There is often a perceived tension between regulation and innovation. A pervasive narrative has emerged that these two important parts of our society are at odds with each other. In reality, it’s when these two come together as partners that we can effect change and transform our world for the better.
Nowhere is this more true than in the blockchain industry.
Over the last few months, we’ve seen seemingly reactionary regulators in different parts of the world try to formulate new rules and guidance in silos, without sufficient input from the key stakeholders most knowledgeable about the technology — the innovators themselves.
We saw this in the United States at the end of 2020 when the Financial Crimes Enforcement Network (FinCEN) pushed out a rule proposal that would significantly impact the digital currency landscape. Initially, they only allowed a two-week comment period over the end-of-year holidays. Ultimately, after an outpouring of feedback from stakeholders, FinCEN expanded that period. By all accounts, it is now engaging in a meaningful dialogue with the industry before moving forward with any further rulemaking. However, since then, draft guidance from the Financial Action Task Force has taken FinCEN’s place, looking to enforce the “old way” without seeking input from the private sector.
We saw this again in February when the Central Bank of Nigeria (CBN) issued a circular that sowed confusion about how they viewed digital currencies. It paused the operations of many promising financial technology businesses leveraging blockchain that were unsure how to proceed. However, after stakeholders inside and outside the industry — including other regulatory bodies in Nigeria — voiced concerns, CBN is now set to collaborate with the blockchain industry. They will conduct research to find ways to develop regulations that balance concerns they and others may have, while still allowing the value of blockchain to benefit the region.
Most recently, Turkey announced stricter rules on cryptocurrency in April, only to quickly clarify a softer approach after strong reactions from the industry and the country’s growing user base.
Innovations empower regulators
At first blush, innovators and regulators may seem like strange bedfellows. Regulatory bodies have a tremendous duty to protect consumers and deter financial crimes, all while supporting — not squelching — economic opportunity and financial inclusion. Perhaps contrary to popular belief, these are values that innovators in blockchain share with regulators.
The genesis of this technology in many countries, and for many entrepreneurs and innovators, is to provide consumers with greater levels of access and protection. Blockchain can further these goals by offering low-cost, efficient payment capabilities and empowering regulators with greater consumer protection tools.
First, an immutable, public ledger becomes a new tool for transparency and accountability to deter and catch financial criminals. For example, forensic analysis firms like Elliptic have built tools that can identify patterns indicative of illicit activity based on publicly available ledger information. Unlike the traditional banking system, a public ledger allows investigators to see the movement of funds and identify suspicious activity before — or as a method of — identifying criminal activity.
Second, blockchain networks can have compliance functionality built in at the protocol level. For instance, on the Stellar network — an open-source, public blockchain — digital asset issuers can control who owns their assets. Recognizing a need for the ability to recall value from a past transaction when fraud, theft or regulatory action occurs — similar to…