The Bank for International Settlements – BIS recently published a working paper on building regulation into blockchain finance.
The paper's opening argument is that:
while regulation should remain technology-neutral, supervision should evolve in parallel with technology
Businesses, consumers, governments and regulators likely agree on this point, "should" remains the key word. Any decision to regulate or not, is necessarily in favour of either existing technology (if new entrants face additional regulation for their technology) or a kind of new technology (where existing rules may need to be relaxed or exemptions granted as technology causes businesses to engage in new ways that don't fit under existing regulations. However, as a statement of intent, government is sensibly trying to stay out of regulating in favour of a particular kind of technology.
In the present regulatory climate, governments and regulators continue to play catch up with technology, while businesses adopting new technology attempt to navigate an uncertain (and often hostile) regulatory environment. Interestingly, the paper says:
"The main legislative challenge is to provide for the concept of decentralised economic finality in legislation governing financial market infrastructure, ie to allow for ownership to be transferred without the involvement of a central registry. Regulators and supervisors would further need to develop auxiliary frameworks that govern distributed markets and their infrastructure, for example, when assigning the responsibility for dealing with crime in decentralised markets"
The paper also introduces and explains its concept of "embedded supervision", defining it as "a regulatory framework that provides for compliance to be automatically monitored by reading the market’s ledger". This concept of automated and low-cost compliance is fundamental, as it cuts right to the heart of what made many of blockchain enthusiasts interested blockchain in the first place.
It is also promising to see the paper adopt the Swiss Financial Market Supervisory Authority FINMA's approach of "same risk, same regulation" principle from FINMA's stable coin guidance.
Thanks to Tom Skevington for his assistance with this note.