Regulations are important for the advancement of technology in the right direction. But regulating new technologies has never been a one-off process. And it has also not been easy for lawmakers. It is rather an ongoing process that develops as does the technology. The same applies to blockchain technology.
Blockchain is gaining adoption across industries. And as that happens, it should be a priority for lawmakers to create a regulatory framework that restricts the illicit use of the technology but also promotes more innovation and implementation.
As of today, most jurisdictions that have taken an active interest in regulating this space have done so only for the financial aspect of it — cryptocurrencies. While some imposed an outright ban on cryptocurrencies, the others tried regulating companies involved in this space with old laws.
Both these approaches are destined to fail. Blockchain is a decentralised technology and no central entity can restrict it in any country. They may restrict people from using it, but they cannot ban the technology or control it as they control the internet. Besides, regulators must work on regulations for the whole blockchain industry and not just cryptocurrencies.
The need for blockchain regulations
The one most important thing to understand is that blockchains themselves cannot be regulated through policies of the real world. But we need a regulatory framework to govern the use cases of blockchain and to define requirements and restrictions of new blockchain networks. That is how innovators can build blockchain networks in a way that it complies with real-world policies.
We need blockchain regulations to bolster innovation and curb illicit activities happening using the technologies. The longer we leave blockchain and crypto as an unregulated space, the more exposed people will be to crimes within the industry.
Regulating the blockchain industry
One of the key elements to creating a well-defined regulatory framework for blockchain is to first set globally-accepted standards. Once we deal with the uncertainty of the blockchain standards, regulators may find it easier to work on policies.
As discussed during the “2019 OECD Global Blockchain Policy Forum,” right now, there is no clear combination of governance mechanisms for blockchain. So, governments must involve a mixture of ‘regulatory levers’ to find the right balance.
One of the best ways for regulators to create laws without stifling innovation is to consistently have a dialogue with innovators in this space. They must try and address all aspects of governance and ensure user safety and security without hindering innovation.
For governments planning to use blockchain on a wide scale, it is also vital that they make changes to their present regulations so that blockchains may fit well with other aspects of business processes. As blockchain is also particularly used for financial disruption, regulators must try and create new financial laws or transform the old ones so that it helps replace legacy systems with better alternatives.
Regulators may also want to define what are the main reasons why they want to regulate the industry. Moving ahead with a purpose will provide a more streamlined process to regulate the industry without stifling innovation. They can prioritize aspects such as protecting users from scam projects, defining security methods for the highest security and privacy of user data, and project compliance.
They should also define how much anonymity should users get within a blockchain ecosystem. And if they are anonymous, a critical question would be how can law enforcement agencies track and trace illegal activities? Regulators may consider blockchain-based systems to tackle issues of identifying anonymous users within a blockchain ecosystem. One such example would be assigning blockchain-based digital identities to each individual.
With the right approach to regulating the blockchain industry, regulators can conveniently keep user security intact while also promoting blockchain innovation.
Blockchain is unlike other technologies. It is decentralised and thus poses multiple challenges for regulators. The traditional approach to regulating a technology will not prove effective for blockchain and cryptocurrencies. In order to ensure that blockchain serves the world with its maximum potential and leads it towards a more digitalised future, regulators need to follow a more open-ended approach and establish new methods to regulate this new technology.