
Need for Availability in Both of Canada’s Official Languages: Y/N
Do stakeholders need the standard published in both official languages?
Do users of the standard need the standard published in both official languages?
Do authorities having jurisdiction need the standard published in both official languages?
Are there health and safety related needs for the standard to be published in both official languages?
For adoptions, is there availability of the regional/international standard or other deliverable from the source?
For adoptions, is there an agreement with the source committee to facilitate official translation?
Geographical Representation Considerations:
Identify the Canadian geographical representation appropriate to the subject area covered by the standard.
Geographic representation may consider factors such as:
a. Industry (e.g. petroleum in petroleum producing provinces);
b. Reference in regulation (if a regulation exists in a province); or
c. Commodity characteristics and social impact (e.g. heating oil for northern climates).
All sectors of the economy.
Trade:
Identify how the standard meets the needs of the marketplace and contributes to advancing trade in the broadest possible
geographical and economic contexts.
For example:
a. Facilitate Canadian innovation to lead internationally;
b. Support the objectives of “One standard, one test, accepted everywhere”;
c. Support the objectives of “First to Market”; or
d. Foster international/ regional/ national alignment of requirements.Digital assets have found fertile ground in certain parts of the world. ICOs crypto exchanges and token marketplaces require regularity clarity and acceptance. Utility tokens, security tokens, stable coins, central bank digital currencies, non-fractionalized NFTs and fractionalized NFTs are a few examples of digital assets that cannot be viewed with the same lens. While a comprehensive digital asset standard that provides guidelines for all these different types of assets does not exist anywhere, some jurisdictions have made more progress than others. As mentioned earlier, Wyoming leads the way among US states. In fact, it is becoming the Delaware of crypto businesses. Moreover, Europe, particularly Switzerland, has been more accepting of blockchain based decentralized finance (DeFi) as it is viewed as an evolution of fintech and open banking. As a result, nearly all major digital asset initiatives are based in certain parts of the US and Europe. This has bolstered entrepreneurship and led to substantial investment in these regions. Canadian regulatory framework leaves a lot to be desired when it comes to digital assets. For instance, it does not draw a line between utility and security tokens. Consequently, there is a dearth of digital asset marketplaces and projects in the country. Currently, Canadian inventors and investors look south of the border or elsewhere for prospects in this domain. NFTs provide an opportunity to not only remedy the situation but also put Canada at the forefronts of digital asset innovation. Due to their newness as mainstream assets, there is a lack of NFT standards across the world that makes them risky investments. Despite this uncertainty, NFTs have become a multibillion-dollar industry in Q1 of 2021. By building a robust NFT standard as part of the digital asset landscape, Canada can gain first to market advantage as the destination of choice for NFT projects. The main reason behind Ethereum blockchain’s monopoly over NFT projects is their ERC 721 technical standard. The efforts invested in building ERC 721 have been richly rewarded as new projects default to Ethereum despite high transaction fees. Investing in digital asset standards, especially around NFTs, can do the same for Canadian economy. Relevant existing documents at the international, regional and national level: Ethereum Improvement Proposals - ERC Token Standards https://eips.ethereum.org/erc A Distributed Media Curation Platform on Hyperledger Fabric (initial notes), Hyperledger Media & Entertainment Special Interest Group https://wiki.hyperledger.org/pages/viewpage.action?pageId=41591166 Utility NFTs on Hyperledger Fabric https://sched.co/j3c4 SF0125 - Digital assets-existing law. Wyoming Legislature https://www.wyoleg.gov/Legislation/2019/sf0125
Joint CSA/IIROC Staff Notice 21-329 - Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements https://www.iiroc.ca/Documents/2021/12d84d32-7a4b-4f81-b864-cb65f5ffd93b_en.pdf SEC Memo on NFTs https://www.sec.gov/rules/petitions/2021/petn4-771.pdf International Standard Content Code - A Proposal for a Modern and Open Content-Based Identifier https://iscc.codes/specification/ TRC-721 Protocol Standard https://developers.tron.network/docs/trc-721 TRC-20 Token Standard https://tronprotocol.github.io/documentation-en/contracts/trc20/ Reports by the Chamber of Digital Commerce https://digitalchamber.org/policy/chamber-reports/ CSA Staff Notice 46-307 Cryptocurrency Offerings https://www.osc.ca/sites/default/files/pdfs/irps/csa_20170824_cryptocurrency-offerings.pdf Security Tokens, a paper by SIFMA and PWC https://www.sifma.org/wp-content/uploads/2020/11/Securitytokens-Paper.pdf
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