Crypto’s Upcoming Collision with Data Localization & Global Momentum on Crypto Policy
Twali Wrapped is a community-driven initiative tracking the most important developments of the past week for policy, regulation, compliance, and legalities, related to web3.
In addition, we speak with experts toiling with how best to implement regulation and policy changes, while prioritizing simplicity in communication to ensure our reader’s complete understanding of the implication of such developments.
We’re always looking for more experts in compliance, HR, legal, tokenomics, governance, accounting, tax, etc) If you know someone who would be interested, please send them the application form, and receive a referral fee in return!
TL:DR;
Global Institutional Posturing on Crypto
Crypto’s Upcoming Collision with Data Localization
From Our Netwerk: On DAO Accounting with Kevin Ngo & The Accountant Quits
The Docket
by Lucy Pappas
Welcome to the Docket - A Bulletin Board of the most important legislation either proposed, or passed, in the past week.
FDIC Financial Institution Letter
On April 7th, the Federal Deposit Insurance Corporation (FDIC) sent a financial institution letter (FIL) to update banks on new rules for dealing in crypto. This FIL requires all FDIC-supervised institutions—all national banks and the majority of all banks—that “intend to engage in or are currently engaged in any activities involving or related to crypto assets” to notify the FDIC of such engagements.
The takeaway. Recent months have shown major momentum from governments and regulatory bodies looking to affirm their power by exerting control over crypto. This latest FIL serves as more evidence of the fear of institutional transformation made possible by crypto and blockchain technologies.
Brazil’s Bitcoin Law
In Brazil this week, a proposed House bill on regulating cryptocurrencies was approved and set to a Senate vote that will take place next week. The bill, similar to the one passed in El Salvador, would make Bitcoin legal tender in Brazil. If the legislation passes through the Senate and goes through necessary drafting and revision, we could see Brazil as another national adopter of crypto as early as June.
The takeaway. Governments globally are moving quickly to propose and pass legal frameworks on crypto adoption and regulation. As regulations unfold and the international crypto landscape draws borders, crypto allies and enemies are making themselves known.
Mexico’s CBDC Legislation
Mexico’s Senator Indira Kempis has been outspoken in the past about her support in making Bitcoin legal tender. This week, however, she proposed draft legislation that would amend Mexico’s Monetary Law with provisions for a Central Bank Digital Currency (CBDC). 180° turn? While she has given no explanation for the sudden change in tone, Senator Kempis celebrated the increased financial security, access, and regulation that a CBDC would bring to citizens.
The takeaway. On one hand, CBDCs may be able to popularize crypto-markets and provide greater financial access and equity across populations. On the other hand, CBDCs can be used to maintain centralized power in a global economy pushing further into decentralized and borderless territory. How governments concurrently adopt CBDCs and regulate other currencies is a key indicator of where crypto will flourish.
Crypto’s Upcoming Collision with Data Localization
By Max Moncaster
The press release announcing the U.S. Trade Representative’s (USTR) 2022 National Trade Estimate Report on Foreign Trade Barriers did not signal anything particularly special. The annual publication of the report serves as a perfunctory exercise for USTR and the trade policy community. Each year since 1985, USTR has used the occasion to identify a laundry list of barriers facing the U.S. business community around the world.
The report has relevance for nearly every industry sector one could think of, but for crypto and decentralized finance, one focus area stands out: data localization.
Data localization refers to legal and regulatory requirements that define where the data of a nation’s citizens can be collected, processed, and/or stored. Governments take an active interest in the privacy and security of their population’s digital information. Some nations may be genuinely concerned about protecting the rights of their citizens, while others may engage in more cynical ploys to maintain domestic surveillance capabilities. Either way, the movement of data across borders occupies policymaker attention from Beijing to Brussels to Washington, DC.
For distributed blockchain networks, the implications of restrictive data localization requirements is clear. The premise of network decentralization is that distributed ledger nodes can be located anywhere with sufficient energy and internet access. Regardless of the type of consensus mechanism employed, distributed ledger networks will need to store transaction data. And transaction data is generated by people in specific places. The ability for crypto networks to effectively comply with data localization requirements is challenged by the underlying architecture itself.
The U.S. government is mostly inclined to push for less data localization, not more. Powerful American technology companies want the freedom to move data around with ease, and they have been successful in promoting their policy agenda. Partially as a result, the National Trade Estimate outlines a litany of data localization policies the U.S. is watching closely.
Even close allies are not immune from scrutiny. For example, the report highlights a 2021 law in the Canadian province of Quebec and notes the U.S. will monitor implementation to ensure any restrictions to not impede cross-border data transfers.
Other government take a more skeptical approach to cross-border data flows than the U.S. The European Union (EU) boasts that its General Data Protection Regulation “is the toughest privacy and security law in the world.” Compliance is required if a company processes the personal information of EU citizens, regardless of where the company is located. Meanwhile, China ramped up their domestic data localization requirements late last year.
One saving grace for crypto and decentralized finance could be the anonymity afforded by permissionless networks and protocols. Most data localization requirements pertain to information that can be used to personally identify an individual. If true privacy can be maintained on distributed ledgers, perhaps the networks will not fall under the purview of data localization rules. After all, a user does not necessarily need to disclose their personal information to have and interact with a crypto wallet. Of course, in practice, true on-chain anonymity may be difficult to achieve.
Data localization is just one of the many existing regulatory approaches that was not designed with crypto in mind. The continued expansion of distributed networks is sure to challenge the status quo in the international arena.
From the Community
On The United States Senate Republican Policy Committee’s CRYPTOCURRENCY GOES MAINSTREAM
Eli Kamerow - master move by GOP to care about crypto. R's making crypto an R issue will force dems to oppose it bc the state of politics in the US is such that if a bunch of Republicans say “crypto = good” then the knee jerk reaction of many on the left will be “ahhh crypto = bad” ...and then it'll make it easier for 'moderate' repub candidates to get elected and further the GOP goals… think a ton of voters are single issue voters so Moderate R’s who make it a big issue will attract attention from conservative Dems and independents, that in turn gets more votes and more fundraising.
Twali Accounting Experts Umar and Kevin on the Necessity of DAO Accounting
This week, host and Twali expert Umar (@accountantquits) released an episode with fellow Twali expert Kevin Ngo (@kevinngo_la) who also manages the books for Polywrap’s DAO.
Topics covered were:
The difference between managerial accounting and compliance accounting for a DAO
How web2 accounting differs from DAO accounting
DAO budgeting and spending
Challenges for DAO accounting
Skills for an accountant to bridge from web2 to web3
Tools for DAO accounting Twitter thread
Kevin's word of advice to DAO founders to simplify their accounting today is not to pay contributors in different cryptocurrencies as it just complicates the accounting. And so try to stick with stable coins or the DAOs native token, if possible, it's going to build a more simplified foundation when building out accounting in the future.
Kevin Ngo - Not a lot of DAOs are doing accounting today. Not because it's not important, but because they're just not aware of it and they're not aware of how to do it.
Listen to the full episode below!