The blockchain technology has taken the world by storm. Governments and regulators have initially been at odds with this technology, but are now slowly opening up to the many applications of this technology, including cryptocurrencies like Bitcoin and altcoins. However, there still remains a lot of challenges facing regulators in order for them to be able to understand the implications of this new technology and devise new regulatory structures to cater for new businesses and ideas.
When we refer to the blockchain technology, we are talking about a decentralized, peer-to-peer system, which relies on a system which does not have a single point of failure. An important aspect of blockchains are cryptocurrencies. The latter are often considered as alternatives to fiat currencies. However, cryptocurrencies have a dual role, acting as an alternative to fiat currencies but also acting as a security mechanism for ensuring the security of the network.
In a blockchain, miners have a huge responsibility of adding blocks of transactions and validating all these transactions. These are very expensive activities and require time and monetary resources. This is why miners are rewarded with cryptocurrencies, which need to have an inherent value based on demand, supply and scarcity. Bitcoin is an example of how a blockchain and its native cryptocurrency works together.
In an ideal world, forward-looking countries should be proactively devising the necessary framework to promote innovations. Currently, regulations have been more reactive in nature, which represents a big roadblock to innovators and entrepreneurs who need to move fast. The work of regulators are aimed at strengthening the laws and regulations to basically fight fraud, corruption and money laundering. The importance of the work of regulators cannot be overstated but a question that often comes to the forefront is whether regulations make it more difficult for entrepreneurs and startups because of the administrative, regulatory and compliance burdens. Regulations and innovation are currently in a race where innovations will be ahead and regulations have to follow very closely. In general, implementation of regulations is key. What is often shunned by startups and companies engaged in FinTech are mere popular announcements without any real thought about real implementation of the measures.
Regulators face a lot of challenges when they need to set up the required structure to properly regulate blockchain-based businesses and activities. Among the most important responsibilities of a regulator includes:
It is crucial to have a partnership structure between regulators and entrepreneurs. Innovation is moving very fast and both of these parties are on a continuous learning curve. There has to be a co-learning and a co-sharing process. Traditional regulatory behaviour promoting fear, penalties, blacklisting and disqualification needs to be discouraged in favour of a more constructive structure. It is only when regulators and innovation experts come together that a right formula can be derived. Regulators will need to innovate and adopt different models to ensure that their work is more constructive in nature. For instance, having regular meetings with innovators and entrepreneurs which would include discussions and brainstorming sessions to set up proper helpful and non-restrictive regulations to actually help businesses.
We tend to believe that there are two sides when we talk about regulations. On one hand, we have regulators and on the other hand, innovators. This is actually wrong. Regulators are innovators, because they need to constantly research and set up new frameworks, regulations and facilities to conduct business. The one thing that is missing though is the use of technology in regulatory activities. This is what is often known as RegTech - a marriage of Regulations and Technology.
In the future, AML checks could be done in real-time with regulators getting real-time alerts of any infringement, including the ability to block a transaction or an activity with a smart contract. Parts of regulatory frameworks are implemented in smart contracts which are completely transparent and devoid of any outside and unsolicited interference, where the rules are defined clearly and transparently. Anyone infringing upon the rules get real-time fines which are paid from a fund that they keep in terms of crypto assets.
Let’s take a very concrete example about a regulatory system around ICOs and STOs. The idea is to determine whether a company can be given a license to conduct an ICO or STO or even an IEO. The following steps and conditions could be used as an initial filtering system: