Long reads

The globe is on the cusp of DLT regulation and industry input is essential

The Hon Albert Isola

The Hon Albert Isola

Minister for Digital and Financial Services at HM, Government of Gibraltar

Over the last two years, there has been an explosion of institutional and mainstream interest in DeFi and blockchain. The rise in Total Value Locked (TVL) across the crypto sphere, which hit $78B in August, and the ever multiplying projects involved in the space, have led regulators who have previously watched from the sidelines, to sit up and take notice of the inevitable expansion and incredible potential of Distributed Ledger Technology (DLT). As regulators proactively consider how to manage DLT, it is essential that they come to the table with industry experts who can feed into the conversation and bring their insider knowledge to ensure that laws are both effective and appropriate for the technology at hand.

Marking a watershed moment in DLT history, many major regulatory proposals came to the fore last year. The European Commission’s publication of its regulatory proposals on Markets in Crypto-Assets (MiCA) saw a host of states publish extensive legislative proposals, reflecting that crypto assets were now being taken into serious consideration. Continuing this momentum, in July this year, the European Commission published a series of crypto provision proposals to place much needed concrete rules around money service providers and exchanges in order to reduce money laundering.

When these rules were announced, European Commissioner for Financial Stability, Financial Services, and the Capital Markets UnionMairead McGuinness mistakenly tweeted that anonymous crypto wallets would be banned under the new proposals, causing outcry across the blockchain community, wherein almost all wallets are automatically anonymous. This episode demonstrated the need for industry experts to be involved in regulatory discussions. Ensuring that experts who understand the nature and needs of the industry are included in the future will ensure that necessary and effective policy proposals are constructed and communicated effectively.

The U.S. has also made major moves when it comes to DLT regulation. In September last year, the Conference of State Bank Supervisors, which is composed of regulators from all 50 states, launched a regulatory framework for payment and cryptocurrency companies that will help them to lower the cost of regulatory compliance and ultimately get to grips with what is expected of them. KYC and AML compliance is resource heavy and time consuming to navigate for both traditional and decentralised finance bodies. Increased regulation can not only make it easier for crypto projects to get to grips with what is expected of them, opening them up to greater institutional integration, but it can also allow for greater collaboration between blockchain technology and traditional finance.

The appointment of Gary Gensler, former professor of digital currencies at MIT, as the Chairman of the SEC, marks a positive move for the industry this year. As a leader with personal knowledge and experience of digital assets, Gensler is well placed to lead the regulatory charge. This month, he raised hairs when he argued that the vast majority of crypto tokens and initial coin offerings violate U.S. securities laws, arguing that there is currently inadequate investor protection. However, it is important to note that Gensler has repeatedly indicated that he sees potential in blockchain and cryptocurrencies and is well positioned to take a balanced and informed approach.

Outside the SEC, US lawmakers also made waves this year, when they proposed paying for the US Infrastructure Bill by imposing tax-reporting requirements for cryptocurrency brokers. As it stands, the definition of a broker includes anyone who regularly provides any service that affects transfers of digital assets. This definition could extend to a multitude of crypto businesses, including miners, software developers, and startups and may lead to a lot of businesses moving overseas. Reflecting the broad scope of implications that a regulatory move like this could have on various sectors of the blockchain industry, this proposal again reflects the necessity of bringing leaders from the industry to the table to help inform DLT regulation going forward.

Rather than being a hindrance to the industry, DLT regulation is essential for ensuring that blockchain can grow to its full potential. Taking an active stance on DLT, will have a positive impact on institutional adoption as traditional players will feel more comfortable engaging with members from the blockchain industry, ultimately opening up both sides to increased capital flows and technological innovation. From a regulatory standpoint, bringing industry leaders from all sides into the conversation will be essential to ensure that DLT regulation is both effective and accurate going forward and that society can benefit most from the impact of blockchain technology.

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