Why Clarity Around Digital Asset Regulations is Vital for Innovation

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

As countries around the globe start to recover from the impact of COVID-19, it’s clear that the pandemic has continued to accelerate the global uptake of emerging financial technologies. Harnessing the benefits of these technologies is essential for innovation – and a clear regulatory framework will be vital to supporting their development.

The financial services industry is one sector that has constantly faced significant pressure to pivot to digital products and offerings to meet the demands of the evolving payments landscape. As more digital assets enter the mainstream – serving different economic functions and purposes – it paves the way towards new and 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 underpinning the financial systems of the future. However, the challenge is that while the technology is primed and ready, the regulatory frameworks that are needed to support innovation are still being developed. In fact, many jurisdictions still lack any form of regulatory framework to support the development of digital assets – making it hard for financial institutions to truly embrace their full potential.

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

Defining the digital asset

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

Singapore provides a great template for such a taxonomy – digital assets are regulated either as digital payment tokens, or as digital tokens that constitute capital markets products. This allows for an activity-based licensing framework encompassing a wide range of activities, which better facilitates innovation while mitigating risks.

Fostering rather than disincentivizing innovation

With clear definitions in place, regulators and policymakers can then move towards setting the ‘rules of the road.’ While it’s vital to provide certainty and consumer safeguards, it’s also important that regulators and policymakers take a leading role to encourage innovation – not stifle it.

Given the accelerated pace of technology, the digital assets regulatory landscape calls for innovative and flexible ways for intermediaries to design, create, and deliver financial services and products to the consumer. Regulations that are appropriately calibrated and applied consistently and transparently will deliver predictable results, while regulations that aren’t will breed uncertainty and chaos.

So, what might such a regulatory framework entail?

For starters, it should be technology-agnostic. In practical terms, this means that financial services using digital assets as a solution should not be treated differently from those that choose to leverage traditional architectures instead.

It should also be principles-based, guiding market participants to regulatory and policy goals, without imposing an overly prescriptive and onerous process. This is particularly important given the dynamic nature of digital assets.

Finally, an ideal framework would use a risk-based approach which calibrates regulations to the specific risks that a class of digital asset poses – in turn building a simple, secure, and accessible ecosystem that will encourage investment into digital assets.

Looking again to Singapore as an example, the Payment Services Act is a framework that adopts a risk-based approach for regulating payments services activities, consistent with the risks posed by the activity. However, to determine if a digital asset should be regulated as a security 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.

The successful and vibrant digital assets ecosystem in Singapore proves how important it is to have in place a clear, agile regulatory framework 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 critical for regulators and policymakers as they look to reimagine and refresh policies and frameworks.

Such regulatory frameworks should be forward looking and flexible while providing regulatory certainty and consumer safeguards, and at the same time meet the goals of encouraging innovation and growth.

By doing so, the benefits of digital assets – speed, scalability, efficiency, and negligible costs – will be passed on to consumers and end-users, helping reduce friction and inefficiencies in the existing financial system and thereby removing barriers to entry and improving competition. It is time for regulators and policymakers to seek out technology-driven solutions that help drive adaptability for an optimized financial landscape – a landscape where the pace of change is only accelerating.

Rahul Advani, APAC Policy Director at Ripple.

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