This presentation was shared by Cab Morris of the Illinois Department of Financial & Professional Regulation on the June 5th at the Banking Digital Currencies seminar.

1. Digital Currency: A Regulatory Perspective
Banking Digital Currency Seminar
Cab Morris | 5 June 2017
Illinois Department of Financial
and Professional Regulation
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2. Overview of IDFPR
Fintech, Financial Services and Blockchain in Illinois
IDFPR’s Financial Innovation Initiative
Digital Currency: Regulatory Perspective & Approach
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IV
Agenda

3. IDFPR’s Reach at a Glance
Mortgage & Residential Lending
1,231 13,900
Loan Originators
Consumer Lending & Money Services
1,140794
Money Services Firms
Mortgage Firms
Consumer Lenders
State-Chartered Depositories
395 $275 B
Total Assets
State-Chartered Credit Unions
$36.2 B210
Total Assets
IL Chartered
IL Chartered

4. Chicago: An Emerging Fintech Hub
#5
Global Fintech Hub
Financial Services Epicenter
Chicago acts as the epicenter of all FinTech
activity in the Midwest, representing well
over 20,000 financial institutions .
Deep Workforce
Chicago is home to over two fifths of the
top business universities in the US and has
a deep financial engineering talent pipeline.
Strong Talent Pool
Over 6% of the Chicago workforce are
focused on the financial ecosystem
contributing to its talent pool.
20K
2/5
- Deloitte
“CHICAGO’S STARTUP SCENE IS ON FIRE.” – FORBES
6%
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5. Illinois Blockchain Initiative
Illinois Department of Commerce
and Economic Opportunity
Illinois Department of
Innovation and Technology
Illinois Department of Financial
and Professional Regulation
Illinois Pollution
Control Board
Illinois Department
of Insurance
Cook County
Recorder of Deeds

6. IDFPR’s Financial Innovation Initiative

7. Financial Innovation Principles
Early Engagement
Financial regulators should participate directly in
proofs of concept to advance regulatory
understanding of technological innovation and
determine how new innovations may help regulators
do their jobs more efficiently and effectively.
Risk-based Analysis
Financial regulators should work closely
with innovators to determine how rules and
regulations could be adapted to enable 21st
century technologies and business models
focusing on tangible systemic or consumer
protections risks vs. potential for risk.
Collaborate Globally
Financial regulators should provide a dedicated
resources to analyze best practices across the
various state, federal and foreign regulatory
bodies and regimes across domestic and
international jurisdictions. Global collaboration
only strengthens markets.
Experimentation
Financial regulators should foster an environment that
spurs innovation similar to the UK Financial Conduct
Authority’s (FCA) sandbox, where collaboration with
regulators where innovators have appropriate room to
develop and test innovative solutions without fear of
enforcement action and regulatory fines.

8. Our Approach
Engagement & Assistance Education & Training Modernizing Regulation
Improving staff’s awareness and
understanding of emerging products/trends,
ensuring access to training resources,
programming via a variety of delivery
channels. Look to those innovating in the field
as the primary resource for these education
and awareness training efforts.
Outreach and engagement will be a key
component in efforts to encourage and
support innovation. It will be essential to
foster consistent communication between
regulators, fintechs, and established FS
institutions to ensure innovative products
are quickly brought to market in a
consultative manner.
In order to achieve policy goals, it will be
essential to understand modern regulatory
approaches/tools and how they can be
implemented. As regulators this ensures we
design guidance that is practical to
implement, but also allows us to have agility
much like the innovators in the space.

9. Initiative Plan of Action
Office Hours Program RegHub Portal Technology Advisory Board
Staffing a Financial Technology
Advisory Committee advising
IDFPR on technology
developments in the financial
services space as well as the
unique licensing and regulatory
compliance challenges both
depository and non-depository
innovators face.
Implementing RegTech
Developing “RegHub”, a
dedicated portal on our website
that provides early-stage
innovators plain-language
resources needed to effectively
navigate compliance and
regulatory obligations in Illinois
as well for the broader state
regulatory system.
Regularly scheduled office
hours at local fintech and
innovation incubators to
provide informal assistance to
fintech companies looking to
enter the market and licensed
businesses looking to bring a
new product to market.
Explore ways “RegTech” can
reduce the burden of
compliance while also allow
improving the Department’s
capacity to identify and
mitigate market and consumer
risks. Expand our participation
in blockchain and distributed
ledger technology consortiums.

10. Illinois’ Regulatory Approach
What is the best way to balance consumer
choice, competitive markets and innovation?

11. Digital Currency: Policy Framework
What are the use cases, who are the users
and what is the market penetration?
As state financial services regulators, we touch a wide
variety of lending, depository and payments products, but
not all. Unlike the UK, we have to know what products are
directly relevant to us vs. our federal counterparts.
What falls under our jurisdiction (does any)?
A crucial and often overlooked step in making an informed
policy decision regarding an emerging is understanding
what the technology is, how it works and how it is used.
As digital currencies grow in popularity, how do we balance
a low-touch framework with the regulatory clarity required
for businesses operating in this space?
What are the risks? What are the benefits?

