How Will Finance Approach the Regulation of Blockchain?

By Peter Chawaga

Whether you see Bitcoin as the key to a free, utopian form of economy, or as a regulation-free mystery of the digital age, it has, to this point, thrived outside of the standard rules that dictate how finance traditionally functions. Blockchain, the technology that has enabled Bitcoin to remain a maverick of the fintech industry, exists on fundamental security systems that make traditional regulators unnecessary. But blockchain, and by extension Bitcoin, may not live outside of the reach of financial regulators for much longer.

In December, the Federal Reserve released a report, “Distributed ledger technology in payments, clearing, and settlement,” that may indicate its first moves toward reining in blockchain’s currency applications. It was one of many government entities to release its views on the technology towards the beginning of 2017, joining the People’s Bank of China, for instance.

While release of the report did mark a significant move from the Fed, the regulatory body did not tip much of its hand in regard to what actions it plans to take.

“It remains largely unclear what, specifically, regulators can or should do right now because so much will depend on the specific way in which blockchain is implemented,” The Hill reported, in a story about the release.

That being said, there are some complications presented by blockchain that are surely on the minds of regulators.

“As the Federal Reserve report notes, there are numerous legal considerations involved in determining the legal basis of specific parts of financial blockchain,” per The Hill. “For example, the legal procedures that deal with securities settlement systems, central counterparties, or central securities depositories may need to be updated if these intermediaries are made redundant by a distributed and decentralised system based on blockchain.”

In addition to determining any new regulations, the Fed is likely focused on making sure that blockchain-based systems aren’t able to violate existing regulations. For instance, components that look like central counterparty may not actually be central counterparty, potentially leading to an influx of shadow banking.

Regulators have had a difficult time responding to blockchain developments for several reasons. First, it can be argued that there is really nothing for them to oversee, as blockchain’s financial applications have yet to reach a commercial level. Furthermore, it’s not exactly clear how regulators can respond to such a disruptive and quickly-evolving technology.

No matter how it all shakes out, the report seems to be an indicator that federal regulators will have to deal with blockchain at some point in the near future. Whether that ends up being as a facilitator or an impediment is yet to be seen.

“The lasting legacy of blockchain may turn out to be that of a catalyst, enabling many disparate financial actors to come together and cooperate on the design of 21st century financial plumbing, whatever that ultimately looks like,” according to The Hill. “But it will not solve the ethical issues that have driven regulation in financial markets for more than a hundred years. Regulators need to ensure that blockchain is serving the interests of investors and the market, not the other way around.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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