Impact Finance Regulatory Sandbox

Research and write a blueprint for creating a regulatory sandbox to experiment with innovative DeFi in social and environmental finance.

Commercial and Intellectual Property Law; DAOs & Blockchain regulation; Financial markets software engineering, Govtech, Impact Investing market technology; Economist, public offical, markets and public finance; Data and analytic strategy for social investment and taxation.

[IMPACT]

Our aim is to establish a regulatory experiment for Blockchain-based social and environmental financing, a.k.a a Regulatory Sandbox for Impact Investing. Regulatory experiments[1] that help to define, refine, and learn about practices and processes, anchored in Cardano solutions, that can demonstrate functional and regulatory equivalence to existing financial market regulation.

The first step to achieving that goal is to develop, in consultation with regulators, a blueprint for regulatory experiments (in New Zealand) with blockchain-based social and environmental investing as the motivating purpose. In conjunction with New Zealand Government agencies and State-Owned Enterprises, we will research and write a blueprint for creating a regulatory sandbox. The final result will be a published report and associated web and video marketing collateral used to promote the blueprint in New Zealand and abroad. Helping to build an ecosystem of public officials interested in championing legislation in New Zealand and beyond.

To help contextualise the blueprint, three case studies will be researched and developed:

1. Payments for ecosystem services will explore the use of market mechanisms for financing biodiversty threat surveillance, management actions, and biodiversity outcomes[2].

2. Using fractional ownership of digital cultural assets (as NFT) to represent extra-legal property rights in a way that protects and funds creative sector products; Representing indigenous property rights that fall outside existing intellectual property rights regimes[3][4].

3. Demonstrate the potential for network organisational models— DAO-2-DAO integration— to enable pluralism[5] in appropriations and funding of value-based care pathways.

The blueprint will, through research, consultation, and workshop sessions explore current and proposed approaches to Blockchain regulation with a focus on the APEC region (with a primary focus on New Zealand, Australia and Singapore).

NOTE: For readability references are provided in the attached PDF.

Specialists in regulation, lawyers, and politicians: The research and writing team are professionals in law, legal scholarship, public finance, policy, blockchains, and software engineering. 

Appropriate and effective regulation is essential to open and free societies that adhere to rule-of-law. Like the Internet and the Web before, Blockchain technology challenges the effectiveness and applicability of legal regulations. Compared to prior technologies, by design Blockchain networks have one distinctive feature, they facilitate transactions across jurisdictions[6]. Cryptocurrencies, Fungible and Non-Fungible Tokens, DeFi, and DAOs all challenge the existing legal order in different ways, thus are considered alegal[4] - pushing and pulling at the boundaries of legal systems. However, it is difficult for legal regimes to adapt to alegal technologies. Through our unique mix of experience (senior government/legal/technical) and via consultation across our professional networks, the research team aims to provide a pathway for regulators to navigate the alegality of blockchain in a way that supports perminissionless innovation.

A positive environment for adoption: We face significant social and envirnomental challenges now and into the future. If we want to live on spaceship earth[7], the change has to occur from the centre and at the edge. Our moon-shot is to figure out how to enable more effective local change by bringing impact investment to Cardano. Using tokens and market mechanisms, Blockchains can enable new operational forms of common and public good financing[8]. Using new digital capital allocation approaches to finance networked organisations (DAOs) and develop digital Public-Private Partnerships[9] that drive social and environmental change. Despite the potential for financial and regulatory transparency offered by Cardano, financial market regulations can make financing social and environmental impact programmes too cumbersome to pursue efficiently.

Collaboration key to creating favourable regulatory environment(s): One approach to solve the tension is to create experimental regulation[10], carve out exemptions, or both; Time-boxed legal regimes for regulatory experiments based on legal effectiveness, evidence-based lawmaking, temporary legislation, and regulatory innovation. Such sandboxes are often explored in the compliance heavy financial sector[11], although they are applicable in many other domains too.

Proof-of-Stake (PoS) and Cardano: Blockchain technology and Domain-Specific Languages (DSLs)[6] have affordances that can significantly lower the burden of regulatory oversight, disclosures, and reporting[12]. High-assurance 3rd Generation Blockchain Networks such as Cardano also provide a much stronger guarantee of information integrity, which is necessary for regulators. Cardano's commitment to Patent-free, Open-Source Software, Proof-of-Stake green consensus mechanisms[13], and concrete moves towards decentralised community governance, also provide arguments for sustainable long-term operation needed for digital public infrastructure. These are all a reasonable basis to experiment with regulations in public and common good financial innovation.

