Future-proofing blockchain regulation — is it possible?

Future-proofing blockchain regulation — is it possible?
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As the number of companies and industries exploring blockchain technology continues to swell, an air of ambiguity still hangs over those operating within the space when it comes to regulation. When money is on the line, ignorance is no longer bliss but rather a tangible risk. Without clear regulation, only the bravest will venture into new and uncharted technology spaces, meaning that many entrepreneurs are being dissuaded from embarking on potentially groundbreaking innovation, and instead sit on the sidelines for fear of inadvertently running foul of the law. As such, it is incumbent on governments and regulators to provide a robust system of oversight for Distributed Ledger Technology (DLT), creating an environment where blockchain innovators can thrive.

Oversight, through regulatory process, is an exciting prospect for the industry, but a lack of shared knowledge between the public and private sector has the potential to create a sizeable disconnect. This tension may seem inevitable as traditional regulatory practices can infringe upon, and even destroy, creative development.

Even amidst the cutting-edge technologies of today, there are distinct murmurs of the death of innovation and developer decline as the progress of entrepreneurs, inventors, and startups is curtailed by ever-stricter security measures. While this legislation around data protection, privacy, security, and transparency is fundamental for technological stability, it should not come at the expense of creative development.

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The blockchain ecosystem sees regulation as more than a protective measure. Regulatory oversight within this new and disruptive sector offers, for the first time, a framework of support and stability that, rather than deter industry progress, actually encourages it.

Those who have pushed the technology to the brink of mainstream adoption now recognize the need for an environment that provides critical breathing room for economies and societies to fully realize its transformative potential. This industry is still in a highly experimental phase and so cooperation between regulators and business is key to increasing a mutual understanding, as opposed to hard and fast rules handed down without due consultation.

This is also an opportunity to create collaborative and mutually beneficial frameworks that can rejuvenate and revolutionize outdated and unbending systems of governance.

The hindrance of regulatory uncertainty

PWC’s blockchain survey of 600 executives earlier this year indicated that 48 percent of businesses are concerned about the regulatory uncertainty surrounding the technology. There is no doubt that key players leading legitimate blockchain projects will endeavor to meet the standards of regulators when it comes to important risk-related issues like Know Your Customer (KYC) and Anti Money Laundering (AML). While companies are willing to comply with comprehensive guidelines, they are understandably apprehensive to toe the line of obscure legislation. The current atmosphere of protracted hesitancy illustrates the urgent need for further clarity, competency, and precision around regulatory procedure and practice.

Perhaps understandably, many regulators are taking a ‘wait and see’ approach, anticipating the actions of some of the world’s largest economies. Navigating an industry only beginning to receive mainstream recognition now can seem like an overwhelming and fruitless task, particularly without the reassuring example of global economic giants.

However, a recent report from the Financial Stability Board (FSB) indicated that a proactive and vigilant monitoring of cryptocurrencies, given the speed of market developments, is the most recommended approach for regulators. The adaptive and nimble processes of smaller legislators and governments perfectly position them as cryptocurrency monitors.

The case for fair and flexible regulation

In an ideal scenario, there would be a regulatory framework that gives a very clear indication of what is expected if companies wish to use DLT in that particular jurisdiction, while providing assurances that the framework is flexible and open to alterations as the technology progresses. This approach, based on a list of high-level principles agreed by government and regulators will be combined with a detailed application process for projects that want to operate in the jurisdiction, allowing the cream to rise to the top.

As firm believers in the technology’s potential to bring permanent and overreaching change to a range of sectors, leaders of blockchain projects are already going to great lengths to connect with external stakeholders in order to create a fair system of oversight. However, this is an exhaustive and complicated approach without supportive governance to define this system. Only in finding empathetic regulators can flexibility be integrated into all legislative frameworks. Flexible regulation is intrinsically linked to enabling true blockchain innovation and facilitating mass scale implementation.

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An underlying and innate philosophy of the blockchain community is to eschew government regulation in favor of self-regulation. While many crypto-enthusiasts may be unwilling to accept the need for governance, the opportunities enabled by flexible and adaptive frameworks are limitless - as we are seeing ample evidence of the number of blockchain companies relocating to jurisdictions providing this umbrella of legislative support.

In the traditional economy and systems of business, applying strict regulatory controls has proved logical and successful. However, emerging blockchain technology does not fit into uncompromising systems or traditional structures. At its core, it is disruptive, revolutionary, and innovative, which means that any attempt to govern it must be equally innovative.

Regulators need to marry clarity with adaptability, governance with support, and knowledge with practicality as together we navigate a fast-paced sector primed for potential.

More than anything, it must be remembered that we are witnessing an industry in its infancy. In order to ensure the sector matures appropriately, flexibility must be the cornerstone of every regulatory approach, and oversight - much like a protective parent - the primary aim of all legislative action. In this way, we can ensure a future in which innovation and oversight are the symbiotic lungs of the blockchain industry, continuing to breathe growth and opportunity into an ever-expanding sector.

Albert Isola M.P. is Minister for Commerce of Gibraltar, which is working to become a blockchain technology hub.