How smart regulation of crypto can power growth

In the first and second article in this series we explained why we believe it is time for crypto and regulation to become more aligned, and what is currently being done to make that happen in different parts of the world.

In this final piece, we give our thoughts for what should happen next. We still have some way to go in order to truly unlock the potential of the crypto and blockchain market, but the steps below can, in our opinion, help get us there faster.

The relationship between the players in the blockchain ecosystem and regulators is often portrayed as antagonistic by the media. This has to change if we’re to establish a new paradigm in which crypto regulation can be a driving force for growth.

Respect from both sides

One of the first things that must happen is a cooling off of the most extreme views on either side of the debate. For cryptoasset advocates, this means accepting that some aspects of decentralized, autonomous finance can and will (and perhaps should) be regulated. This is inevitable in a world where nation states and supranational organizations hold sway and have a responsibility to protect consumers. Indeed, attempts to operate “without” the law, such as with the ICO boom in 2017, have not been a success, with the ICO bubble coming to an end as investors were not prepared to invest in a market perceived to be rife with bad actors. Let's start by agreeing that the word “decentralized” is deceiving. Period. Even the most decentralized service has some level of human interference, in either writing or deploying the code, maintaining the servers, marketing the offering etc.

On the other side, skeptical regulators must accept that blockchain-based products and services, including cryptoassets, are here to stay and indeed the technology can be used to benefit markets and consumers. Today, Bitcoin is being bought by major financial institutions, Ethereum is a platform that thousands of developers are dedicating their careers to and DeFI is establishing innovative financial services that provide clear efficiency benefits.

Regulations that encourage, not inhibit

Once we recognize this state of play, regulators can focus on implementing regulations that power growth.

The first step is to set out clear and simple guidelines on asset classifications and taxation requirements for cryptocurrencies , which are operable in practice.

As a second step, they should look at examples of where financial regulation has spurred growth and innovation in the past, in order to see which lessons can help guide crypto regulations.

One of the best examples is Open Banking. In the UK, this initiative began with a clear and simple plan to make it an obligation for financial institutions to share customers’ financial data with authorised providers. In this way, Open Banking was an attempt to change the market by reducing the power of large banks and breaking down the walled gardens of data they controlled.

In just three years, this has led to a vibrant, innovative market in which over 300 providers participate, offering a range of new and varied products to consumers.

Why collaboration and education matter

In order to get this regulatory framework right, crypto companies, payments experts and regulators must come together to co-design what the best outcome might look like.

So far, this has often been lacking. The lines of communication between the key parties are weak and fragmented. Monologues need to evolve into dialogues. And we need to agree on the intent, so we can start speaking the same language, and with each other.

We have seen this with Open Banking and there is a big opportunity to do the same with cryptoassets.

The current signs are encouraging, with the UK Treasury and FCA jointly announcing plans to regulate stablecoins at the end of 2021 in order to encourage responsible innovation in finance. Not only that, we’ve seen various crypto and blockchain-related companies taking part in the FCA’s regulatory sandbox in recent years, and a growing number of licenses being granted.

These are all encouraging signs because they are aimed at putting crypto companies and regulators in the same room to discuss a path forward. Our own experience of working with crypto companies has taught us that these companies have specific needs and unique business models. However, this shouldn’t preclude them from fitting into a regulatory system designed to encourage innovation and growth.

Crucially, regulators and crypto companies need to be in regular discussion so the companies understand what the regulators’ aims are and the regulators can see the entirely legitimate activities these companies are undertaking. This is the starting point that should lead to regulation designed to foster innovation and growth.

It is by no means a groundbreaking suggestion: greater collaboration between the relevant parties required to regulate the crypto market will super-charge the industry’s growth and acceptance among consumers. However, it is one that we seemingly need to remind ourselves of.

Open Banking shows us what innovation can be achieved when stakeholders work together. Both sides must realise that they are not going to outlast the other - cryptocurrency and financial regulation are both here to stay.

A forward-thinking approach in which knowledge is shared will give crypto the opportunity to flourish it deserves, as well as the regulatory safety it needs.

By Dr. Ozan Özerk, Founder of OpenPayd and James Burnie, Financial Services Regulation and FinTech Partner at gunnercooke.