An Insight Into 3 Biggest Digital Asset Supportive Jurisdictions

| November 17, 2023

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An Insight Into 3 Biggest Digital Asset Supportive Jurisdictions

The digital asset industry has emerged as a dynamic and rapidly evolving sector, fueled by the rise of cryptocurrencies, tokens and digital securities.  These digital assets offer new opportunities for decentralized transactions, enhanced security and improved efficiency.  At the core of this industry lies Distributed Ledger Technology (DLT), with various foundation companies playing a pivotal role in driving innovation and shaping the future of digital assets.  In this article, we will explore the digital asset industry and delve into the relevance of DLT foundation companies in its development.

Digital Asset Industry

The digital asset industry encompasses a wide array of assets that exist in digital form.  It includes cryptocurrencies such as Bitcoin, Ethereum and Litecoin as well as utility tokens, security tokens, non-fungible tokens (NFTs) and other digital representations of value.  These assets facilitate peer-to-peer transactions, enable ownership transfer and support the development of Decentralized Applications (DApps) on blockchain platforms. The digital asset industry has gained significant traction due to several factors.  Firstly, it provides avenues for financial inclusion by offering access to financial services for the unbanked and underbanked population. Cryptocurrencies enable secure and real-time transactions, providing an alternative to traditional banking systems. Secondly, digital assets offer programmability and automation through the use of smart contracts, which are self-executing agreements that automatically enforce predefined conditions when specific criteria are met.  By eliminating intermediaries and reducing costs, smart contracts enhance efficiency in various industries such as supply chain management, real estate and decentralized finance (DeFi).

Role of DLT Foundation Companies

DLT foundation companies are entities that develop, maintain and innovate upon Distributed Ledger Technology.  They play a crucial role in shaping the digital asset industry in several ways:

  • Development of Blockchain Platforms: DLT foundation companies are responsible for developing blockchain platforms that serve as the foundation for digital asset ecosystems.  These platforms provide the infrastructure for creating, trading and managing digital assets.  They offer features like consensus mechanisms, smart contract functionality and interoperability enabling the seamless integration of various applications.
  • Technology Innovation: DLT foundation companies drive technology innovation within the digital asset industry.  They continuously research and develop new protocols, consensus algorithms and scalability solutions to overcome the limitations of existing blockchain networks.  These advancements aim to improve transaction speeds, reduce fees, enhance scalability and address security concerns, thereby fostering the growth and adoption of digital assets.
  • Standardization and Governance: DLT foundation companies contribute to the establishment of industry standards and governance frameworks.  They collaborate with regulatory bodies, industry consortiums and other stakeholders to define best practices, compliance guidelines and security measures for digital assets.  Standardization efforts help build trust, ensure interoperability and promote wider adoption among businesses and institutions.
  • Developer Support and Ecosystem Growth: DLT foundation companies provide resources, tools, and support for developers and entrepreneurs to build applications and services within their ecosystems.  They offer software development kits (SDKs), documentation, educational initiatives and funding opportunities to nurture a vibrant developer community.  By fostering ecosystem growth, these companies encourage innovation and attract new participants to the digital asset industry.
  • Tokenization and Asset Digitization: DLT foundation companies drive the tokenization and digitization of real-world assets.  By leveraging blockchain technology, they enable the representation of physical assets such as real estate, art and commodities as digital tokens.  This process enhances liquidity, enables fractional ownership and facilitates seamless transferability of assets.  It opens up new investment opportunities and expands the scope of digital assets beyond cryptocurrencies.

