How smart regulation can improve the future of blockchain
Given the extreme views on either side, some might argue that we feel that decentralized technology and regulation are mutually exclusive. As this story spreads, a more evolved perspective is that both decentralization and regulation are unavoidable, so the best results will be achieved when regulators and innovators alike work together. But what if this partnership look like?
At Stellar Development Fund, we believe that regulators and innovators (and should) affect one another, which means that both parties should be ready to compromise. Let’s begin with an honest self-reflection: No inherent quality of blockchain or cryptocurrency deserves to be completely untrue, but on the flip side, technology also does not deserve to get prohibited or controlled just because it’s different or new.
Financial Action Task Force
Distributed ledger technology is a paradigm change. Traditional fund is intermediate and vertical, while decentralized fund (DeFi) is peer reviewed and peer reviewed (P2P) finance. The problem we’re facing today is that fiscal regulation is nearly uniformly based on the regulation of intermediaries – no intermediary means no authority. It is this apparent lack of authority which produces regulators nervous about a decentralized future. The Financial Action Task Force (FATF) explicitly acknowledged this concern in its latest draft guideline on virtual resources and the VASP:
“In addition, the full maturity of these protocols that enable P2P transactions could herald a future without financial intermediaries, potentially calling into question the effectiveness of the FATF recommendations.”
However, as we mentioned in the drafting of the FATF guidelines, concerns about loss of market discuss or narrowing of the extent of regulation aren’t a basis for sound policy making.
Connected: FATF draft directive for compliant DeFi
Often the fears that follow a paradigm change result in a regulatory crackdown. Taking no opportunities is a prime example. As regulators enact ever stricter anti-money laundering rules, companies will respond by cutting services to less profitable customers. As a result, business and legal interests are served, but increasing amounts of people, especially the planet’s poor and the businesses that serve them, find themselves locked out of the financial system. The FATF recently acknowledged its role in continuing this dangerous issue. However, individuals who are being pushed out of the controlled financial system are the ones who blockchain technology enables most by reducing their dependence on intermediaries. At Stellar Development Fundwe see this firsthand through our cooperation with partners such as Leaf Global and Tala, who enable the working poor and displaced migrants to flee tragedy or persecution at home by accessing blockchain-based financial solutions.
Despite these benefits, national reactions to blockchain have been blended. Where nations like India, Turkey and Nigeria saw fear, others such as Singapore, Switzerland, Bermuda, Ukraine – and today El Salvador – recognized the chance and developed chances. The new regulatory framework covers the decentralized character of the blockchain. And they’re reaping the benefits. These countries have become global hubs for blockchain technologies.
Innovators and entrepreneurs are attracted to their stable and secure regulatory environment. While demands for regulatory actions against cryptocurrencies are mounting in the United States and the European Union, the countries listed above have gone even farther.
The US and other advanced economies, especially in the West, are quickly approaching a turning point. The conclusion that lies ahead of us is no longer about whether or not to adapt, but how. Fortunately, policymakers do not need to make decisions in a vacuum and would be wise to learn from the two classes of states mentioned above – those that are attempting to prevent crypto and those who adopt it. Without exception, countries that have adapted their regulators to ensure the technology has become more effective than those who have attempted to prohibit it. While it’s not too late for the United States to follow the powerful guide, it has to reaffirm its decision.
The self-hosted wallet rule advocated by the Financial Crimes Enforcement Network (FinCEN) provides a useful case study on this selection. FinCEN’s suggestion was against decentralization and individual empowerment from the start. While self-hosted wallets aren’t explicitly prohibited, many believe that it does in practice. However, the blockchain community has responded effectively, posting a record number of remarks in a really short time. One of the problems that arose from these comments was that because of the inherent transparency of people blockchains, FinCEN had access to most of the data sought in the proposal. FinCEN appears to have listened and will find additional contacts with those who understand the technology best.
While we have to wait and see what happens, FinCEN seems to be taking the industry collaboration approach that’s foreseen – but not necessarily practiced – in the rule-making procedure. Compromises aren’t simple, but they create the best outcomes.
Connected: The governments are attempting to close the gap on non-storage pockets
It is the responsibility of authorities to protect markets, not to make certain that they never change. Politicians should take that decentralization is a brand new, differentiated paradigm that’s worthy of its regulatory strategy. The immunity of the sector has been directed against the thought of regulation and much more against being pressured to an inadequate regulatory framework. Even so, managers and innovators can find a middle ground, but only if the two sides are open-minded.
Likewise, the blockchain community needs to better explain why and how the technology differs, educate policy makers about the real dangers, while highlighting real life examples. In addition, we ought to take regulations up accordingly.
After all, the legitimacy that comes from regulatory takeover of the technology could be the final hurdle on the road to mass adoption.
Seth Hertlein is Head of Political and Government Relations for the Stellar Development Foundation, a nonprofit that supports the growth and expansion of Stellar, an open source system that joins the world’s financial infrastructure. Seth started his career as a securities manager and most recently as Managing Director and Assistant General Counsel for Public Policy and Regulatory Affairs in FS Investments, a major financial substitute. Seth has an MBA in Finance from Wright State University and a JD from Ohio State University.