Regulating Cryptographic Consensus Technology: Oxymoron or Necessity?

Abstract

This paper examines the dynamics affecting access to highly regulated public capital markets by developers of the technology underpinning blockchain, distributed ledger technology and similar. Regulatory agencies have to date primarily applied existing regulatory standards to the industry where they can. There is a general sense that this will not be enough to facilitate industry development while also dealing with the risk of fraud and criminal use. Establishing a sustainable regulatory approach is complicated by features of the technology still undergoing transformational evolution that pose novel challenges to regulatory policy making and raise fundamental questions about what regulatory oversight might look like, and to what it should attach.

Participants within some segments of the industry actively invite regulatory oversight and voluntarily adopt best practices that go beyond their legal obligations. However, policy considerations and the usual patterns of legal and regulatory development can mean that wanting to be regulated is not always the same as being able to be regulated. Other participants in the industry either wish to take advantage of the current situation by moving to the lowest commercially viable legal standard or jurisdiction, or advocate that the industry should not be subjected to any regulatory oversight other than by the community participating in cryptos.

After a discussion of the relationship between technology, capital formation and the delivery of social benefits, this paper discusses how the technology intersects with regulatory policy making. It explores the potential uses and dangers of attempts to understand the technology via taxonomies, and suggests that an approach based more closely on the underlying technology could assist policy development. The issues within the industry itself that impact on the ability to regulate it are considered. The building blocks essential for industry maturation in the financial sector and for meaningful, comprehensive regulation to be imposed are discussed. Whether the current trajectory of regulatory thought and action on cryptos is working toward supporting the efficient allocation of risk and industry development is considered.

It is argued that the reality of being able to engage in anonymous yet secure commerce, as a result of scientific breakthroughs, is a significant game-changer that requires regulators to adopt different approaches from that taken previously. It is suggested that solutions can and will be found within the technology itself.

Keywords: blockchain, crypto, cryptocurency, consensus, securities regulation, policy development, securities law, Securities Act 1933, DLT, immutability, taxonomy, distributed ledger technology