Why clarity around digital asset regulation is vital for innovation

Rahul Advani of Ripple explains the importance of regulatory clarity in the digital asset space and what an appropriate regulatory framework entails.

As countries around the world begin to recover from the impact of COVID-19, it is clear that the pandemic has continued to accelerate the global adoption of emerging financial technologies. Harnessing the benefits of these technologies is essential for innovation – and a clear regulatory framework will be essential to support their development.

The financial services industry is an industry that has consistently faced significant pressure to turn to digital products and offerings to meet the demands of the changing payments landscape. As more and more digital assets enter the mainstream – serving different functions and business purposes – this paves the way for new innovative use cases, such as creating faster and more reliable cross-border payments.

It is clear that digital assets will increasingly play a critical role in supporting the financial systems of the future. However, the challenge is that, even if the technology is primed and ready, the regulatory frameworks necessary to support innovation are still being developed. In fact, many jurisdictions still lack some form of regulatory framework to support the development of digital assets, making it difficult for financial institutions to realize their full potential.

So what can regulators and policymakers do to support innovation in digital assets in the future? Australia has taken a firm step in this direction, with policymakers asking for suggestions that will help grow the digital asset sector. Ripple participated by sharing our approach to establishing an appropriate regulatory framework for digital assets, which I will develop in more detail.

Define the digital asset

Before we start to look at what a clear regulatory framework might look like, there is an urgent need to establish and standardize clear definitions of digital assets, and to describe how they can be used. This is essential not only for traditional banks and financial institutions venturing into this space, but also for emerging fintechs looking to use digital assets for new and innovative solutions.

Singapore provides an excellent model for such a taxonomy – digital assets are regulated either as digital payment tokens, or like digital tokens which are products of capital markets. This enables an activity-based licensing framework encompassing a wide range of activities, which better facilitates innovation while mitigating risk.

Encourage rather than discourage innovation

With clear definitions in place, regulators and policy makers can then move towards establishing the “rules of the road”. While ensuring consumer certainty and guarantees are essential, it is also important that regulators and policymakers play a leading role in fostering innovation – not stifling it.

With the accelerating pace of technology, the regulatory landscape for digital assets calls for innovative and flexible ways for intermediaries to design, create and deliver financial products and services to the consumer. Regulations that are properly calibrated and applied in a consistent and transparent manner will produce predictable results, while regulations that are not will create uncertainty and chaos.

So what could such a regulatory framework imply?

To begin with, it should be technology agnostic. Concretely, this means that financial services using digital assets as a solution should not be treated any differently from those who choose to take advantage of traditional architectures.

It should also be principle-based, guiding market players towards regulatory and political objectives, without imposing an overly prescriptive and onerous process. This is especially important given the dynamic nature of digital assets.

Finally, an ideal setting would use a risk-based approach that calibrates regulations based on the specific risks posed by a digital asset class – in turn build a simple, secure and accessible ecosystem that will encourage investments in digital assets.

Taking the example of Singapore again, the Payment Services Act is a framework that takes a risk-based approach to regulate payment service activities in accordance with the risks posed by the activity. However, in determining whether a digital asset should be regulated as collateral under the Securities and Futures Act, the Monetary Authority of Singapore will examine the structure and characteristics of the digital asset, including the rights attached to it. .

Singapore’s thriving and vibrant digital asset ecosystem proves how important it is to have a clear and agile regulatory framework in place to support innovation.

The way forward for digital assets

As we continue to drive innovation and reinvent the financial services industry, understanding the benefits that digital assets and blockchain technology provide to consumers and end users will be essential for regulators and policymakers as they seek to reinvent and update policies and frameworks.

Such regulatory frameworks should be forward looking and flexible while providing regulatory certainty and guarantees to consumers, while meeting the objectives of encouraging innovation and growth.

In doing so, the benefits of digital assets (speed, scalability, efficiency and negligible costs) will be passed on to consumers and end-users, thereby helping to reduce friction and inefficiencies in the existing financial system, thereby removing barriers to business. entry and improving competition. . It’s time for regulators and policymakers to seek technological solutions that help foster adaptability for a lean financial landscape – a landscape where the pace of change is only accelerating.

Rahul Advani, APAC Policy Director at Ripple.

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