This November, The Fintech Times is looking to broaden the understanding of digital currencies, ranging from blockchain’s use outside of crypto to CBDCs, in an attempt to replace the notion that digital currencies are a synonym for crypto.

Talk to anyone within the fintech space right now and they’re almost guaranteed to tell you that regulation is one of the biggest challenges when it comes to innovating and operating in this industry.

Of course, this is for good reason, as regulation is vital for the safety and security of the consumers, the businesses and even the economy itself.

With regulation increasing in the sector in every global market, blockchain and its technologies has also seen an increase in regulatory scrutiny as the use of the technology is becoming more and more popular – not just in finance but across multiple industries. 

Russell Starr, CEO of DeFi Technologies said: “Whenever you have revolutions like blockchain that rock the very foundation of the status quo, you typically start without any regulations at all and then morph into standard regulation. Take the advent of internet technologies or biotech, for example, these technologies started out without regulations but later followed the traditional path of regulatory markets.

“Blockchain, on the other hand, is directed specifically towards destabilisng the status quo and traditional markets. Roughly 1% of the world has adopted or has exposure to crypto. If we are able to get to a world where people are comfortable with investing in blockchain and crypto — a world where everyone is able to realise its benefits, not just that 1 per cent — we need the global market to invest in them. And in order for Wall Street and Bay Street to gain a foothold to truly leverage the technology, the regulatory environment would need to catch up.

“Right now there is virtually no regulation with very little limits on innovations in the field. However, you can expect the next decade will be very volatile for crypto. That means that there will have to be changes for that other 99 per cent (beyond that 1 per cent of the global population) to get comfortable with using and investing in crypto. One of those changes is the use of an exchange-traded fund (ETF), which would allow investors to buy and sell the assets outside of cryptocurrency exchanges. The use of these crypto ETFs will help show the world that it is possible to invest in these decentralized finance products, and still do so in a regulatory and compliant way.”

Charley Cooper, Chief Communications Officer for R3 said: “As much as some members of the crypto community want this technology to exist entirely outside of the existing financial system, it can’t. The disruption that the original, fully decentralised model seeks to cause will simply not be permitted by regulators whose job it is to ensure orderly and stable market conditions. The future of finance isn’t completely decentralised or completely centralised; it’s hybrid.

“Ultimately, real change in financial markets is driven by collaboration. The global financial system has evolved slowly over millennia, and improvements to the way money and assets flow through it have almost always been achieved by successfully integrating new technology with the existing infrastructure and institutions within it.”

UK Regulation

In terms of regulation in the UK, the government and the regulators have taken a generally flexible approach to blockchain technology. There is a recognition that blockchain has the potential to deliver significant benefits, as long as the risks are managed and UK financial markets remain safe and transparent. The FCA has supported tests of blockchain technology within its regulatory sandbox after the Kalifa review stressed the strategic importance of blockchain technology to the UK fintech market. 

EU Regulation

The EU is championing the uses of blockchain technology and is home to a number of platforms, applications and companies who all exist and innovate in the space. The European Commission has a strategy designed to support a “gold standard” for blockchain technology in Europe. This aims to embrace European values and ideals in its legal and regulatory framework, and hel[ the EU achieve its goal of being a leader in the space. 

The gold standard includes environmental sustainability, digital protection, digital identity, cybersecurity and interoperability. Additionally, the EU strongly supports EU-wide rules for blockchain to avoid legal and regulatory fragmentation.

London-based fintech investor Viktor Prokopenya said: “Regulation is better than non-regulation in the long run because it attracts big businesses to invest in innovative projects, where they would not normally invest in if there was a high degree of regulatory risk. It brings clarity for institutional capital. There are of course different types of regulation, strict regulation versus flexible or adaptable regulation, for instance. China and Russia have a restrictive approach, while Switzerland and Gibraltar have a flexible approach. Gibraltar has established its own regulatory body which is innovative in two main regards: it puts technology experts at the top level of the regulatory body’s management.

“In addition, flexible regulation is tailored to each individual blockchain business according to nine principles. This is because Gibraltar seeks to stimulate innovation, not limit it. The Gibraltar model could potentially scale to larger countries but is limited, not by operational factors, but primarily by political factors.”

Anca Bogdana Rusu, Head of Strategy, Public Sector at Celo’s cLabs, said: “I don’t know if I agree that regulation has become stricter. We have generally seen that regulators have given guidance on how existing regulations in industries that use blockchain might apply, or have started thinking through how to enact new pieces of regulation more suited to the needs of the new technology.

“For both regulators and technology providers, there is still a significant need for education. Regulators need a better understanding of the technology, focusing on use cases and taking a principled approach is needed. Technology providers need to understand regulators’ perceptions, what risks and opportunities they might see, to help address these concerns. There is an understanding and communication gap right now. –

“They added that blockchain companies want regulation, and are eager for regulators to bring in guidelines. “Most blockchain companies want regulation in place. Regulation helps mitigate risks and reduces uncertainty. We see the growth of the blockchain industry in areas where they have both clear regulatory guidance and a regulation informed by facts and use cases.”

Blockchain Regulation in the USA

The US can be seen to have several different policies on the blockchain, with state governments implementing their own policies and regulations. Despite this, Ron Levy, CEO of the Crypto Company. Believes the USA is behind in keeping the sector regulated. 

He said: “To really understand this subject, we first need to address the fact that the crypto/blockchain industry is not America’s industry, but a worldwide industry. America certainly needs to have regulations, which we are very behind on. However, in the meantime, the industry is growing tremendously. For the most part, this growth is happening around the world, and not in the US. This is due to the fact that the American government as a whole, regulators such as IRS, SEC, CFTC and FinCEN have been addressing the industry from their individual points of view.

“Without overall decisive actions from the legislature itself, both the House and the Senate, we have in effect decided to push the industry elsewhere. Without that body deciding that the industry is important to the country and passing favourable growth laws, the regulators will not be sailing in the same direction. This will leave us right where we are. Without clear goals, and a clear path, for the industry, there can be no regulative clarity. Presently, as each regulator gives clarity on something, it is often in complete conflict with a different regulatory agency. The net result is that until Congress gives guidance in the form of laws, the industry will not have clarity and the majority of the growth will continue to have the bulk of its growth in other countries. Without laws written around US involvement in the industry, the result is more of what we currently have, which is jobs and tax dollars being pushed elsewhere for decades to come. Basically, due to the existing non-decision, it’s goodbye nextgen Silicon Valley from our shores.

“In summary, regulation is critically important. However, without laws being written with intention, that value the industry, more regulation will not give us more clarity.”