Embedded Supervision: How to Build Regulation into Blockchain Finance

33 Pages Posted: 8 Oct 2019

See all articles by Raphael Auer

Raphael Auer

Bank for International Settlements (BIS)

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Date Written: September 16, 2019

Abstract

The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, ie a regulatory framework that provides for compliance in tokenised markets to be automatically monitored by reading the market's ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralised market is modelled that replaces today's intermediary-based verification of legal data with blockchain-enabled data credibility based on economic consensus. The key results set out the conditions under which the market's economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger's data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.

Keywords: tokenisation, asset-backed tokens, stablecoins, cryptoassets, cryptocurrencies, regtech, suptech, regulation, supervision, Basel III, proportionality, blockchain, distributed ledger technology, digital currencies, proof-of-work, proof-of-stake, permissioned DLT, economic consensus, economic finality

JEL Classification: D40, D20, E42, E51, F31, G12, G18, G28, G32, G38, K22, K24, L10, L50, M40

Suggested Citation

Auer, Raphael, Embedded Supervision: How to Build Regulation into Blockchain Finance (September 16, 2019). BIS Working Paper No. 811, Available at SSRN: https://ssrn.com/abstract=3463885

Raphael Auer (Contact Author)

Bank for International Settlements (BIS) ( email )

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