ADGM’s Legislative framework for DLT Foundations

The Abu Dhabi Global Market (ADGM), an International Financial Centre, known for its progressive approach to fostering financial innovation, had published a consultation paper on Distributed Ledger Technology (DLT) Foundations framework seeking feedback from the industry participants.  The proposed framework in the consultation paper aims to transform the legal structures for Decentralized Autonomous Organisations (DAOs) and act as a catalyst for the growth of the digital asset industry in the UAE. The new framework considers founders, council members, guardians, beneficiaries and persons in ‘control’ and additionally the token holders holding more than 25% voting rights for beneficial ownership.  It also proposes to allow voting rights for token holders on qualified and delegated matters.  The framework requires non-exempt DLT foundations to appoint a company service provider, licensed by ADGM, to promote a culture of effective corporate governance among DLT foundations and improves transparency in functioning of the companies and decision making.  The new regime also proposes to appoint a guardian after the founder steps down from the foundation council, who will oversee the milestones of the foundation council.  This promotes a complete decentralization in the management of the company as the guardian has the oversight of the council. The new regime proposes that the definition of tokens would be aligned with the standards of FSRA.  It also proposes that a description of the intended use of token should be specified in the DLT foundation’s charter and also if buyback is required for such tokens.  These result in enhancing the governance around token issuance within the organization. The regime also requires the DLT foundation companies to be audited annually and the financial statements to be published, which further aligns with the ADGM companies regulations, thereby bringing a uniformity across to improve disclosures and transparency. Ensuring investor protection and maintaining market integrity are paramount in ADGM’s regulatory approach.  ADGM seeks to strike a balance between innovation and the need for appropriate safeguards to mitigate potential financial crime risks and market manipulation, by establishing clear rules and requirements. The proposed regulations aim to overcome the limitations of traditional foundation structures, ensuring transparency and accountability, and boosting investor confidence in the industry.  These controlled environments allow market participants to test and implement their DLT solutions within a supportive and supervised regulatory framework.  By providing a safe space for testing and learning, ADGM aims to foster the development of cutting-edge blockchain applications while ensuring appropriate oversight and risk management.

SFC’s Requirements for Virtual Asset Trading Platforms

The Securities and Futures Commission (SFC), the independent statutory body to regulate the capital market in Hong Kong, issued a consultation paper inviting public comments on proposed regulatory requirements applicable to licensed virtual asset trading platform (VATP) operators.  These frameworks aimed at comprehensively addressing the needs of the players in the arena and the risk mitigation measures required to effectively manage risks. The proposed guidance aims to provide services to retail investors provided that the virtual asset trading platform operators ensure to comply with the onboarding requirements religiously for retail clients as well.  SFC also aims to bring in criteria for token admission where the relevant tokens would be allowed on to the platform for trading by clients subject to necessary due diligence.  The admission may be subject to the review of the appropriate committee internally within the organization resulting in enhanced governance. The tokens admitted for trading should comply with all the rules and regulations laid down. A major step in protecting the interests and assets of the consumers is that SFC requires the operators to hold 98% of the clients’ virtual assets in cold wallets where the security risks are minimal compared to that of hot wallets.  Since the security risks are minimal, the coverage threshold to insure the client assets is proposed to come down to 50% provided that 98% of the assets are mandatorily held in cold wallets.  This helps companies to utilize the funds for various business operations. From a virtual asset custody perspective, there is currently no regulatory regime in Hong Kong to oversee or govern this space.  Understanding the importance of safe custody, SFC insists on having the custodians to be a wholly owned subsidiary of the operator.  This forms the basis of requiring all the keys to be securely stored in Hong Kong.  This will also ease the oversight obligations and also help in enforcement as and when required. SFC understands that the implementation of the travel rule to be a major cornerstone of bolstering the virtual asset industry’s compliance regime within Hong Kong.  SFC insists on collecting mandatory information relating to the originator and beneficiary of the virtual asset transfers in order to subject them for sanctions screening and also to ensure the information is carried upon throughout the payment chain in line with the FATF recommendation.  This provides the parties to the transactions with real-world identities who can be associated with the transactions. Inspite of all the initiatives from SFC, there are always room for improvements in this rapidly evolving space.  The ongoing and upcoming regulatory changes will aim to make Hong Kong a desired destination for virtual asset services.

