Incoming Institutions: How Big Players Are Fast-Tracking Blockchain Regulation

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By Nick Cowan, CEO of the Gibraltar Stock Exchange (GSX) Group

In 2012, two monumental developments took place in the world of technology. Mark Zuckerburg announced in a status update that Facebook had reached over 1 billion active monthly users. Meanwhile, the European Commission proposed an unprecedented reform of the EU’s data protection rules, which is now known as GDPR.

These developments indicated something very significant — every major corporation, institution and enterprise in the world was shifting business, operations and profit models towards data-sharing in some respect, and this required some form of regulatory framework to support such a shift. The astronomical growth of Facebook and other tech firms mandated important, rapid action from global legislators in a new economy where data became one of the world’s most valuable resources.

If we turn our focus to the flourishing blockchain sphere, up until last year the technology was in early growth. Regulators have not paid much significant attention, given that the adoption of blockchain had largely been limited to technocrats, small pools of early adopters and unfortunately, criminals. Enthusiasm then spread to speculative retail traders, with some institutions and enterprises following suit.

However, in the past year the tide has turned, with a groundswell of momentum powering a wave of institutional investor involvement.

A spate of recent announcements by big players interested in exploring the technology, is slowly forcing regulatory movements. JPMorgan, BNP Paribas, Microsoft, Samsung, Facebook, among several other banks and financial institutions, are all driving forward projects utilizing the technology, and regulators are smelling the roses. In order to preserve investor protection, risk-management and proper market competition, regulators will take drastic steps, and we are now edging closer to a regulatory awakening.

Why? Institutional players and organizations rely on regulated products, processes and strong infrastructure, and we are now witnessing a recognition of this from global regulators.

Let’s consider the statistics. In a recent “Q2 2019” report, Binance asked its 41 institutional and VIP client participants what they believe to be the top factors that could potentially contribute to the rise of the crypto industry. Participants overwhelmingly indicated that changes in global and local regulations are by far the largest single potential growth driver in the future of the cryptoasset industry.

With the crypto space experiencing some of the largest levels of institutional growth as seen with as a number of established banks issuing their own cryptocurrencies on their private blockchains — the case for robust regulation has never been more pronounced.

Interestingly, initiatives from private companies such as Facebook, JPMorgan and Samsung were generally ranked as low potential growth drivers for the cryptoasset space by survey respondents. I would argue that these factors are linked inextricably. The growth of big players in any industry will provide the impetus for regulatory assessment or indeed, advances. If 2019 has taught us anything, it’s that the crypto and blockchain space is undergoing a similar pivot towards regulation, and not a moment too soon.

In the wake of the Libra announcement, we are seeing a trend of regulators attempting to grasp how this technology can be harnessed in their respective economies. In the US, the light is shining bright on the current Senate Banking Committee hearings on crypto regulation with a particular focus on Facebook’s impending Libra cryptocurrency. In June, The U.S. Securities and Exchange Commission initiated a public comment period for a proposed exchange-traded fund (ETF) backed by bitcoin and Treasury bills.

In Europe, the U.K. Financial Conduct Authority (FCA) has concluded its guidance on crypto assets, clarifying which tokens fall under its jurisdiction. The Financial Markets Authority (AMF), France’s top financial organization, plans to release an experimental regulatory framework for crypto firms.

The reasoning behind these regulations is not solely to provide regulatory clarity to institutions — financial regulators aim to protect the investor. The arrival of institutional players represents a significant seal of approval for the crypto space, opening the door to new swathes of potential market participants.

For example, Facebook’s recently announced Libra project would open up a third of the world’s population to a blockchain-driven currency without a fully fledged global regulatory framework. When we factor in the 27 additional companies listed as members of the Libra Association (including Visa, Uber, and Spotify), the reach extends even further.

With the potential advantage of on-ramping billions of users to digital assets through its Libra/BTC pairing, increased consumer exposure to the crypto market more broadly can be expected too. This depth of consumer involvement cannot be ignored and Facebook’s current battle with regulators is likely to set the wheels in motion for building out the fundamentals of a regulatory framework.

Never before has the regulation of blockchain been so imperative.

Regulation is imperative for institutions as it can either assist and foster growth by providing a framework within which they can work and flourish, or it could thwart growth and development. The key for regulators is hit the right note between regulatory prudence and enabling innovation. Rather than relying on antiquated styles of bureaucracy, the promise of DLT merits a different approach to designing regulation.

Today’s regulators might take a page out of the book of the global DLT innovators by beta testing regulations, hosting regulatory sandboxes and promoting small segments of innovation, engaging the public and relying upon consumer data and demand to decide how to regulate technology. By testing more flexible mechanisms, governing bodies could achieve the balance required to take blockchain to a happy medium where the public can trade digital assets with fair trade and reduced risk.

With significant user bases and influence, the world’s largest companies and institutions have their finger on the button, which, if pressed, would  extend the benefits of blockchain to billions of citizens worldwide. Evidence has been mounting throughout the first half of 2019 that large players are actively exploring how to do this. Much like how GDPR shifted the data privacy dial, regulatory paradigm shift is in store for the crypto and blockchain space, fueled by the increasing appetite for blockchain exploration among institutions. So regulators, let’s set the table!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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