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World Economic Forum: How Best to Regulate Crypto?

While the WEF's white paper on regulating the crypto asset industry raises a broad range of questions, we also look at its recommendations.

Photo by Evangeline Shaw / Unsplash

Table of Contents

In a white paper on regulating crypto assets, the World Economic Forum (WEF) talks about a global approach while dealing with the challenges of regulating "something that's borderless, open-source, decentralised and constantly evolving."

The report tries to answer an important question that the crypto industry, policymakers and users are grappling with as the crypto asset ecosystem develops.

"As with some other emerging technologies, regulating this ecosystem is like walking a tightrope – it requires a delicate balance between preventing harms, protecting users and promoting innovation," says the lead author Arushi Goel, a data policy and blockchain specialist at the World Economic Forum.

Broad Questions

The report raised a broad range of questions, which include:

  • How should crypto-assets be defined and catagorized?
  • How should they and associated activities be characterized to facilitate a unified knowledge of the ecosystem and enhance regulatory cooperation?
  • To what extent do new legal and regulatory considerations arise when crypto-assets and related activities go from highly centralized to highly decentralized.
  • Do we need new frameworks to handle these problems, or can we modify the ones we already have?

Goel hopes that the white paper, created with extensive help from contributors on the Digital Currency Governance Consortium (DCGC), a worldwide, multistakeholder network of more than 85 prominent organisations in the field, different players will be able to speed up communication, cooperation possibilities, and action towards the goal of creating a fair, inclusive, and sustainable crypto asset ecosystem.

The WEF report suggests there is a need for a global approach to crypto asset regulation.

"The borderless nature of the technology, the interconnectedness within the crypto-asset ecosystem and the prospect of linkages with the traditional financial ecosystem strengthen the case for a global approach to crypto-asset regulation," said the lead author.

But there are several challenges to a global approach.

The WEF report cites a "lack of standardized definitions, taxonomies, classifications and understanding" as the wide range of demands of such an approach.

The white paper quotes Dante Disparte, chief strategy officer and head of global policy at Circle Internet Financial in the US, to highlight the need and "the prospect of interconnectedness between traditional financial and crypto-asset ecosystems."

According to the report, Disparte says, "The advent of crypto-assets and blockchain-based financial services is proving to be more about convergence than disruption of the traditional economy, banking and finance."

"This should be encouraged, and the vital work carried out by the World Economy Forum and the Digital Currency Governance Consortium provides an accessible blueprint for jurisdictions to catalyse growth and investments in the digital assets economy while ending the perilous era of race-to-the-bottom regulatory arbitrage," added Circle's Disparte.

The report shows that countries have regulated crypto-assets in myriad ways, leading to a fragmented regulatory landscape.

Broad Regulatory Framework

The WEF's white paper suggests the following mix-match approach to overcome the challenges in regulating digital assets.

Principle-Based Regulation: Principle-based rules explain both the big-picture ideas and the concrete goals.

This kind of regulation lays forth the desired outcomes and levels of performance rather than outlining specific rules to be followed.

This method is typically accompanied by guidelines, industry standards, and other nonstatutory techniques to give clear direction while allowing enterprises some degree of flexibility to achieve the results.

Risk-based regulation: In risk-based regulation, the rule or standard-setter evaluates the risks associated with their area of responsibility and determines the necessary action to mitigate them.

If an actor engages in a low-risk activity, the regulations would be relaxed to make it easier for them to comply.

As a result, authorities may allocate their limited resources more wisely and concentrate their efforts where the danger is greatest.

Agile regulation: Because policy and regulation formation are no longer the sole purview of governments but rather involve a growing number of interested parties, agile regulation takes a reactive, iterative approach rather than prescribing and enforcing laws.

Self-regulation & co-regulation: In self-regulation, business leaders work together to establish norms and guidelines for their sector.

Self-regulation can increase trust among businesses, customers, and government agencies, and it helps keep businesses informed of changes in the ecosystem.

However, it is open to less stringent restrictions without clear regulatory backing and may not be enforced successfully.

Regulation by enforcement: The term "regulation by enforcement" refers to using actual enforcement to determine legal parameters.

Given the overlap between crypto-asset uses and existing regulatory frameworks around securities, commodities, money laundering, etc., several regulatory authorities have brought enforcement actions against crypto asset companies and participants, arguing that despite the novel nature of the underlying technology, the companies/participants should be held liable for the violations of preexisting laws.

Conclusion & Suggestions

Based on the white paper's analysis of each approach, the top ratings for promoting innovation come from outcome-based regulation & agile regulation broadly.

"Crypto asset regulation requires a forward-thinking and flexible approach that balances innovation and stability. By examining global best practices,
we gain valuable insights to develop regulatory frameworks that encourage growth, protect consumers and foster trust in this dynamic digital landscape," said Sheila Warren, chief executive officer at Crypto Council for Innovation, according to the WEF report.

The risk-based approach scores high on providing certainty to businesses and enforcement effectiveness.

"A global approach to regulating crypto-assets is ideal and needs collaboration in order to leverage the benefits and manage the risks," said the lead author of the WEF report.

The white paper says the technology, law, regulation, and oversight challenges must be met by cooperation and collaboration between international standard-setting agencies, regional authorities, national governments, and the industry players they represent.

Recommendations to International Organisations

  • Promote a harmonized understanding of taxonomy/classification of crypto-assets and activities: The WEF says this will provide a level playing field for businesses of all sizes and in all sectors of the economy and between different legal systems. It will also prevent the blanket treatment of crypto-assets that might harm responsible innovation.
  • Set out best practices and baseline regulatory standards for achieving the desired regulatory outcomes: Since companies will be motivated to adhere to best practices and regulatory requirements to generate confidence in the ecosystem, this will provide predictability for businesses and safeguard users.
  • Encourage pass-portability of entities and data sharing: Bad actors will be deterred from manipulating the ecosystem if information about threats, vulnerabilities, and enforcement is regularly shared. Passportability will also facilitate international cooperation.

Recommendations for regional/national regulators

  • Cross-sector coordination: As a result, confidence in the system will increase, and regulators will be better able to craft flexible, evidence-based laws and guidelines.
  • Regulatory certainty: This way, everyone knows the rules and is incentivized to follow them.
  • Using technology for regulation by design: This is crucial for the industry's ethical growth as it will increase openness, lower risk, and boost confidence.

Industry recommendations

  • Standard setting: Interoperability will be boosted, security tightened, and compliance with regulations facilitated.
  • Sharing best practices: In addition to improving the user experience and ecosystem security, this will encourage responsible conduct.
  • Responsible technology innovation: This is vital to guarantee that the technology is used for the greater good of society and its stakeholders and to empower its users.

Overall, the WEF says the report will serve as the basis for a new project by the Blockchain and Digital Assets team at the World Economic Forum to compare and contrast the efficacy of various regional approaches to regulation.

As part of this initiative, public and private sector officials will get together to discuss the lessons they've learned and the unintended repercussions of various regulatory schemes, added the lead author, Arushi Goel.