In the first and second article in this series we explained why we believe it is time for crypto and regulation to become more aligned, and what is currently being done to make that happen in different parts of the world.
In this final piece, we give our thoughts for what should happen next. We still have some way to go in order to truly unlock the potential of the crypto and blockchain market, but the steps below can, in our opinion, help get us there faster.
The relationship between the players in the
blockchain
Blockchain
Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others.
Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others. Read this Term ecosystem and regulators is often portrayed as antagonistic by the media. This has to change if we’re to establish a new paradigm in which crypto regulation can be a driving force for growth.
Respect from both sides
One of the first things that must happen is a cooling off of the most extreme views on either side of the debate. For cryptoasset advocates, this means accepting that some aspects of decentralized, autonomous finance can and will (and perhaps should) be regulated. This is inevitable in a world where nation states and supranational organizations hold sway and have a responsibility to protect consumers. Indeed, attempts to operate “without” the law, such as with the ICO boom in 2017, have not been a success, with the ICO bubble coming to an end as investors were not prepared to invest in a market perceived to be rife with bad actors. Let’s start by agreeing that the word “decentralized” is deceiving. Period. Even the most decentralized service has some level of human interference, in either writing or deploying the code, maintaining the servers, marketing the offering etc.
On the other side, skeptical regulators must accept that blockchain-based products and services, including cryptoassets, are here to stay and indeed the technology can be used to benefit markets and consumers. Today, Bitcoin is being bought by major financial institutions, Ethereum is a platform that thousands of developers are dedicating their careers to and DeFI is establishing innovative financial services that provide clear efficiency benefits.
Dr. Ozan Özerk, Founder of OpenPayd
Regulations that encourage, not inhibit
Once we recognize this state of play, regulators can focus on implementing regulations that power growth.
The first step is to set out clear and simple guidelines on asset classifications and taxation requirements for
cryptocurrencies
Cryptocurrencies
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities.
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities. Read this Term, which are operable in practice.
As a second step, they should look at examples of where financial regulation has spurred growth and innovation in the past, in order to see which lessons can help guide crypto regulations.
One of the best examples is Open Banking. In the UK, this initiative began with a clear and simple plan to make it an obligation for financial institutions to share customers’ financial data with authorised providers. In this way, Open Banking was an attempt to change the market by reducing the power of large banks and breaking down the walled gardens of data they controlled.
In just three years, this has led to a vibrant, innovative market in which over 300 providers participate, offering a range of new and varied products to consumers.
James Burnie, Financial Services Regulation and FinTech Partner at Gunnercooke.
Why collaboration and education matter
In order to get this regulatory framework right, crypto companies, payments experts and regulators must come together to co-design what the best outcome might look like.
So far, this has often been lacking. The lines of communication between the key parties are weak and fragmented. Monologues need to evolve into dialogues. And we need to agree on the intent, so we can start speaking the same language, and with each other.
We have seen this with Open Banking and there is a big opportunity to do the same with cryptoassets.
The current signs are encouraging, with the UK Treasury and FCA jointly announcing plans to regulate stablecoins at the end of 2021 in order to encourage responsible innovation in finance. Not only that, we’ve seen various crypto and blockchain-related companies taking part in the FCA’s regulatory sandbox in recent years, and a growing number of licenses being granted.
These are all encouraging signs because they are aimed at putting crypto companies and regulators in the same room to discuss a path forward. Our own experience of working with crypto companies has taught us that these companies have specific needs and unique business models. However, this shouldn’t preclude them from fitting into a regulatory system designed to encourage innovation and growth.
Crucially, regulators and crypto companies need to be in regular discussion so the companies understand what the regulators’ aims are and the regulators can see the entirely legitimate activities these companies are undertaking. This is the starting point that should lead to regulation designed to foster innovation and growth.
It is by no means a groundbreaking suggestion: greater collaboration between the relevant parties required to regulate the crypto market will super-charge the industry’s growth and acceptance among consumers. However, it is one that we seemingly need to remind ourselves of.
Open Banking shows us what innovation can be achieved when stakeholders work together. Both sides must realise that they are not going to outlast the other – cryptocurrency and financial regulation are both here to stay.
A forward-thinking approach in which knowledge is shared will give crypto the opportunity to flourish it deserves, as well as the regulatory safety it needs.
By Dr. Ozan Özerk, Founder of OpenPayd and James Burnie, Financial Services Regulation and FinTech Partner at gunnercooke.
