“Regulation” is not often a word associated with “benefits” in blockchain and cryptocurrency circles. Indeed, many governments have been sharply criticised following the roll-out of regulatory guidelines addressing the flourishing blockchain industry. Some even suggest that it is a lack of regulation which has allowed the blockchain sector to develop as quickly as it has. Such conclusions are mistaken.
Regulation for the blockchain industry has its role to play, as much as technological development and appropriate funding in creating a mature and vibrant technology sector within the international economy. Regulation which is coordinated internationally, and sensibly drafted based on industry insight, is not only beneficial for the blockchain industry, but will be necessary for blockchain to fulfill its full potential.
National regulation of the blockchain space has, unarguably, more often than not been contradictory and unclear – while some jurisdictions, such as Singapore, Malta, and Liechtenstein, have proactively drafted well-defined, non-constrictive regulations for the issuance and use of digital assets, others have lagged behind. One need only look to the United States for an example of regulatory indecision and delay in issuing clear recommendations for the cryptocurrency market and blockchain space.
Meanwhile, China’s outright ban on cryptocurrencies and the heavy-handed approach adopted by Korean and Japanese regulators has left many homegrown innovators questioning their place in local technology ecosystems. This has had a tangible impact on the expansion of the blockchain industry and has severely limited the ability for startups to grow their operations equitably on a global scale.
2019, however, is witnessing a turning of the tide.
While jurisdictions previously worked in isolation, assessing the merits of emerging technologies and drafting regulations accordingly – international cooperation in regulating this expansive industry is becoming more common.
At the recent G20 summit in Osaka, world leaders jointly acknowledged that “technological innovations can deliver significant benefits.” This international alignment has been mirrored in a more practical sense by the Financial Action Task Force (FATF), which has over 37 members including the European Union, United States, and China.
In June, FATF issued regulatory recommendations to member states tackling KYC/AML in the cryptocurrency industry, representing the first worldwide regulatory attempt to provide international guidelines to an international problem. Should FATF’s suggestions make their way into the legislation of member states, they will create regulatory clarity across numerous key markets for thriving technology startups. This will leave company decision-makers in a much better position to innovate without fearing the retroactive issuance of subpoenas by local courts. The current uncertainty and resulting anxiety within the blockchain space around complying with regulator’s expectations can only be alleviated if regulatory boundaries are clearly indicated.
The internationalisation of blockchain regulation will also have a profound impact on the ability of companies to operate in multiple jurisdictions. To successfully create a fully decentralised world, it is imperative that the nascent blockchain sector be capable of scaling on a global level, bringing its benefits to people all over the world.
To date, inconsistent regulation has seriously inhibited the organic growth of startups which have struggled to bear compliance burdens in more than one state. This is made evident by the jurisdictions within which some of the industry’s most successful companies choose to operate. Despite being enormous markets with a wide potential customer base, both the United States and China have a relative dearth of homegrown blockchain-based startups, with many relocating overseas to the more hospitable regulatory climes available in Europe, the Caribbean, and South-East Asia. In fact, Deloitte studies have shown that only 14% of American companies are in the midst of blockchain production – compared to a global average of almost 40%.
The blockchain ecosystem will rely on clear regulation
If greater clarity, ease expanding overseas, and acquiring larger customer bases were not reason enough to support internationally coordinated regulation of the blockchain sector, investments might be.
Following 2018’s “Crypto Winter,” institutional investors and traditional financial institutions have remained skeptical of the blockchain space. While many are diversifying their portfolios with digital assets behind the scenes, and some notable exceptions – such as JP Morgan – have entered the industry with much fanfare, the majority remain on the edge of the industry.
Enticing these sophisticated investors and institutions into the blockchain ecosystem will rely on clear regulation. Coming from heavily-regulated sectors, such as securities markets, institutions and accredited investors expect legal clarity and well-defined “rules of the game” before placing their money in ambitious startup projects using innovative technology which they may not understand. It has only been the result of increased regulatory clarity that institutions have begun entering the blockchain market gradually, and international regulation which is coordinated and sensible will lead to an injection of capital into the space.
While we may only now be witnessing the beginning of international coordination in regulating the blockchain sector – it is the start of a positive transformation of the industry.
While regulators have often been viewed as an enemy of innovation, in reality, they aim to ensure that laws are obeyed and that emerging technologies are not hijacked by criminal elements for nefarious ends. We are on the same team, with the same objective: rooting out bad actors and stimulating growth in the right places.
The FATF recommendations mark a significant change in the attitude of regulatory bodies. Through closed-door discussions with industry leaders, FATF endeavoured to inform their proposal with input from those it would affect: the lines of communication between industry and regulators seem more open than ever. Only through discourse and dialogue can we help shape the regulations which will shape our industry.
The benefits of global regulation are there, and regulation is coming – whether we like it or not.
Michael Ou is Founder and CEO of CoolBitX. He is a Fintech entrepreneur, who is extremely passionate about blockchain security. Michael is the chairman of a publicly-traded company SmartDisplayer Technology, a 20-year-old family business that pioneered banking security solutions. Used by 50+ banks in over 30 countries, and certified by the likes of Visa, MasterCard and UnionPay, SmartDisplay Technology develops and manufactures payment cards that generate one-time passwords to securely merge online and offline transactions. When Michael first heard about Bitcoin in 2013, he foresaw a similar evolutionary path for virtual currency’s infrastructure. Equipped with traditional banking security background along with passion and vision for the crypto and blockchain technology, Michael founded CoolBitX in 2014 – a blockchain security company that presented the world’s first mobile hardware wallet, the CoolWallet S, which transformed the world’s expectations of hardware wallets. In 2019, Michael was invited to participate in the Financial Action Task Force (FATF) forum, where he made recommendations to the FATF’s recent AML frameworks for virtual currencies. He also introduced Sygna, the first-in-class attestable end-to-end KYC wallet solution. Moving forward, Michael and the team at CoolBitX are dedicated on improving the reputation and operations of the virtual currency industry.