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Rethinking the Regulation of Cryptoassets

Updated: Sep 26, 2021

NEW BOOK: Rethinking the Regulation of Cryptoassets: Cryptographic Consensus Technology and the New Prospect

By Syren Johnstone, executive director of the Master of Laws in Compliance and Regulation programme, Faculty of Law, The University of Hong Kong, Hong Kong SAR

Listen to Syren Johnstone as he discusses the contents of his new book in this Listen to HKU Fintech podcast.

This book is now available for purchase through Edward Elgar Publishing, Amazon, Google Books or Google Play, and Book Depository.

Here's the complete podcast transcript:

My name is Syren Johnstone and in this podcast I'll summarize some of the questions explored in my book, Rethinking the Regulation of Cryptoassets: Cryptographic Consensus Technology and the New Prospect.

I'll conclude by introducing the proposals I've made for reform.

A primary concern of the book is that not enough attention has been given to two key questions arising in the blockchain context.

Prof. Johnstone’s book on the regulation of cryptoassets forces us to think twice about the way we try to regulate the digital economy. He challenges the habit of the regulators to push new disruptive ideas and instruments into old frames and concepts, and invites them to move out of their comfort zone. Rethinking the Regulation of Cryptoassets is a complete account of the challenges we face in developing a crypto-economy and proposes a coherent and sustainable regulatory framework that ensures both market efficiency and technological relevance

First, is it right to apply financial regulation?

Second, how has this regulatory approach influenced the shape of the digital ecosystem?

When Bitcoin emerged, the puzzle faced by policymakers and regulatory agencies was to understand what it was. This was later complicated by Ethereum and everything that could be built on it.

The application of financial laws and regulations such as the Howey test, seemed to provide some answers, but it also fundamentally changed the landscape for the evolution of blockchain technology.

Because this spans developers seeking to create new commercial and economic models around blockchain, it reaches into the uses the technology is put to, as well as the character of secondary market activity.

Cryptographic consensus technology presents extraordinary market opportunities but also raises a host of vexing regulatory challenges. Rethinking the Regulation of Cryptoassets maps this complex terrain and charts a way forward, offering a novel approach to the regulatory enterprise to protect against abuses while fostering innovation. Johnstone brings considerable legal, financial, and technological sophistication to the task, and his analysis is at once rigorous and accessible. This book will become essential reading on the future of cryptoassets

It's time to ask: In what ways the Financial Regulation narrative has succeeded or failed in these regards? For example, has applying it achieved outcomes consistent with the objectives of regulation? Is it an appropriate response in view of the new social forces, expectations and opportunities associated with this technology? Has it promoted or stifled diversity in the ecosystem?

Early on, it puzzled me that despite all the talk about the importance of ecosystem development, very little thought has gone into the factors that influence it.

And this is something I devote some time to consider in my book.

The application of regulations developed in the 20th century to a technology that creates possibilities that have only emerged in the 21st have led to regulatory agencies too quickly grabbing hold of a fit to existing regulation taxonomy that provides ready answers without actually solving the underlying problem.

The crypto industry moves fast and requires regulatory frameworks that can cater to that pace. Prof. Johnstone brings forward a number of ideas that are worth reflecting on as cryptoassets are definitely here to stay

This is a result of incrementalist thinking - something that works well when change is gradual, but when change is not gradual, incrementalism fails. And that fairly becomes more apparent when we look at the underlying assumptions of securities regulation that no longer hold true in the context of blockchain technology as I examine in the book.

I want to turn now to some aspects of the different kind of approach I've taken to these issues.

The first is what I've captured under the concept of the new prospect.

Blockchain technology creates new possibilities for the formation of commercial relationships, institutional arrangements and community interactions that weren't previously possible.

Though it's long been understood that information and communication technologies can change how markets and economic activity is undertaken and disrupt traditional hierarchical structures.

The new prospect can be contrasted to the existing ways of doing things - the old prospect - frequently heard mantras such as same business, same risks, same rules or even technology neutrality are decoys to what we should be thinking about.

This technology is not only about the old prospect and yes, the new prospect is all about the technology. This is why I say that technology neutrality does not imply technology agnosia.

And in my book I argue that the Financial Regulation narrative has stifled the potential social opportunities presented by the new prospect.

The second approach I've taken involves identifying the enabling concepts of the technology. These are public key cryptography that enables secure transactions and consensus to be formed across a decentralized network. Hence, the subtitle of the book - Cryptographic Consensus Technology and the New Prospect.

This approach has led me to five proposals for how we can do better. Three of them are concerned with high level principles or institutional reform.

Johnstone provides a refreshing way to think about the regulatory limits of applying the standard financial narrative to a technology that is globally programmable but locally valuable. His DBA (Determined-By-Architecture) framework may help align regulation with the borderless possibilities of mathematics

The first two proposals present what I've called a Determined-By-Architecture framework based around the enabling concepts of the technology.

The Determined-By-Architecture or DBA approach can provide policymakers with a more useful heuristic tool to reframe thinking and provide new perspectives. This is because thinking about the technology from the enabling concepts rather than customary labels such as blockchain or DLT, helps to create new perspectives that are capable of delivering a more sustainable regulatory framework as novel ways of configuring the enabling concepts are found and put to new use cases.

As things stand now, the rate of problems that are emerging seems to be exponentially faster than the rate of solutions the financial narrative is capable of offering.

If there is a risk of allowing an intractable gap to open up in our legal or economic systems, there is a real need to understand how to reason about this technology to foster more astute policymaking.

Topics such as regulations and cryptocurrencies are covered in the 2020 edX Prize nominated Professional Certificate in FinTech by The University of Hong Kong. Try one of the courses, the largest fintech online course on edX - Introduction to FinTech.


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