Krypto presents regulatory authorities with serious challenges

The author is the author of ' The future of money : How the digital revolution changes currencies and finances

Whatever the fate of decentralized cryptocurrencies like Bitcoin may remain other forms of cryptocurrencies and blockchain technology. Decentralized finances can create innovative ways to provide and expand access to financial products and services, while the additional competition forces traditional institutions to improve their efficiency.

This presents regulatory authorities with challenges that recognize the potential advantages. How can innovations promote and at the same time limit risks?

The answering of some fundamental questions would help to make the technology usable and to improve the inevitable benefit-risk compromises.

First: Is blockchain technology the best answer to existing defects? For example, digital payments in the USA are faced with high costs due to regulatory and other obstacles. International payments are still expensive, slow and difficult to follow up everywhere.

Blockchain technology is hardly the only or optimal solution. Mobile phone -based and other technologies enable broad and easy access to inexpensive digital payments. The regulatory authorities should prefer simpler technologies that best meet the actual needs of consumers and companies, and not those that promise speed and efficiency, but make it easier for payments and make it easier for illegal trade.

second, how can investors and consumers be protected? Supervisory authorities cannot always restrict how much risk an investor should take. But they have to protect inexperienced investors. Public blockchains are transparent and accessible, but this is not a substitute for disclosure that makes downward risks understandable, supported by measures to strengthen financial competence.

Thirdly, how can it be prevented that a single product or protocol is prevented from infected the broader financial system? Stable coins that are secured by government bonds and high -quality securities may not be hit by panicking storms. Nevertheless, a wave of withdrawal applications could trigger extensive liquidations of collateral, disturb the underlying securities markets and have a cascade effect in the entire financial system. The regulation should take into account the system risk with the expansion of the sector.

Fourth, how can it be avoided that regulation, the simply established actors consolidate and the market concentration is reinforced by increasing the entry costs? Simpler, more transparent rules would enable newer and smaller companies to compete under the same competitive conditions. A certain degree of emigration among financial institutions is not necessarily harmful as long as it does not damage the trust in the system.

And finally, how can the market integrity be preserved? Decentralized architectures and governance are attractive and in principle safe, but open weak points such as the front running running of certain protocols. The technology hardly eliminates the need for effective supervision.

Definition issues are also important. Is a StableCoin issuer a Narrow Bank or a money market fund? Is Ethereum a goods or a securities?

The answers to such questions are crucial for what, who and how to regulate. The crypto industry has an interest in clouding the waters. This increases the need for quick action, as it is recognized that some innovative technologies only improve the packaging and delivery of existing products. Definitions also play a role for emergencies. For example, the classification as a bank would give a stable coin issuer access to the central bank liquidity facilities, which should, however, trigger equity requirements.

When an industry cries after regulation, it usually longs for the associated legitimacy and at the same time tries to minimize the supervision. This is the greatest risk that the supervisory authorities have to protect themselves - to give the crypto industry an official imprimature and at the same time to subject it to a slight regulation.