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. In fact, it is when these two partners 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 past few months, we’ve seen seemingly reactionary regulators in different parts of the world trying to formulate new rules and guidance in silos, without sufficient input from the most tech-savvy key stakeholders – the innovators themselves.
Related: Stablecoins present new dilemmas for regulators as mass adoption looms
We saw this in the United States in late 2020 when the Financial Crimes Enforcement Network (FinCEN) came up with a proposed rule that would have a significant impact on the digital currency landscape. Initially, they only allowed a two-week comment period during the year-end vacation. Ultimately, after a wave of feedback from stakeholders, FinCEN extended this period. In all respects, he now engages in a constructive dialogue with the industry before moving forward with any new regulations. However, since then, the Financial Action Task Force’s draft guidelines have taken the place of FinCEN, seeking to apply the “old way” without soliciting input from the private sector.
We saw it again in February when the Central Bank of Nigeria (CBN) issued a circular that confused how it viewed digital currencies. This suspended the operations of many promising fintech companies exploiting the blockchain who did not know how to proceed. However, after stakeholders inside and outside of the industry – including other regulators in Nigeria – raised concerns, CBN is now poised to work with the industry. the blockchain. They will conduct research to find ways to craft regulations that balance concerns they and others may have, while allowing the value of blockchain to benefit the region.
Related: More harm than good? Nigerian crypto users in disbelief over CBN ban
More recently, Turkey announced tougher cryptocurrency rules in April, to quickly clarify a softer approach after strong reactions from the industry and the country’s growing user base.
Related: Crypto Payments Banned In Turkey – Is It Just The Beginning?
Innovations empower regulators
At first glance, innovators and regulators may seem strange. Regulators have a huge duty to protect consumers and deter financial crime, while supporting – not stifling – economic opportunity and financial inclusion. Perhaps contrary to popular belief, these are values that blockchain innovators share with regulators.
The genesis of this technology in many countries, and for many entrepreneurs and innovators, is to provide consumers with higher levels of access and protection. Blockchain can promote these goals by providing efficient and inexpensive payment capabilities and by equipping regulators with better consumer protection tools.
First, an immutable public registry becomes a new tool of transparency and accountability to deter and catch financial criminals. For example, forensic analysis companies like Elliptic have developed tools that can identify patterns indicating 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 built-in compliance functionality at the protocol level. For example, on the Stellar network – an open source public blockchain – issuers of digital assets can control who owns their assets. Recognizing the need to be able to recall the value of a past transaction in the event of fraud, theft, or regulatory action – similar to what is known as a ‘payback’ in traditional finance – the developers of the Stellar Network are working on features to enable this feature. This work highlights that it is possible to harness the power of decentralization while delivering compelling functionality from centralized networks that facilitate compliance.
Finally, there is a whole ecosystem of companies that create compliance tools to better assess and analyze risks. So not only do companies have the tools they need to comply with current regulations, there are also innovators ready to adapt these tools as needed. Blockchain technology can be, and is, used in a compliant way today. It uses the traditional know your customer and anti-money laundering practices used by regulated financial institutions and the enhanced transaction tracking capabilities offered by a public ledger. These technological developments open the door to more effective risk assessments, lowering barriers to financial inclusion. This is a testament to how regulation and innovation, taken in tandem, can change the world for the better.
Dialogue is the answer
Recent developments in the field of regulation reinforce the importance of an open and collaborative dialogue between stakeholders – public and private – to determine the best ways to regulate blockchain and digital currency. Trying to create regulatory frameworks behind closed doors or as a knee-jerk reaction to perceived risks without considering potential benefits is not a productive way to approach innovation.
Related: The need for dialogue between crypto firms and regulators
To do this well, we must work together. Blockchain innovators need a seat at the table to help educate regulators on what this technology is (and isn’t). We want to work with regulators to shape the guidelines around this technology, addressing their concerns while enabling innovation in the critical quest to expand access to financial markets and economic opportunities. Creating the right policy and regulatory frameworks for blockchain technology, if done in partnership, can finally end the misconception that regulation and innovation are at odds. We look forward to the role we can play in proving the value of this partnership.
The views, thoughts and opinions expressed herein are the sole ones of the author and do not necessarily reflect or represent the views and opinions of TBEN.
Candace kelly is the general counsel and head of legal, policy and government relations for the Stellar Development Foundation, a nonprofit organization that supports the development and growth of Stellar, an open source network that connects the global financial infrastructure. Candace began her professional career with the United States Department of Justice where, for 17 years, she served as legal and policy advisor in executive offices in Washington DC and as a prosecutor in the Northern District of California. She holds a Bachelor of Arts in East Asian Studies from Williams College and a Juris Doctorate from the University of California, Hastings College of the Law.