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How blockchain can usher in new era in crypto regulatory compliance

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How do you feel about regulation? The question is ambiguous enough to be practically meaningless. You can get a feel for someone’s career, risk appetite and political inclination by gauging their reaction to that simple question. It begs the question of what the purpose of regulation is, and whether it is fulfilling its function in the modern world. 

Today, finance is one of the most scrutinized sectors globally when it comes to regulation, but that wasn’t always the case. In fact, it wasn’t until global economies were tipped into a punishing recession due to a malfunctioning banking sector at the end of the last decade that the topic came under the spotlight. Many say the catalyst was a lack of regulation, or the hollowing out of existing regulation such as the Glass-Steagall Act, first signed in 1933. Others will say that the regulatory cure in response to the crisis has been worse than the disease, and that finance professionals are being targeted due to the reputational hit of the crash, facing a “regulatory penance” that is more punishment than market correction.

While arguments continue in some quarters over the importance or threat of regulation, entrepreneurs have been doing what they do best and continuing to innovate and disrupt, creating massive value in the process. My co-founder, Amber Ghaddar, points out that there have only been three major disruptions in modern history — the steam engine, electricity and the internet. The companies that have been made possible because of these innovations have created enormous wealth for entrepreneurs and the economy at large, improving living conditions around the world. 

If we look around today, one thing most of us can agree on is that our current financial and economic system has caused a lot of this wealth and power to be concentrated among a small group of individuals and companies. This kicks off fresh rows about taxation and public services, often falling along similar lines to the earlier ones about regulation. Some will say the problem is free market capitalism unfairly exploiting workers without compensating them properly, others will blame excessive regulation locking in state-granted monopolies through lobbying and regulatory capture. 

Whether you believe it is the former or the latter, or for that matter both or neither, the scale of change needed to better distribute wealth will not be achieved through working within the political system. The surge in living conditions across the developing world this century has come more from access to markets and increased competition than political change. What we need to address the issue is to subject finance to a fourth disruption on an equivalent scale to the three above.

Increasing innovation by decentralizing capital is possible through blockchain technology. Doing so will increase access to finance as a lever of wealth creation, sparking competition in areas that have become closed shops due to strict regulation, spiralling compliance costs, and increased capital requirements. Blockchain could help turn ailing sectors like lending around by opening them up to competition and rationalizing their regulation.

See related article: Urszula McCormack of King & Wood Mallesons: data regulation will be a challenge for the virtual asset sector

And there is no reason to look only at lending. Blockchain can link up all international financial ecosystems, bridging the walled gardens of different national regulatory systems. Incumbents would have access to the same financial instruments as ever, but now startups and small businesses could compete too. Such a system would streamline regulation by improving access and reimagining the sector as a whole.  

In the long term, the goal would be to have seamless integration of transactional infrastructures across multiple blockchains, jurisdictions and institutions. Doing so would facilitate incumbent financial institutions accessing their existing financial products, but with drastically reduced costs of compliance. Startups and blockchain-first companies would be able to compete in the same spaces for the first time, increasing competition and innovation. Only a company that relied entirely on regulatory capture would have any reason to oppose it. 

To realize this potential we need to make it easier for incumbent financial companies to access blockchain solutions, as well as facilitating blockchain startups looking to compete with established financial products. Regulatory innovation is crucial to realizing this. Rather than expecting regulators to predict the future of innovation, we should look for innovation within regulatory technology. The job of regulators is to ensure minimum standards of prudence and safety are observed, while the job of regulatory technology is to allow entrepreneurs to focus on creating value without having to worry about the details of compliance. Both should be operating in harmony.

Here blockchain can allow for compliance to be distributed and decentralized. Through new cutting-edge decentralized finance (DeFi) collaborations on the market now, lenders can ensure compliance with important sector regulation such as the E.U.’s Payment Services Directive (PSD2). This in turn allows them to grant and revoke access to data, which will ensure compliance with regulations such as General Data Protection Regulation (GDPR) and simplify the process. Rather than creating value through lighter regulation, an accusation historically leveled at the fintech sector, blockchain creates value by simplifying compliance and making it more accessible.

See related article: How global fragmentation is holding back blockchain’s progress

Regulation remains an emotive topic for many people, but gradually this is beginning to change. Now, entrepreneurs need to spend as much time thinking about compliance as they do about accessing electricity. This can be made possible for incumbents and startups through blockchain technology. 

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