In the first and second article in this series we explained why we believe it is time for crypto and regulation to become more aligned, and what is currently being done to make that happen in different parts of the world.
In this final piece, we give our thoughts for what should happen next. We still have some way to go in order to truly unlock the potential of the crypto and blockchain market, but the steps below can, in our opinion, help get us there faster.
The relationship between the players in the
blockchain
Blockchain
Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others.
Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others. Read this Term ecosystem and regulators is often portrayed as antagonistic by the media. This has to change if we’re to establish a new paradigm in which crypto regulation can be a driving force for growth.
Respect from both sides
One of the first things that must happen is a cooling off of the most extreme views on either side of the debate. For cryptoasset advocates, this means accepting that some aspects of decentralized, autonomous finance can and will (and perhaps should) be regulated. This is inevitable in a world where nation states and supranational organizations hold sway and have a responsibility to protect consumers. Indeed, attempts to operate “without” the law, such as with the ICO boom in 2017, have not been a success, with the ICO bubble coming to an end as investors were not prepared to invest in a market perceived to be rife with bad actors. Let’s start by agreeing that the word “decentralized” is deceiving. Period. Even the most decentralized service has some level of human interference, in either writing or deploying the code, maintaining the servers, marketing the offering etc.
On the other side, skeptical regulators must accept that blockchain-based products and services, including cryptoassets, are here to stay and indeed the technology can be used to benefit markets and consumers. Today, Bitcoin is being bought by major financial institutions, Ethereum is a platform that thousands of developers are dedicating their careers to and DeFI is establishing innovative financial services that provide clear efficiency benefits.
Dr. Ozan Özerk, Founder of OpenPayd
Regulations that encourage, not inhibit
Once we recognize this state of play, regulators can focus on implementing regulations that power growth.
The first step is to set out clear and simple guidelines on asset classifications and taxation requirements for
cryptocurrencies
Cryptocurrencies
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities.
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities. Read this Term, which are operable in practice.
As a second step, they should look at examples of where financial regulation has spurred growth and innovation in the past, in order to see which lessons can help guide crypto regulations.
One of the best examples is Open Banking. In the UK, this initiative began with a clear and simple plan to make it an obligation for financial institutions to share customers’ financial data with authorised providers. In this way, Open Banking was an attempt to change the market by reducing the power of large banks and breaking down the walled gardens of data they controlled.
In just three years, this has led to a vibrant, innovative market in which over 300 providers participate, offering a range of new and varied products to consumers.
James Burnie, Financial Services Regulation and FinTech Partner at Gunnercooke.
Why collaboration and education matter
In order to get this regulatory framework right, crypto companies, payments experts and regulators must come together to co-design what the best outcome might look like.
So far, this has often been lacking. The lines of communication between the key parties are weak and fragmented. Monologues need to evolve into dialogues. And we need to agree on the intent, so we can start speaking the same language, and with each other.
We have seen this with Open Banking and there is a big opportunity to do the same with cryptoassets.
The current signs are encouraging, with the UK Treasury and FCA jointly announcing plans to regulate stablecoins at the end of 2021 in order to encourage responsible innovation in finance. Not only that, we’ve seen various crypto and blockchain-related companies taking part in the FCA’s regulatory sandbox in recent years, and a growing number of licenses being granted.
These are all encouraging signs because they are aimed at putting crypto companies and regulators in the same room to discuss a path forward. Our own experience of working with crypto companies has taught us that these companies have specific needs and unique business models. However, this shouldn’t preclude them from fitting into a regulatory system designed to encourage innovation and growth.
Crucially, regulators and crypto companies need to be in regular discussion so the companies understand what the regulators’ aims are and the regulators can see the entirely legitimate activities these companies are undertaking. This is the starting point that should lead to regulation designed to foster innovation and growth.
It is by no means a groundbreaking suggestion: greater collaboration between the relevant parties required to regulate the crypto market will super-charge the industry’s growth and acceptance among consumers. However, it is one that we seemingly need to remind ourselves of.
Open Banking shows us what innovation can be achieved when stakeholders work together. Both sides must realise that they are not going to outlast the other – cryptocurrency and financial regulation are both here to stay.
A forward-thinking approach in which knowledge is shared will give crypto the opportunity to flourish it deserves, as well as the regulatory safety it needs.
By Dr. Ozan Özerk, Founder of OpenPayd and James Burnie, Financial Services Regulation and FinTech Partner at gunnercooke.
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