12. Overview
When it comes to digital currency regulatory questions, as a state, there are two primary areas of
consideration: financial surveillance consideration for banks and credit unions involved in the space and
digital currency considerations for consumer protection (money transmission regulation).
Does consumer protection regulation add value to Illinois-based digital
currency users or is it still premature? How do we balance open innovation
while clearly articulating the risks and benefits. How do digital currencies
fit into our current money transmission framework?
Although this primarily a function of federal regulators, as a state, we can
engage the banking and digital currency side to promote a culture of best
practices.
Articulating our Goals:
Consumer Protection: (Money Transmission Regulation)
Financial Surveillance (AML/KYC): (Depository Regulation)

13. Digital Currency Use Cases
Speculative Digital
Asset/Investment
Medium of Exchange Payment Rail
Non-monetary
Use cases
Analyzing the Use Case:
Although Bitcoin was initially conceived by Satoshi Nakamoto as “a purely peer-to-peer version of electronic
cash (that) would allow online payments to be sent directly from one party to another without going through a
financial institution.”
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Even in its early days, it has actually proven to be a much more dynamic asset than its intended initial use as
an electronic cash system:

14. Market Penetration (Bitcoin):
Estimated User Base: (Global)
2.8 to 5.9 million2
Primary Uses:
~ 54% of users use it
as an investment2
Market Capitalization
$43 billion USD
Daily Transactional Volume
~$320k on-chain*
transactions
1. Hileman, Dr Garrick, and Michel Rauchs. "2017 Global Cryptocurrency Benchmarking Study." (2017).
2. Burniske, C., and A. White. "Bitcoin: ringing the bell for a new asset class." (2016).

15. Our Regulatory Framework
Given our analysis, we settled on a light-touch approach
A relatively small user base
Digital currencies are still only used by a relatively
small and highly informed consumer base. As they
become more available and accessible to mainstream
retail consumers, the area will need to be continuously
assessed/monitored. At this point in time, state
regulatory intervention adds more risk than value.
Continuous collaboration
Although it is still early for digital currencies and
Blockchain, we believe they represent a truly
innovative way to transfer value digitally. We are
committed to ensuring that Illinois is a place
where businesses operating in this space can
thrive and feel comfortable innovating.
A self-correcting market
Digital currencies even early in their inception
have not been immune to consumer protection
concerns (i.e. Mt. Gox). In response to many of
these high-profile events, crypto-markets have
responded by building very strong consumer
protection tools (i.e. multi-sig, n-lock etc.).
Definitive guidance
Although digital currencies still have a relatively
small user-base, a say nothing approach creates
uncertainty for innovators operating in Illinois.
IDFPR’s digital currency guidance attempts to
address this uncertainty by clearly delineating
activities that constitute “money transmission”.
1. Nakamoto, Satoshi. "Bitcoin: A peer-to-peer electronic cash system." (2008)

16. Financial Surveillance
Industry Concerns
A recent study on the cryptocurrency industry by the
Cambridge Center for Alternative Finance indicated
sustainable banking relationships were one of the most
consistent pain points for all industry participants,
including exchanges and payment service providers:
“The biggest challenge for nearly all cryptocurrency payment
service providers constitutes the difficulty of obtaining and
maintaining relationships with banking institutions and money
transfer operators (MTOs). Only companies that provide money
transfer services (as defined by the taxonomy introduced
before) indicate that the high cost of regulatory compliance
poses the biggest challenge to their operations.” 1
1. Hileman, Dr Garrick, and Michel Rauchs. "2017 Global Cryptocurrency Benchmarking Study." (2017).

17. Banking Digital Currency Businesses
Our Capacity to Catalyze Change:
As state financial services regulators we do not have explicit
capability to implement policies or rules that will mitigate
issues plaguing MSB and digital currency businesses. Systemic
“de-risking” is often cultural and does not benefit the broader
financial services ecosystem. Given the wide variety of
financial services entities we regulate, however, we do have
the capacity to engage both our state-chartered banks, credit
unions, MSBs and digital currency companies to work
together to ensure commercial relationships are mutually
beneficial for both parties.
• Knowledge-sharing and development of standards/best practices
• Increase dialogue between depositories, customers & regulators
• Provide guidance and feedback when and where feasible

18. Contact Information
Bryan Schneider, Secretary
Department of Financial and Professional Regulation
bryan.schneider@Illinois.gov
Cab Morris, Deputy Director of Strategy and Operations
Department of Financial and Professional Regulation
richard.morris@Illinois.gov
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Jennifer O’Rourke, Illinois Blockchain Business Liaison
Department of Commerce & Economic Opportunity
Jennifer.orourke@Illinois.gov