Adoption of Cardano in jurisdictions: The blueprint’s focus is on New Zealand regulation, an APEC Commonweath country with a common law jurisdiction. As a founding member of the Digital Nations[14], New Zealand Government initiatives are often exemplars for other Governments to follow [15]. It is a small country that considently ranks 1st for ease of doing business, high transparency, and low corruption. The legal-order is progressively blending western and indigenous (Māori) jurisprudence which highlights a willingness for legal innovation. 

The medium-term goal is simple: get New Zealand market regulator and tax authority to acquiescent to regulatory experiments for impact investment. With longer-term potential for the New Zealand Government to export its trusted jurisdiction, through Blockchain technology, to other countries[8][16].

Regulator/Agency Interest: It is difficult to determine New Zealand regulators' appetite for legal and fintech innovation. In general, they have been responsive to working with and helping technology innovation; however, the hype and stigma of crypto-currencies and NFTs may make them more conservative than usual. Economic issues resulting from COVID and world events will overshadow other priorities agencies may have also. We will address any potential engagement issues early in the project life-cycle by immediately contacting the respective agencies upon confirmation of funding. The team has professional experience and influence in the domain under consideration, increasing the likelihood of engagement. The research, consultation, and writing can proceed with minimal involvement from regulators; however, the mid-term objective and impact will be less.

Scheduling and Team Commitments: The team will be working part-time on this project, juggling other commitments. Contribution and time will vary, making scheduling challenging to arrange. Virtual workshop sessions will mitigate some of the schedule coordination issues. We plan to also consult with different stakeholders outside of the group. Arranging these sessions even virtually will need some schedule flexibility. Inevitability, due to unforeseen circumstances, there maybe be delays. Hence delivery timeframes will be flexible. Upon confirmation of funding, we will plan out the schedule of activities in a more detailed manner to give us a better sense of the blueprint's expected delivery date.

Breadth of subject domain: We've allowed six months to complete the necessary setup, research, consultations, workshops, and writing. However, blockchains as regulatory technology [8] are in the irruption phase[17] of deployment, and the subject traverses many domains of expertise. That will make it hard to research, distil and integrate material that is suitable for framing a regulatory sandbox. The timeframe and budget may both be short. We've addressed these factors with the team's mix of experience, which is antidisciplinary, and team members have worked together previously on similar projects [2].

[FEASIBILITY]

Over six months, the team will progress with six interwoven projects: research, legal review, consultation, writing, publication, and promotion. The research, review, and consultation will occur over three months. Distillation and synthesis of the research/analysis and consultation will start halfway through the projected time frame— starting with writing workshops. The creation of media assets such as motion graphics, video, and website for presentation, publication and promotional purposes can start a little later, finalising the blueprint's visual design and website in the latter part of the project. Finally, we will run a webinar to present the result to regulators and interest parties. 

We expect to start the project in July 2022. In May and June, pre-planning, setup, and scheduling will occur. As part of the consultation and promotional strategy we will arrange several Legal Hacker [18] brown-bag sessions to discuss topics with a wider community (Note: The Legal Hackers outreach work is not part of the proposal’s budget).

After One Month:

Project setup, initial consultation conducted with NZ FMA (market regulator) and NZ IRD (tax authority), literature and regulation survey done. Research and review workshops started. Legal Hackers (NZ) webinar brown-bag sessions scheduled and promoted. 

After Three Months:

Research and review workshops continue. Synthesis or research and writing has started. Three consultation sessions with NZ Government Agencies have been conducted. Interim drafts have been published in Github. We have run two Legal Hackers (NZ) webinar brown-bag sessions. 

After Six Months:

Blueprint written and published. Supporting website and video produced. Research and Blueprint findings presented to regulators and interested parties. We have run two more Legal Hackers (NZ) webinar brown-bag sessions. And “Impact Finance & Regulatory Sandbox” webinar has been presented and distributed to the Legal Hackers global community.

The initial literature and legal review of related New Zealand regulation including FATCA and KYC/AML/CTF requirements. Understand the implications and integration with emerging Consumer Data Right[19][20], and Digital Identity Trust Framework legislation[21][22]. Review Australia’s Senate Select Committee on Financial Technology and Regulatory Technology report (Bragg Report) on Digital Assets, DAOs, and De-Banking[23] and related material. Survey technical and engineering implications of Law-as-Code/Rules-as-Code [6][24][15][25][26] and the limitations of blockchain technology to achieve compliance and disclosure outcomes. Using these findings, we will surface patterns and establish the boundaries and parameters for future regulatory experiments.

The requested budget is for time and expenses over six months. The funds for this proposal contribute to the setup and schedule of the project, conducting research and team writing/review workshops, consultation with regulators and other interested parties, writing, reviewing, editing, and publishing the blueprint document. 