MAS’s proposed amendments to Payment Service Regulations

The Monetary Authority of Singapore (MAS) recently released a consultation paper outlining proposed amendments to the Payment Services Act (PS Act) and its associated regulations. The consultation paper aims to enhance the regulatory framework for payment service providers, address emerging risks, and foster innovation in Singapore’s payment ecosystem.  The Payment Services Act, enacted in 2019, provides a comprehensive framework for regulating payment services in Singapore.  It aims to promote innovation, ensure consumer protection, and safeguard the integrity and stability of the payment system.  As the payment landscape evolves, the MAS recognizes the need to refine and update the regulatory framework to address emerging risks and support the growth of new payment solutions. Payment Services Amendment Act aims to  expand the scope of: (a) “cross-border money transfer service” to include the service of “brokering” cross-border money transfer transactions between entities in two different countries (“Expanded Cross-Border Money Transfer Service”); and (b) “digital payment token service” (“DPT Service”) to include numerous other activities (“Expanded DPT Services”) – this is intended to align with the enhanced standards adopted by the Financial Action Task Force Standards (“FATF Standards”) applicable to digital payment token service providers (“DPT Service Providers”) on money-laundering and terrorism financing (“ML/TF”) risks. The Payment Services Amendment Act will come into force on a gazetted date appointed by the Minister of Finance. The Consultation Paper sets out additional proposals by the MAS to operationalise the Revised Payment Services Act.  The proposed amendments shall bring in applicability of the travel rule, AML/CFT requirements to the new payment methods like the DPT and create a robust compliant environment. The Payment Services Amendment Act is also a friendly approach towards the payment services sector and provides ease of business due to flexibility provided for the timeframes associated with the transmission of money thereby improving business relations Cautionary measures have been taken by MAS wherein all the license applications have to be backed by additional requirements, third party assessments, thereby making the application review process faster and easier. The introduction of these additional regulatory requirements, along with a relaxation / flexibility towards business models which pose less regulatory risks, demonstrates the risk-based approach by the MAS towards regulating the payment services industry.  While the MAS remains committed to mitigating the evolving risks arising under the payment services space, it is also cognizant of the fact that its regulatory approach should still be commercially sensible in developing Singapore as a financial technology hub.

More on Crypto

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Buckle up as we’re about to take a trip down memory lane. 

The year 2023 was a wild ride that showed signs of a plummeting market, groundbreaking innovation and regulatory hurdles. 

Contrastingly, in the same year, we saw no market-shattering crashes. Financial institutions extending an olive branch, key jurisdictions unlocking the doors to blockchain technology. 

Simultaneously, at Liminal, we experienced significant breakthroughs, re-engineering our positioning and becoming a pioneer in digital asset security with bank-grade custody. 

We took major strides this year, right from building comprehensive products to becoming a qualified custodian, from revamping our brand design to expanding our offices in newer locations, from partnering with hyper-local communities to onboarding a diverse set of clients,  we did it all. 

So, let us take you through everything we accomplished in 2023 and what the future holds.  

Liminal Became A Qualified Custodian

One of the prominent moves we made this year was to change our positioning as a regulated custodian from being a wallet infrastructure platform. 

We got two licenses in key jurisdictions to operate as a regulated custodian. 

The first one came from Hong Kong, where we acquired the TCSP license issued by the SFC, which oversees and regulates financial activities to ensure compliance with legal and regulatory obligations. 

Our next license came in the MENA region, where we got In-Principle Approval for the FSP license granted by the FSRA, a governing body in ADGM, to establish a progressive financial services environment. 

Both these licenses paved the way for Liminal to push its wallet infrastructure and offer bank-grade custody to institutions looking to operate in these particular regions. 

Liminal Introduced A Suite of Products & Features

Continuing our building spree, we launched new products and integrations to broaden the existing infrastructure and added more parameters of security, scalability and sustainability. 

Staking-as-a-Service

Liminal launched staking for institutions to eliminate the risks involved in running staking nodes and the vulnerabilities in hot wallet transfer. 

Hence, we introduced an industry-first mechanism of cold wallet staking to ease staking for institutions and secure assets explicitly.  

Whitelabel Solution

Accelerating the go-to-market time for organisations looking to build a secure and customisable application, Liminal launched its whitelabel solutions

Targeted to help organisations meet security standards, manage assets with maximum control, and add their custom branding to give it a personal touch. Our whitelabel solution is a first-in-class custodian-developed solution for institutional grade custody.

