Biz Builder Mike

You can't sail Today's boat on Yesterdays wind - Michael Noel

A minster’s look at regulation and innovation: A necessity to strike a balance

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Repeatedly, proponents of disruptive technologies have proven that regulation and innovation have an immense potential to actualize a mutually beneficial existence. The often delicate relationship between innovators and regulators — which may be mired by antagonism — is fundamental to the functioning of the global economy, especially at times as challenging as we are facing now. 

The fuel that keeps the fire of the important relationship between regulators and businesses alight — like any — is communication and collaboration. This could not be more apt when it comes to the innovators behind distributed ledger technology and the regulators in overseeing the space.

Ideas surrounding DLT first arose in the early 90s, however, it was not until 2009 that the first block of what we now know as blockchain was mined. In 11 short years, blockchain and DLT more generally have had tremendous success in garnering attention from the financial community and the wider public. Just this year, Big Four audit firm Deloitte’s 2020 Global Blockchain Survey found that business leaders now see blockchain as “integral to organisational innovation,” while analytics agency Gartner has forecasted that blockchain technology will have generated $3.1 trillion of value-add to companies around the world by 2030.

Related: A minister’s look at healthcare: Providing fertile ground for blockchain innovation

The regulation necessity

While mainstream adoption of the blockchain industry is gathering pace, I believe it will not succeed without regulation; in fact, it needs it to survive and, indeed, to thrive. It is incumbent on regulators to strike a balance and allow companies operating in this industry with the space to continue operating at the cutting edge of innovation in a sensible and safe manner. Finding this balance and the future success of decentralized finance is inexorably linked. It will take a whole-of-industry approach where all stakeholders uphold a commitment of communication and collaboration with the regulators to ensure the harmony that the industry needs.

However, the burden of finding this balance is not just on the industry itself but on regulators and policymakers, too. Standards are commonplace across every industry, and this one is no different if it is to thrive and succeed in the main street of finance.

Meanwhile, overregulation could stifle crypto markets that are based on distributed ledger technology. Of course, it is possible to find the equilibrium point that allows the realization of the full potential of this technology within the boundaries of the regulations that govern traditional markets.

Some governments are working closely with key players in the field. In January 2018, Gibraltar became among the first jurisdictions to introduce a regulatory framework for DLT providers. Since then, the Gibraltar Financial Services Commission has awarded multiple licenses to global industry leaders, with a number of active applications currently under review. This measured regulatory response was only possible through open communication between the regulators and the innovators.

Similarly in Switzerland, its remarkably progressive stance toward cryptocurrencies and distributed ledger technologies has propelled the country ahead of the pack and closer to its aim of becoming the first “crypto nation.”

In short, there are at least 45 central banks around the world that have publicly expressed their efforts to develop central bank digital currencies by utilizing DLT. This proves that the appetite to embrace these technologies not only exists among business leaders, it is burgeoning among legislators.

There is little doubt that regulators will follow suit by working with the private industry to achieve the desired equilibrium but in order to achieve this, much more needs to be done when it comes to communication and collaboration.

The establishment of working groups between DLT companies and regulators, and government bodies and watchdogs should become commonplace.

DLT will not reach its full potential if there is still a semblance of distrust among the general public. Through open dialogue, we can work together to ensure that the market is regulated and trustworthy and that regulators have faith in the technology, while those involved in the creation and use of the technology can enjoy the immense benefits it brings.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Albert Isola is Gibraltar’s minister for digital and financial services with the primary responsibility of raising Gibraltar’s profile as a well-regulated financial services center, leading the way in DLT and online gaming regulation. Minister Isola previously served as Gibraltar’s minister for commerce where he played a central role in spearheading Gibraltar’s purpose-built DLT regulatory framework, which was introduced in January 2018 for firms using blockchain to store or transfer value.

A minster\’s look at regulation and innovation: A necessity to strike a balance

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Chinese state-endorsed public chain to act as a global DeFi bridge, says Conflux Founder

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Conflux Network, a permissionless blockchain project which is endorsed by the Chinese state, told Cointelegraph on Sept. 22 that the project has officially launched its Tree Graph Research Institute with the Shanghai government. 

According to Fan Long, Founder of Conflux and Director of the TreeGraph Research Institute, the Tree-Graph Blockchain Research Institute will experiment with local states to build a regulatory compliance platform that can bridge global DeFi applications and government regulations. He added that:

“DeFi is a new world and while it appears as though it may pose a challenge for regulators, they appear willing to listen. At this stage, the most important thing is to maintain a reliable communication channel between two sides— the DeFi innovators and the regulators.” 

When it comes to new techniques and innovations, the Chinese government has shown signs of tolerance for experimentation in the past. Fan indicated that the complexity surrounding DeFi and other relevant distributed innovations will make open communication crucial for continued legislative acceptance. He stated that: 

“Regulators need a reliable way to learn what the new technique is about and where it might lead us to. Innovators need a way to understand the concerns and red lines of regulators.” 

At the moment, Conflux is working with the Shanghai government on several sandbox projects. Fan told Cointelegraph that these projects include integrating blockchain borrowing and lending services into Shanghai’s Pudong Development Bank, and leveraging the Shanghai free trade zone’s unique regulatory framework to devise a unique stablecoin for the region, The Founder explained:

“Shanghai Free Trade Zone is outside of capital control of China where RMB is offshore with its own set of rules, so we are trying to come up with some regulation breakthroughs with experimenting under the free zone framework.” 

