Regulating Crypto-finance: A Policy Blueprint
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This post is based on a chapter in my forthcoming book, Regulating the Crypto-economy (Hart Publishing). A brief introduction to the book sets the context for the arguments made in the chapter regarding the regulation of crypto-finance.
The book is concerned with policy and regulatory attention being focused on the financial phenomenon in the crypto-economy. As a corollary, policy-makers may not perceive productive forms of innovation and commercialisation that are at play opening up a new economic space. Innovative businesses on the Ethereum blockchain are developing peer-to-peer models of 'prosumerist' service provision that can, at scale, disrupt conventional platform economies, which have become rent-extracting giants, or oligopolistic businesses providing services that benefit from significant network effects. A prosumerist economy allows participants to join in both the supply and demand sides of the economy, such as consuming as well as selling secondhand goods on a platform like eBay. In the crypto-economy, a business model like Filecoin allows nodes to provide as well as consume idle hard disk space on local computers as an alternative form of cloud storage. New forms of productive economic mobilisation should be encouraged but as such productive activity relies on crypto-financial workings such as the peer-to-peer transfer of value via native cryptocurrencies, economic and financial activity in the crypto-economy become highly intertwined, resulting in social and policy attention being drawn mainly to the financial aspects. The book charts the financial development of the crypto-economy, ie cryptocurrency, and subsequently, cryptoassets offered by development businesses, followed by the development of private 'stablecoins' which attempt to mitigate the sub-optimal monetary qualities of cryptocurrency for commerce, and decentralised finance.
The financial development in the crypto-economy is accounted for as part of a more holistic account of the new productive crypto-economy, much activity observed especially on the Ethereum blockchain. This account provides the basis for policy recommendations in the book dealing with (a) the organisation of decentralised Applications (dApps) many of which are businesses built on the Ethereum blockchain; (b) the monetary and payment order of the permissionless blockchain economy and (c) fund-raising by development dApps, otherwise known as ICOs. Although some observe that the ICO hype took place between 2017-8 and has petered out, a genuinely functioning crypto-economy would still have to continue to support development fund-raising. The book argues that a regulatory agenda that is enabling in nature and theorised according to the vision of regulatory capitalism can benefit the development potential of the crypto-economy. The role of regulation is not merely to tame the financial wildwest of the crypto-economy, but to place finance in an order that would support and not destroy the productive potential of the crypto-economy.
My paper is one chapter of the book dealing with the financial development of the crypto-economy that significantly pivots towards speculation. Hence, it does not cover the matters in relation to cryptocurrency and ICOs which are covered elsewhere in other chapters. The book also proposes a different regulatory agenda from the EU’s Markets in Crypto-assets Regulation proposal and the US’ Stable Act.
Two key points are made in this chapter. One is that a financial regulation agenda based excessively on concerns for regulatory arbitrage, hence attempting to fit crypto-finance within existing regulatory categories, or to extend new forms of regulation that are derivative in terms of ideology and methodology to crypto-finance, would likely be myopic in character and fail to grapple with the 'raison d’etre' and multifunctional nature of crypto-financial innovations. Second, policy-makers and regulators need to more fundamentally grapple with their conceptions of productive and speculative finance, the intimate connection between the two, and how this same phenomenon in mainstream finance plays out in crypto-finance (and is likely exacerbated towards more speculation), in order to determine to what extent policy can be framed to support the productive function of finance while mitigating the damage and excesses of speculation.
These two principles form the backbone of a high-level blueprint the chapter proposes that can provide guidance for regulatory conceptualisation and design for the different phenomena in crypto-finance, from mainstream financial institutions’ adoption of ‘crypto’ instruments to innovations engineered for decentralised peer-to-peer finance on permissionless blockchains. Such a high-level framework is important, as siloed and derivative conceptualisations of crypto-finance are likely to be outgunned by bottom-up innovations. In other words, finance that can be algorithmically programmed for auto-execution in a peer-to-peer context, potentially disrupting traditional intermediaries and introducing new service providers, gives rise to some unique ontological and governance questions. Policy-makers should engage with these purposeful and functional differences from mainstream finance that are made possible by new technology, and recognise that technology is not merely a new means to do something that is merely old hat.
Iris Chiu is a Professor of Company Law and Financial Regulation at the Faculty of Laws, UCL.
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