Regulating Innovation: A Policy Maker’s Perspective
Excerpt from the GDF Annual Report 2019
The OECD’s Director-Directorate of Financial & Enterprise Affairs Greg Medcraft talks shaping the regulatory environment to unlock the full potential of blockchain and DLT.
The past twelve months have served to illustrate the rate at which blockchain and other distributed ledgers technologies (DLTs) are maturing and integrating into mainstream financial products and market infrastructures. The decentralised systems set up by a multitude of banks, insurers and major exchanges are fast moving from experimental to operational.
Few shifts have been more significant than the development and expanding adoption of stablecoins (a name, it must
be said, which does not accurately represent these assets), from advances in Fnality’s Utility Settlement Coin and launch of J.P. Morgan’s JPM Coin at the wholesale level, to the new Facebook’s Libra proposal at the retail level.
For several years the OECD’s research has highlighted
the need for digitally native currency to truly unlock the promise of blockchain and distributed ledger technologies (DLT) to drive efficiency, speed and cost savings in finance — including, as the Libra model underlined, the urgent need to bring down cost and time of international transfers.
In this sense, the emergence of stablecoins are a turning point, enabling a new wave of tokenisation, adding liquidity to markets and creating new asset classes.
“For several years the OECD’s research has highlighted the need for digitally native currency to truly unlock the promise of blockchain and distributed ledger technologies (DLT) to drive efficiency, speed and cost savings in finance …”
The pace of change has challenged existing public and private institutions alike. From policymakers’ perspective, concerns over consumer welfare, financial stability, impacts on monetary policy, competition issues, and the potential for regulatory arbitrage prompted the kinds of reservations that led the US Congressional Financial Services Committee to request a halt to Libra’s development. French Finance Minister Bruno declared “the monetary sovereignty of states is under threat” at the OECD’s annual Global Blockchain Policy Forum in September.
“Governments must recognise that, if risks are appropriately managed, innovation’s creative destruction ultimately leads to better outcomes for citizens, consumers and business.”
These concerns are legitimate. Yet at the same time, governments must recognise that, if risks are appropriately managed, innovation’s creative destruction ultimately leads to better outcomes for citizens, consumers and business. The rapid development of blockchain and DLT demands close engagement between policymakers and industry,
so that regulatory responses are developed with a full understanding of the technology and how it interacts with policy goals.
It also demands international cooperation between governments, because many decentralised financial products are global by their very nature. Regulators
will need to clarify cross-border regulatory frameworks and explore cooperative oversight arrangements and information sharing between jurisdictions. A common policy approach will also be important to give business the regulatory certainty it needs to innovate and operate on an international scale.
Public institutions are responding, and 2020 will be an important year in shaping the policy environment for distributed ledger technology (DLT). Major central banks are edging towards development of their own digital currencies to meet demand and overcome barriers to cross-border payments — some, including the People’s Bank of China, are reportedly well progressed.
“2020 will be an important year in shaping the policy environment for DLT. Major central banks are edging towards development of their own digital currencies to meet demand and overcome barriers to cross-border payments.”
Central bank digital currencies will only accelerate tokenisation and the development of decentralised financial products mentioned above. Leading international standard setters, including the FSB, the Committee on Payments and Market Infrastructures (CPMI), FATF and the OECD, are also carrying out detailed analysis, articulating common approaches and formulating international guidance.
Industry’s voice is critical, and we look forward to continuing to work with GDF and others to ensure we get these efforts right.