Compared with the central bank’s digital currency, or CBDC,  Fan pointed out that  although a CBDC will allow the central government to maintain control of the financial activities, it would be hard for such a centralized form of digital currency to be accepted outside of China. 

Conflux is trying to either create a free zone stablecoin or build a public permissionless cross chain for the CBDC.

The project, which began its life as a research project at Tsinghua University, has been working to provide a robust and cheap framework for developers to build decentralized finance applications. Fan explained that: 

“Conflux Network seeks to provide a POW network with transaction speeds an order of magnitude faster. The key enabler technique is a novel DAG-based ledger structure together with an optimistic concurrency control to achieve a consistent order of transactions among all the nodes in the network.”

Fan believes that DeFi projects will only be able to go mainstream through willfully enacted compliance measures which evolve alongside government regulations. Blockchain and DeFi are new areas for regulators. Although he cannot speak to how regulators will go about this, his predicts that: 

“Decentralization will make it more difficult for regulators to control DeFi products, but there are still possibilities to exercise controls at the boundary between the decentralized world and the centralized world.” 

The Shanghai Municipal Government, one of the states endorsing the project, is interested in exploring how the city can leverage blockchain techniques to integrate traditional finance with decentralized financial services, says Fan.

In order to connect global DeFi projects and regulations, the company also created the Conflux Open Defi initiative. 

Members include: Sequoia Capital, Blockpower Capital, Antelope Holdings, dForce, DeBank, and MCDEX along with Chinese state support through the Shanghai Science and Technology Committee. Fan says Open DeFi aims to unite Eastern and Western DeFi markets through three globally focused program tracks: risk management, new liquidity strategies, and incubation & innovation.

Chinese state-endorsed public chain to act as a global DeFi bridge, says Conflux Founder

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Bank of England Governor Andrew Bailey Says Bitcoin Falls Short in Payments but Stablecoins May be Useful

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Andrew Bailey, the Governor of the Bank of England, spoke at the Brookings Institue in the US this week and he tackled a hot topic: cryptocurrencies. More specifically, Bailey spoke about the efficacy, or lack of, when using certain digital assets in payment transactions.

Bailey said that while Bitcoin may have “extrinsic value” it has no connection to money and is unsuited for the world of payments.

Stablecoins, on the other hand, may have merit, according to the Governor:

“Some stablecoin proposals may be used to facilitate investments. However, where a stablecoin is used to facilitate the transfer of ‘money’ for buying goods and services and the settling of debts, then it may become widely used a means of payment and store of value.

Global stablecoins seek to apply new technology, stemming from the world of crypto-assets, as well as changing some of the fundamentals of the underlying payment chain. They change not only how you pay but what you pay with – rather than a transfer of money between bank accounts, stablecoin systems transfer the asset itself – the stablecoin – from one person to another.

Stablecoins could offer some useful benefits. For example, they could further reduce frictions in payments, by potentially increasing the speed and lowering the cost of payments (particularly if global stablecoins were to be established). Stablecoins may offer increased convenience, including via integration with other technology, such as social media platforms or retail services.”

Bailey appears to be supportive of innovations in digital currency but he rightly points to a need for stablecoins to adhere to standards of operation similar to other forms of payments and transfers.

Bailey said that some stablecoins fall short in hitting this standard:

“Some stablecoin proposals do not include a legal claim for coin-holders. And some stablecoins propose backing in instruments that may have material market, credit and liquidity risk, but do not have the money protections I have outlined. While this might be acceptable for speculative investment purposes, it would not be for payments widely relied upon by households and businesses. Stablecoins need to offer coin-holders a robust claim, with supporting mechanisms and protections to ensure they can be redeemed at any time 1-to-1 into fiat currency.”

Global stablecoins must have “robust governance” and be transparent in structure. Regulators must be part of the mix if an aspiring stablecoin issuer is to be deemed worthy of achieving its mission.

As for Central Bank Digital Currency (CBDC), Bailey echoes a sentiment that has been stated by many others – that a CBDC requires careful consideration and study prior to any utilization. The Bank of England has been exploring CBDCs – along with many other jurisdictions.

Jackson Mueller,  Director of Policy and Government Affairs at Securrency – a Regtech/Fintech that is seeking to facilitate “a new financial services infrastructure to leverage the benefits of blockchain technology,” shared the following comment after Bailey’s speech:

“There’s a particular part of Andrew Bailey’s remarks that should reverberate within regulatory agencies, the halls of policymakers, and industry offices. That is, the need for a wider debate when it comes to the future of payments and how payments innovations are going to interact and interoperate across networks and borders,” said Meuller. “For too long we have pigeonholed ourselves into looking at cryptoassets, stablecoins, CBDCs, among other forms of payment, strictly within the silos of this terminology. In essence, we’re missing the forest for the trees.”

Mueller said that what needs to be examined in much further detail and with greater emphasis is the underlying architecture that supports these and future payments innovations and how such a system can be (and are currently being) developed in a manner that is capable of responsibly managing the movement of value across disparate systems and in a way that promotes innovation, while maintaining robust regulatory standards that protect the underlying financial services ecosystem.

“What this points to is a recognition that all of these forms of value can move across common compliance and security rails without creating a monolithic network and while preserving technological optionality.”

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