Blockchain technology should be regulated as data rather than a financial instrument, according to a panel of lawyers and policy consultants at a London Blockchain Week conference today.
Panellists also said smart contracts would be the future of regulation in financial services.
“We have to stop thinking about blockchain as being a financial technology; we have to start thinking about blockchain as being a data-based technology, as a digital uniqueness technology,” said Lee Schneider, general counsel at blockchain solution Block.one.
“We have to say to ourselves – what are the functions and the features of that particular digital item? And that’s how we should regulate it. If it’s a security then let’s regulate it as a security, but I don’t want my identity regulated as if it’s a financial instrument … Nobody thinks identity is a financial instrument.”
Schneider criticised the US practice of applying the 1946 Supreme Court case SEC v Howey, a case that defined investment contracts, to blockchain and distributed ledger technology (DLT) businesses. Securities and Exchange Commission (SEC) commissioner Hester Pierce has also condemned the practice.
“What we’ve lost sight of in the US and I think more generally globally in a rush to financialise everything is this idea that digital assets actually don’t need to be financial instruments … We need lawyers and regulators to do what they have done throughout the ages which is look at the thing, figure out what its legal wrapper is, and not judge it by its technology wrapper or any other wrapper,” said Scheider.
John Salmon, technology partner at Hogan Lovells agreed, adding that a large proportion of regulation within financial services can be applied to the digital asset space, but there is still a small proportion that needs to be changed.
“Technologists are not policy writers and policy writers are not technologists, and they’re not speaking the same language,” said Loretta Joseph, consultant, government affairs at Medici Ventures. She criticised a culture of miscommunication between the two parties.
The nature of financial regulation itself was questioned, with Joseph saying that blockchain would likely provide the future infrastructure for regulators.
“I think that’s the biggest candidate for regulation, the ability to codify regulation.”
Salmon agreed, adding that a smart contract could provide regulators with the ability to instantly see when a company isn’t complying with regulations.
“It makes [regulators] active participants in the ecosystem which is important,” said Schneider. He referenced a Bank of International Settlements (BIS) paper on embedded supervision from September 2019. The paper argued that DLT offers a framework for compliance that is automatically monitored by reading the market’s ledger, reducing the need for firms to actively collect and verify data.
While the panellists agreed that smart contracts and codified regulation offer great promise, the decentralised aspect of blockchain remains an obstacle in creating a global standard of practice.
“One of the biggest challenges that we face is that blockchain technology is global by its nature and particularly when it’s decentralised blockchain, you have people from all over the world participating on it and the idea that you need to take account of US regulation for the US nodes, you need to take account of UK regulation for the UK nodes etc,” said Schneider.
“It’s just impractical and it’s never going to happen. And if governments want to regulate it, what they need to do is they need to band together.”