• Research/Writing: $62,000 (62.4%)
• Consultation with regulators: $15,000 (15%)
• Proof-Reading and Content Editor: $1,500 (1.5%)
• Graphics Design and page layout: $2,500 (2.5%)
• Website Development: $2,500 (2.5%)
• Video Production: $3,250 (3.3%)
• Travel Expenses: $1,200 (1.2%)
• Software Services/Stock Images: $2,500 (2.5%)
• Project Management: $9,000 (9.1%)

The research and writing budget is based on a pro-rata hourly rate, spread across five team members working one full day a week on the project over three months and calculated using an FTE hourly rate of ~USD$150, which is on the low side for the domains and experience in the team. Should it be needed, we will seek to top-up the budget with other funding sources.

The team has backgrounds in blockchains, dispute resolution, intellectual property law, commercial law, innovation, health, public finance, financial and energy markets, software engineering, and marketing. 

Alex Sims: Associate Professor in the Department of Commercial Law, Auckland University [27], and an Associate at the UCL Centre for Blockchain Technologies (CBT), executive council member of Blockchain NZ [28]. PhD on Decentralised Autonomous Organisations (DAOs): Governance, Dispute Resolution and Regulation[29]. Primary research areas are blockchain technology, DAOs, NFTs, the regulation of cryptocurrencies, consumer protection, and legal issues surrounding smart contracts. 

Graham Scott: Economist, former Secretary to the Treasury Government of NZ, Chairman of NZ Electricity Market Company (EMCO), health funding authorities, and NZ Productivity Commissioner. Public Sector Consultant on government reform, economic policy, and market regulation [30].

Rochelle Furneaux: New Zealand Commercial Intellectual Property and Information Technology lawyer with 25 years experience. Supported social enterprise technology startups through mentoring and as a legal adviser. Past council member of Internet NZ. Co-organiser of Legal Hackers (NZ Chapter).

Robert O'Brien: Distributed Systems Software Engineer (Financial Systems) and Entrepreneur. Co-Founded three start-ups in Financial Data Analytics, International Trade Payments, and Impact Investing. Plutus and Atala Prism Pioneer. Co-organiser of the Catalyst Eastern Town Hall, a Cardano Catalyst Community initiative. Co-organiser of Legal Hackers (NZ Chapter).

James Mansell: Founder of Social Investment New Zealand, New Zealand Data Commons[2], experienced board member and/or advisor of New Zealand government agencies for education, housing, biosecurity, Inland Revenue, and primary research centres.

Paul Beattie (Project Management/Marketing): CEO of a remote-first company providing Cloud-based Enterprise Resource Planning (ERP) solutions to New Zealand and Australian medium-sized organisations. Experienced accounting software product manager and marketer.

To complete this proposal, the research team will draw upon the experience and knowledge of many others across our networks in the NZ public sector, academic, market infrastructure, health science, law, and indigenous communities.

[AUDITABILITY]

We will be using Orbit.Love to track all the team activities and the broader engagement. The primary metric will be Orbit Gravity [31] which measures contributions, outreach and engagement, and activity from different participants. A monthly Plan-on-a-Page (PoaP) Gantt chart will track progress, and a log of completed and planned activity drawn from the team’s task management tool will be part of any reporting. Intermediary results, such as a literature review, will be published to complement the regular reporting. The blueprint will be written in Asciidoc and snapshots of the drafts, along with the published report will be maintained in a public Github repository. 

The Blueprint is published and marketed, resulting is distribution within New Zealand agencies, regulators, and funding bodies. The blueprint is cited by several other government publications in the Digital Nations [14] group and inspires reuse in other jurisdictions. 

Our medium-term objectives: New Zealand market regulator and tax authority support regulatory experiments for impact investment and go on to support work in blockchain-based digital regulation technology.

Licensing

The Blueprint will be published under a Creative Commons Attribution-NoDerivatives 4.0 International (CC BY-ND 4.0) licence.

The proposal is new and the team has been assembled specifically for this work. The published result complements the F7 Retroactive Funding Experiments[32] and work on Creative Assets (NFT+DeFi) for the New Zealand cultural and creative sector (both Cardano projects). The latter is with the assistance of the New Zealand Ministry of Culture and Heritage Te Urangi Innovating Aotearoa Fund [33]. 

SDG Rating

SDG goals:

Goal 8. Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

SDG subgoals:

8.3 Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services

8.4 Improve progressively, through 2030, global resource efficiency in consumption and production and endeavour to decouple economic growth from environmental degradation, in accordance with the 10‑Year Framework of Programmes on Sustainable Consumption and Production, with developed countries taking the lead