Embedded Supervision: How to Build Regulation into Blockchain Finance
30 Pages Posted: 27 Nov 2019 Last revised: 29 Apr 2020
Date Written: 2019-10-01
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, i.e., a regulatory framework that provides for compliance in tokenized markets to be automatically monitored by reading the marketâ€™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 decentralized market is modelled that replaces todayâ€™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 marketâ€™s economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledgerâ€™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, stablecoins, asset-based tokens, cryptoassets, cryptocurrencies, regtech, suptech, regulation, supervision, Basel III, proportionality, blockchain, distributed ledger technology, central bank digital currencies, proof-of-work, proof-of-stake, permissioned DLT, economic consensus, economic finality, fintech, compliance, auditing, accounting, privacy, digitalisation, finance, banking
JEL Classification: D20, D40, E42, E51, F31, G12, G18, G28, G32, G38,
Suggested Citation: Suggested Citation