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Regulating the blockchain

29 Jun 2018

Collaboration, principles-based legislation, and accountability are crucial in regulating the cross-border and decentralised nature of the technology

Unless you have been living under a rock for the past five years, and perhaps even if you have, chances are you would have heard or read about ‘blockchain’ or ‘cryptocurrency’ or ‘Bitcoin’. If, like everybody else with access to the internet, you might also have come across terms such as ‘ethereum’ and ‘ICOs’. And if ‘Zcash’, IOTA, and Hashgraph ring a bell, then you probably already know much of what will be covered in this article (but please continue reading anyway).

But what if you are a financial regulator attempting to find your bearings in an environment resembling a 100-metre dash? To your left is Usain Bolt, and to your right is Tyson Gay, all going full pelt, arms pumping, out of sight even before you are getting up to speed?

“Previously, regulators were risk managers,” points out Lim May-Ann, Executive Director, Asia Cloud Computing Association. “Now, given fintech and all the new technology, there is a strange impetus that regulators need to address, and that’s moving from being a risk manager to a risk taker.

“Regulators need to go out and say, ‘Yes, let’s try out that new thing. I want to push financial institutions to try these new things. We need to figure out blockchain. We’ll end up dealing with the other things that come with it but we have to do this.’”

Noting that it creates an “existential crisis within the regulator’s mind trying to be both things”, Lim calls for more collaboration with the private sector. Regulators have to figure out ways to better monitor what began as a decentralised system, one which has become increasingly cross-border and seemingly impossible to legislate and regulate.

“The genesis of blockchain was in the aftermath of the Great Financial Crisis,” elaborates Chua Tju Liang, General Counsel at the Ehtereum Foundation. “The core technology has been around for a while, but the first real implementation of it was Bitcoin, and it was a response to the GFC. Regulators tried responding to the GFC in their way, which was to increase regulation.

“Technologists did it their own way, which is instead of: ‘How do we prevent a centralised party from abusing its power?’ It became: ‘How do we design a system that has no centralised party so that nobody can abuse its power?’”

Warranted G(overnment) to regulate

Chua and Lim were members of a panel addressing policy and regulatory approaches for Cloud, blockchain and fintech services at the recent 8th annual SKBI Conference: Charting a Roadmap toward a New Data Regime for the Digital Economy. Given the increasingly cross-border application of the technology, a basic question becomes impossible to answer: Who are you going to regulate?

“There is not Bitcoin Inc. or Bitcoin Pte Ltd.,” Chua explains. “The countries in which Bitcoin or Ethereum operate is not a function of a centralised authority.”

“If you have nobody to regulate,” offers another panel member William Hallatt, Partner at international law firm Herbert Smith Freehills, “who will be blamed when it goes wrong? The regulator!

“When this becomes mainstream technology, it won’t be acceptable to say, ‘It’s nobody’s fault.’ Governments won’t accept that. The regulators are very worried that if they accept that there is no centralised party or governing law, they would be seen to have failed in their duty to protect the public.”

That sentiment has its roots in the 2008 GFC when regulators shouldered much of the blame despite being “asked by governments to relax regulations in the 2000’s to make the environment business-friendly, which they did”, Hallatt explains. With blockchain and Distributed Ledger Technology (DLT), legislation needs to be more agile.

“Legislation need to be more principles-based and have less prescriptive rules,” Hallatt expands. “The more prescriptive your rules are, the more they anticipate particular scenarios and types of technology, and the less flexible legislation becomes.”

He adds: “Different countries will have different levels of agility in terms of how their legislatures can respond and make new laws to anticipate the sort of issues we are dealing with. Universally, those legislatures won’t be able move anywhere near the needed speed. By the time they pass a new law in anticipation of a new technology, it may already and is often already out of date.”

“Legislative timetables can no longer be 20-year cycles before we refresh them in view of technology changes,” implores Lim. “It has to be cyclical. It needs to be iterative. Looking forward, the agile model for policymaking needs to be iterative, has to be multi-stakeholder.”

Hallatt concludes with advice for fintech and other financial institutions: “The final piece of the puzzle is accountability. If you want to be given more leeway to run your businesses the way you want to run them, you need to accept greater accountability for what you’re doing.”

 

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Last updated on 29 Jun 2018 .

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