The Role of Regulation in the Future of Blockchain

The future of blockchain depends on several factors, and regulation is one of the most crucial. Regulation is essential to how blockchain has got to where it is today, but it is also the basis of how we will use it in any industry in the future. Here we look at what current regulations exist across the globe, how they benefit and challenge us, and how we need to tackle them in the future. 

Current regulations in Europe, the US, and beyond

What are the current regulations that impact how we use and develop blockchain? In 2013, regulators realized that blockchain would start shaping the financial industry. At first, a lot of regulation came out of fear and managing risks associated with cryptocurrency and other blockchain uses. Now, regulators are looking ahead to impact and solutions. 

Regulation is highly location-specific. Regulations vary in terms of implementation and interpretation across different regions and countries and often respond to specific concerns and fears of the area. The differences can be stark. One example of just how different blockchain regulation is in Asia, where opinions and legal frameworks vary greatly across the continent. 

The differences in regulation across Asia

• In India, cryptocurrency was banned until 2020. In 2021, a bill was prepared to ban private cryptocurrencies but this was never introduced. When India held the presidency of G20 through 2023, the country called for a global framework to regulate virtual assets. As of this year, cryptocurrency regulation in India it still a distinct grey area.
• In the Philippines, around 10% of total gross domestic product is made up of remittances, with cryptocurrencies a popular and cheap way to send money in and out of the country. This is especially true of the unbanked population, who cannot access traditional banking but do have a smartphone and an internet connection. They are currently working on regulating cryptocurrency in the country. 
• Hong Kong has recently launched several spot Bitcoin exchange-traded funds (EFTs), the first financial hub in Asia to do so.
• In Japan, the Financial Services Agency manages cryptocurrency just like yen, and is very open to citizens buying and trading cryptocurrency. Japan has even begun exploring the use of blockchain for digital identity cards, for the use of NFTs and the metaverse, and for national property registry to ensure greater transparency in property transactions.
  
• This is in stark contrast to China, where cryptocurrency is banned completely. Other blockchain services are regulated by the Ministry of Industry and Informatization, the People’s Bank of China, and the Cyberspace Administration of China. 

Regulation in two large markets – the USA and the European Union

Two examples of strong regulation in major markets are FIT21 and MiCA, created in the United States and the European Union. 

FIT21

The US has the Financial Innovation and Technology for the 21st Century Act, also known as FIT21. The biggest issue that FIT21 aims to solve is who has responsibility for digital assets. The Securities and Exchange Commission (SEC) regulates and oversees the equities markets and the Commodities and Futures Trading Commission (CFTC) regulates and oversees derivatives. Neither had fully claimed digital assets, and FIT 21 sought to solve that. On May 30 2024, the House of Representatives passed the bill with bipartisan support.

Now, a framework is in place for digital assets, allocating jurisdiction between the CFTC and the SEC based on whether the associated blockchain is ‘functional, ‘non-functional’, or ‘de-centralized’. FIT21 still needs to pass the Senate before it is signed into law, but the White House has recently said that FIT21 ‘lacks sufficient protections for consumers and investors’ – although it has not gone far enough as to threaten a veto. The SEC also came out with strong criticism of the bill. So although FIT21 is a milestone for US regulation, it is a rocky one. 

MiCA 

MiCA, the Markets in Crypto-Assets Regulation, is a package of legislative proposals for regulating crypto in the European Union. MiCA has several features, including the legal definition and categorization of of crypto-assets, a regulatory framework, an authorization system for crypto-asset service providers to register and be authorized, and protections for investors, transactions, and service providers. MiCA was first introduced by the EU in 2020, and member states are in various stages of preparation for adopting MiCA into national laws. MiCA also impacts countries in the European Economic Area, and other global markets have worked closely to ensure that their regulations align with MiCA to increase consistency and cooperation with the EU.  

Lobbying 

Lobbying is key to the role of regulation in the future of blockchain. The term ‘lobbying’ often has connotations of large American firms lobbying politicians with vested interests. However, lobbying at its core is simply advising, working with, and instructing regulators on how frameworks work best for users and for the industry. Lobbying in the example of MiCA, for instance, was a number of local, national, and regional meetings to give feedback on initial drafts. Different crypto associations, national regulators, and European regulators worked together to try to cover all needs and desires. Outside of its negative connotations in the US, lobbying is important and is already integral to how the world has its blockchain regulation today. 

Something to remember is that regulators jump to find a framework for new technology without fully understanding it. Regulators cannot come up with frameworks for future technologies, so they are in a constant state of catching up. The industry itself needs to go to the regulators with the solutions that work best for itself. 

Future Directions for Blockchain Regulation

What are some future directions for blockchain regulation? 

• Self-regulation
  • Self-regulation within the blockchain community itself will have a huge impact on creating industry practices and standards. Blockchain as an industry has to drive initiatives and go to the regulators themselves with solutions that they see themselves. 
• Hybrid approaches 
  • These approaches combine government regulation with industry standards to ensure that blockchain regulation is up to date with, or even ahead, of technological innovation. 
• International cooperation. 
  • Regulations should look to harmonize across borders, even if every standard can’t stitch seamlessly. 
• Innovation as well as protection 
  • Regulators not only need to focus on the protection of users and investors in the industry but also support innovation. Sandboxing initiatives can help identify potential issues and develop appropriate responses, creating more nuanced and ultimately useful regulations. 

Regulation plus innovation equals the future

Ultimately the role of regulators is to work within the technology that currently exists. The industry itself is always looking to change that technology and innovate what currently exists. These two fundamental differences in goals cannot overshadow the role that regulation plays in blockchain to create a seamless future.