Smart Consolidation

We are building not just secure custody but also automation-based features to eliminate manual errors, increase the throughput of transactions and scale institutional wallets. 

Taking this ahead, we launched the Smart Consolidation feature to automatically calculate all the active addresses and consolidate them into a single address. With this level of automation, managing multiple addresses becomes uber easy for wallet teams. 

Travel Rule 

To limit the use of cryptocurrencies for activities like money laundering and terror financing by regulatory bodies, travel rule was mandated for institutions to follow. 

Continuing the latest compliance integration policy, Liminal partnered with Notabene to introduce Travel Rule, enabling institutions to manage counter-party risk and extend the process of due diligence right from the Vaults dashboard.   

Liminal Accured List Of Security Certifications

Following our ISO certification for data privacy and risk management, we added two new security certifications to fortify our systems and build trust for our clients. 

Liminal Achieves Crypto’s Highest Security Mark: CCSS Level-3 Certified

Cryptocurrency security lacked a gold standard, creating a vulnerable ecosystem. Enter the CryptoCurrency Security Standard (CCSS), setting the bar for auditing and certifying custodian infrastructure and establishing levels of trust and confidence for investors. 

Liminal became only the second wallet infra platform and the first regulated custodian to be accredited with Level-3 certification, deeming wallets, transfer environments, workflows and engines safe and secure. 

Liminal Reciueved SOC 2 Type II Certification

To tackle threats in institutional-grade security, organisations’ SOC has been identified as the primitive compliance standard for service organisations to handle customer data.

Liminal successfully attained SOC 2 Type II certification, validating its setup of security controls & compliance processes to be industry standard. 

Liminal Level Up

Liminal unveiled its most significant platform upgrade ever, revolutionising the future design standard of a qualified custodian. This level-up activity included revamping our website and product UI, giving a completely new look and feel to not “Liminal” but “Liminal Custody”. 

The Liminal level-up activity was a strategic step and the biggest one for us this year to create an intuitive, inviting and tailored experience for our clients. 

Liminal Reached New Borders

We spread out our operations this year, reaching new borders and onboarding a new wave of institutions across gaming, DeFi, HNI wealth, treasuries, and exchanges! From Indonesia and Africa to India, UAE, and Korea, we are setting up custody operations worldwide. 

This isn’t just a roster of clients; it’s a network ready to spark connections, collaborations, and shared success to further the definition of secure assets. 

Liminal Collaborated With Law Enforcement Agencies

The best and the proudest moment of Liminal for this year was when we collaborated with CBI & Himachal Prashesh police department to aid them in seizing digital assets. 

This partnership put us on the map, as we became the first point of contact for LEAs in India, and we standardised the process of secure seizure of digital assets. Leveraging our expertise, we enabled a safe space for officers to learn the basics of custody, contributing to a safer digital landscape.

Team Liminal Grew Bigger

Building such a massive infrastructure, prioritising security and compliance over everything else, we had to grow the team to build at pace and expand at an even higher level. Not only did we grow in team numbers, but we also elongated our footprint to new destinations. 

Team Liminal went from 32 to 70 with 5 new offices in Mumbai, Ahmedabad, Hong Kong, Singapore and ADGM, setting up our custody operations steadfastly. 

What’s To Look Out For In 2024

We are excited to announce that our commitment to integrating the most secure digital asset wallets with a cutting-edge custody platform is swiftly becoming a reality. 

The upcoming year, 2024, will serve as a testament to this transformative journey. Moving beyond self-custody, we are constructing a comprehensive infrastructure encompassing both custodial and non-custodial wallets. Exciting products are set to launch starting from the first week of January, some of which are: 

  • Official Custody Platform Launch
  • Liminal’s Off-Exchange Settlement Hub
  • Secure Custody of Real-World ‘Tokenised’ Asset

The Web3 space has evolved explicitly this year, pushing the narrative of secure digital asset custody and security, introducing new regulations and compliance standards, licensing VASP providers and standardising the use of custodians as a trusted third party. 

At Liminal, we took major strides this year, from building comprehensive products to becoming a regulated custodian, from revamping our brand design to building the full infrastructure of custodial and non-custodial wallets.

January 5, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture