White paper - Ontario Securities Commission

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OS SC RegHa ackTO O

Insights from f Ca anada’’s first regulatory hac ckathon n

March 6, 20 017

Introd duction n Over the weekend w of November 25 2 to 27, 20 016, the On tario Securiities Commiission (OSC)) hosted “Re egHackTO” – the first hackathon h by a Canadia an securitiess regulator. RegHackTO was part of our overa all strategy to better en ngage with tthe fintech community through ou ur OSC Laun nchPad initia ative. Estab blished in Occtober 2016 6, OSC Laun nchPad is a pilot proje ect that focuses on mod dernizing reg gulation to ssupport fintech innovattion, while ensuring investor protection. For more inform mation, visit www.oscla aunchpad.ca a. RegHackTO brought together t mo ore than 120 0 members of the fintecch community who competed to find solu utions to reg gulatory problems in fou ur areas: Re egTech, Kno ow-YourClient (KYC C)/identity authenticatiion, financia al literacy, a and transparency in the e capital markets. This paperr provides an overview of RegHack kTO and key y themes ide entified by tthe OSC from the event.

Why a hackatho on? Technological innovattion is impac cting the fin nancial serviices industry y every day y and our approach to t regulation must evolve accordin ngly. Bringing to ogether stra ategists, sub bject matterr experts, d evelopers a and UX desig gners in an intense 40 0-hour comp petition gave e us a window into the potential fintech can h have in addressing g complexity y in the regulatory ecos system. We e wanted to hear firstha and from innovators s working on n unique solutions to re eal regulatory problemss about their ideas on how techn nology can be b used to solve those problems. p W We sought n new perspec ctives on how w fintech cou uld shape th he financial services sec ctor and ourr work, and what we ne eed to consider in n regulation as markets s change.

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OSC RegHackTO

Aboutt RegHackTO Watch the e video!

Why did d we do this? To engage e with the fin ntech comm munity and gain g a bette er understan nding of how w technologiical innovatiions can hellp the OSC – and the financial serv vices sector – moderniz ze.

When? Novemberr 25-27, 201 16.

Where? ? Toronto, Bitmaker B offfices.

Who? More than 120 individ duals from the fintech community, c including high school s students, coders, em mployees of major finan ncial service es firms, enttrepreneurs and lawyerrs. See Appen ndix A for a list of the te eams. Special gu uests include ed The Hono ourable Cha arles Sousa, Ontario Min nister of Fin nance, and Yvan Bake er, Parliamentary Assisttant to the Ontario O Miniister of Fina ance and Min nister Responsible for Digita al Governme ent. Over 40 OSC O staff too ok part to fa acilitate the event and e ensure partiicipants had d assistance e where nee eded, including OSC Chair Maureen n Jensen, Ex xecutive Dirrector Leslie Byberg and d members of the Execu utive Manag gement Team. Through h this intera action, OSC staff learne ed about the code develo opment proc cess, which allowed us to better un nderstand h how solution ns are create ed and how technology t can help solve regulato ory problems.

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OSC RegHackTO

What? Participantts chose one e of four pro oblem state ements dealiing with reg gulation-rela ated issues, such as Re egTech, KYC C/identity au uthentication, financial literacy, an nd transpare ency in the capital ma arkets. See Appendix A B for a list of the problem m statements. The weeke end culmina ated in the teams t pitching their sol utions to a panel of jud dges including: 

OSC Chair Mau ureen Jense en



Chrris De Bruin n, President,, Digital Plattform, Zafin n Technology y



Ada am Felesky,, President and a Managin ng Partner, Portag3 Ventures GP Inc.



Doug Steiner, CEO, EVREE E Corp.



Eth han Wilding,, Co-founder, Ledger La abs

Judging was based on n how well each e solution met three e criteria: 

cre eativity of th he idea



how w the app makes m regula atory system ms more us er-friendly a and approac chable



how w well the app a works

The solutio ons ranged from techno ologies that would stan ndardize datta in the cap pital marketts to applicattions that alllowed easie er investmen nt product ccomparabilitty, to surveillance application ns that cond duct analytic cs and identtify trends in n the industtry. Participantts did not re eceive any remuneratio r on. The firstt-place winn ner was awa arded a seatt on the OSC’s inaugura al Fintech Advisory A Com mmittee, esttablished in n January 20 017.

The win nners First plac ce: Existence Labs, forr “KeyStamp p”, which usses blockcha ain technolo ogy to verify y compliance with securities requirrements, inc cluding KYC and suitability, using c cryptographic signatures s and timesttamps to show “proof of o compliancce”. This solution would d allow financial services firm ms and regulators to mo onitor the acctivities of a advisers and d verify compliance with legal, regulatory y and firm re equirementss in real tim me.

Second place: p RicL Loo, for “TLS SRegistry”, a blockchain n-based solution that v verifies identities using u existin ng secure websites w and d permits ce ertain action ns, such as g granting

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OSC RegHackTO

permission ns and providing proof of employm ment. This w would centralize proof-o of-identity fo or clients, em mployees an nd advisers, and could be b accessed d by all finan ncial service es firms.

Third pla ace: Extrem me Securities 2k16, for “Rubix Solu ution”, a porrtal that validates initial coin offerings (ICOs), which are similar s to in nitial public o offerings of traditional securities. This solution provides s standardized data for comparing investmentt products in n key areas such as re eturns and fe ees. It woulld also allow w for real-tim me oversigh ht by regulattors, including early e detection of produ ucts that are e not approv ved or that raise investtor protectio on concerns. An honourrable mentio on was given to a team m of recent h high school g graduates, w who built an n algorithmic solution to o verify the registration n of investm ment adviserrs using data from LinkedIn profiles p and the OSC’s Check C Regis stration data abase. Another team de eveloped a web-based d application n that rates financial ad dvisers, sim ilar to Yelp for restaura ants and TripAdviso or for travel..

For more inform mation Visit the RegHackTO R site s at www.osc.gov.on n.ca/en/regh hackto.htm.

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OSC RegHackTO

Themes Several th hemes emerged from th he event, wh hich we beli eve are imp portant for a all regulatorrs to conside er.

1. Tech hnology is rapidly y changin ng how ffinancial services s are deliivered The majorrity of the so olutions presented by participants, p , including the three winning ideas, featured the use of distributed le edger techno ology (DLT) in some forrm. The hacka athon made it clear thatt this techno ology is pow werful – DLT T has the po otential to increase efficiencies e and a transparrencies in our capital m markets, with hin and bey yond the securities sector. Teams used it in a variety of applicatio ons, such ass smart con ntracts that protect inv vestors from m fraudulentt activities, client identiity authenticcation, ledgers that prove secu urities owne ership, and increased i re egulatory m onitoring th hrough enha anced oversight capabilities.. Other tech hnology solu utions includ ded standard dized data m models for investment reporting, allowing in nvestors to have a cons solidated vie ew of their a accounts at different investment firms. These tech hnologies co ould also ass sist regulato ors in their w work, for instance by replacing manual prrocesses currrently used for collectin ng and anallyzing data, and be able e to monitor activities in our capita al markets more m effectively.

2. Open n access to data is essential for a advancing fintech h solution ns Data that can be open nly accessed d, used and shared seccurely can be enefit consu umers and regulators s. Open data a has the po otential to siimplify a clie ent’s onboarding experrience by making co ore informattion about th he client ava ailable to va arious partie es and elimiinating duplicative e forms and processes. The potential for open n data in strreamlining manual m proccesses was d demonstrated by a number off solutions that eliminatted duplicattion in KYC iinformation collection a and verification n processes s, and reflected the desire of investtors to be in n control of their own identities and a data.

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OSC RegHackTO

Open data a may also be b helpful to o regulators. Regulatorrs could potentially acce ess this data on a real-ttime basis, making veriification pro ocedures fasster and eassier and imp proving auditing and oversigh ht capabilitie es. When it co omes to securities regulation, KYC and suitabi lity are fund damental ob bligations. This was a key theme e for many teams t at RegHackTO. F For example e, “Taking C Charge of your Finan ncial Identity y” by FinHackers is a blockchain-b ased mobile e application n that provides users u with a unique univ versal financial identity y for KYC infformation co ollected by financial in nstitutions. Team Schulich’s “Bloc cKYC” writes s KYC inform mation onto the blockch hain, elimina ating the need for in nvestors to fill out KYC forms every y time they work with a new deale er. Firm ID’s “SuitYourse “ lf” allows investors to store, s mainttain and own their own suitability profiles in the blockch hain. This information can c be accesssed by mulltiple parties s, including regulators s and marke et participants.

3. Regu ulators must m be open o to new n way ys of doin ng business RegHackTO reconfirm med that the OSC must continue to be a responsive regula ator through h active eng gagement with the finte ech commun nity. The cre eation of 22 thoughtful solutions to o complex problems p over the cours se of one we eekend high hlighted the vast potenttial of utilizing da ata and tech hnology to solve s regulatory problem ms. Our capita al markets must m remain n competitive, relevant and efficien nt for our co ountry to thrive. As a securities s regulator, we must be e prepared tto consider n novel fintec ch ideas and d business models m in a nimble and flexible manner. While e we must e ensure esse ential investo or protections are in plac ce, we need d to reconsid der our rule framework k in the lightt of rapid business change. c Many of th he DLT and open data solutions s pre esented by the teams a are relevantt not only to o the securitties sector, but also to the broaderr financial se ervices indu ustry, includ ding banking g, payments and insuran nce. Govern nments and regulators n need to worrk together to respond appropriattely to new business mo odels that challenge c tra aditional wa ays of delive ering produc cts and servic ces, and cross jurisdictio onal lines.

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OSC RegHackTO

Next steps s We are de elighted with h the results s of RegHackTO and the e challengess and solutio ons delivere ed by the parrticipants, and look forw ward to working with so ome of the ssolutions prresented at RegHackTO that can assist a us in our work. We W continue e to supportt emerging ffintech businesses s and digital innovation n through ou ur OSC Laun nchPad initia ative, which h has already received 25 2 requests for support. 1. We e recognize that t DLT has the potential for a wide range off useful applications, witthin the secu urities secto or and the broader b finan ncial service es sector. Te echnologies s using artificial intelligence e (AI), includ ding machin ne learning a and data an nalytics, are e also o on our rad dar. We exp pect to contiinue to see businesses use AI in va arious pro ocesses, inclluding clientt onboarding g and inves tment decission-making g. 2. We e will conside er ways to leverage the ese technolo ogies in ourr regulatory work, for exa ample, by re eplacing ma anual proces sses currenttly used for collecting and analyzin ng datta and acces ssing real-time data in overseeing market activities. Thes se tec chnologies could also as ssist us in making m evide ence-based recommend dations on whether certain regulatory y actions, such as invesstigative or enforcemen nt actions, are e required. 3. We e will supporrt the facilita ation of access to data where it faiirly increase es com mpetition an nd provides tangible benefits to On ntario investtors, such as streamline ed acc cess to a bro oader base of products or services . We will do o so as long as privacy and d security co oncerns are addressed.. 4. A key k theme that emerged over the weekend w wa as the need for centralized KYC info ormation co ollection and d verification n processes.. We are hig ghly interestted in solutions that facilitiate th he accurate collection o of key inform mation regarrding inv vestor’s iden ntities and financial circumstances. We encourrage particip pants and th he finttech commu unity to build a test pilo ot and come e talk to us a about poten ntial solution ns to this t problem m. 5. We e will continu ue to engage and collab borate with other dome estic and intternational reg gulators to monitor m and support fintech develo opment. We are a mem mber of the CSA A regulatory y sandbox in nitiative rec cently launch hed by the C Canadian Se ecurities

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OSC RegHackTO

Adm ministrators s (CSA) to support businesses seek king to offerr innovative e products, serrvices and applications. The OSC has also sign ned co-opera ation agreem ments with Aus stralia and the t U.K. tha at enable bu usinesses liccensed in Ca anada to hav ve access to o the e innovation hub progra ams and see ek regulatorry approvalss in Australia and the U U.K. Overall, we are open to taking a more innov vative and flexible appro oach to regu ulation to support th he evolution of the business while maintaining m investor prrotection.

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OSC RegHackTO

Ackno owledgements We would like to exprress our app preciation to o Chami Akm meemana, tthe OSC’s Fiintech Advis sor, and Bitmaker for hostting the eve ent, as well as a INFURA, Nuco and M MLG Blockch hain Consulting g (Open Ban nk Project an nd Sia), which provided d API resourrces to the participants s throughou ut the weeke end. We would also like to thank our special s gues sts: The Hon nourable Ch harles Sousa a, Ontario Minister off Finance; Yvan Y Baker, Parliamenta ary Assistan nt to the Ontario Ministe er of Financ ce and Ministter Responsible for Digital Governm ment; Randy y Cass, Foun nder and CE EO, Nest Wealth; Alex Kurm, Head H of Nimbus BPM and Advisor, P Process Cen ntre of Excelllence, BMO O Financial Group; G Guy Pearce, Managing Partner, REData a Performan nce Consulting; Cory Russell, Ad dmissions Producer, Bittmaker; Verronica Scottti, Presidentt and CEO, S Swiss Re Canada; Jin Tu, Co-fo ounder and CEO, C Nuco; Peggy Van De Plassche, Vice Pres sident (Innovatio on Engagem ment), CIBC; Russell Verrbeeten, De ecentralized Operations Specialist, ConsenSys s; and Michael Wuehlerr, Blockchain Strategy a and Businesss Developm ment, ConsenSys s. Above all, we thank the participants who gav ve up their weekend an nd rose to th he challenge e of helping us focus on n a more effficient securrities regulattory ecosystem.

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OSC RegHackTO

Appen ndix A – Team ms Amani Amini Blockfuturres BlockIPO Canada Bitcoin Blockc chain Crowdvise e Existence Labs Extreme Securities S 2k k16 Finhackers s Firm ID KYC Form Munich RE E, ConsenSy ys Next Gen Pendio RicLoo Solomid System Crrashers Team CIBC C Team Schulich Warp Zafin1 Zafin2

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OSC Re egHackTO

Appen ndix B – Prob blem Sttateme ents Participantts chose one e of four pro oblem state ements dealiing with reg gulation-rela ated issues, such as Re egTech (use e of technolo ogy in the re egulation off the financial industry)), KYC/identity authentication, finan ncial literacy y, and transsparency in the capital markets.

1. RegT Tech Automated d reporting - Can we au utomate the e method off recording a and reportin ng information required by b regulators s? Some examples includ de: Online methods m of reporting diistributions of prospecttus-exempt securities that would allow the au utomatic filing of formss. Digital solutions that allow inside ers to file ins sider reportss on the System for Ele ectronic Disclosure e by Insiders s (SEDI) mo ore easily an nd quickly. Insider tra ading detecttion - Can we w make the e filing of tra ading inform mation by insiders timelier, easier e and more m accuratte? How do we e leverage technology t to: t 

Ana alyze the va ast volume of o data against other pu ublic inform mation and re egulatory filin ngs (e.g. SE EDI).

Identify pa atterns of be ehaviour that may sugg gest insiderr trading or misconduct.

2. KYC//identity authenttication Digital Ide entity - How can we imp plement Dig gital IDs for individual p participants in the capittal markets – officers, directors, insiiders, accred dited investtors – to allo ow for: 

Use e of biometrrics for easie er identification of indiv viduals.



Autthentication of their inv vestor status s (e.g. accre edited invesstor, eligible e investor) ffor purrposes of prrospectus ex xemptions.



Flagging inconsistencies in n investors’ KYC inform mation (e.g. against pub blicly or oth herwise avaiilable inform mation).

Digital doc cuments - How H can we automate and a reduce tthe replication of docum ments for investors and a multiple e firms in th he financial services s ind dustry, in a w way that:

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OSC Re egHackTO



Pro otects privac cy of information.



Req quires conse ent to share e information.

3. Finan ncial Lite eracy Adviser ratings – Prop pose a digita al solution that t would a allow investo ors to rate ttheir adviser in a way that is transp parent and allows users s to: 

Che eck their ad dviser’s profe essional des signations.



Che eck whetherr they are re egistered an nd the typess of securities they can sell.



Ratte their adviser, increas sing transpa arency to otther potentia al investors.

Investor education e - Propose P a user-friendly tool that co ould educate individuals in financia al products and a help peo ople: 

Und derstand the fundamen ntals and be enefits of so und financia al managem ment.



Buiild investme ent savings.



Und derstand the different types t of acc counts to he elp them sav ve (e.g. TFS SA, RSP, RESP, etc c.).

4. Transparency y Distributio on pricing an nd fees - Wh hat sort of technology t ssolutions miight improve fee transparen ncy and com mparability across a the in nvestment iindustry to better empo ower retail investors in i their inve estment dec cisions? Access to information - Can technology prov vide solution ns that make e it easier fo or investors s to find rele evant inform mation, such h as: 

Rec ceive notific cations throu ugh mobile apps regard ding investm ments they a are con nsidering or own in theiir investmen nt portfolio.

Provide a search engine for inves stors to acce ess most reccent prospe ectuses and filings.

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OSC Re egHackTO

If you u have que estions or r comments about tthis reporrt, please contact: OSC La aunchPad osclaun [email protected] c.gov.on.ca (416) 596-4266 5 orr 1-844-405 5-1339

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White paper - Ontario Securities Commission

OS SC RegHa ackTO O Insights from f Ca anada’’s first regulatory hac ckathon n March 6, 20 017 Introd duction n Over the weekend w of November 25 ...

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