Regulatory outlook on public blockchains from an expert meeting Point Zero Forum in Zurich, Switzerland, following are 3 key insights:
- Use cases
- Risks
- Practical regulatory perspective
1. Use cases:
🔹Cross border payments:
Public blockchain offers a golden source of data, very valuable since the banks currently work with their own databases and reconciliation leading to delays and discrepancies.
🔹 Trading & settlement of tokenized assets:
A trading facility called a Distributed Ledger Technology (DLT) – integrated into the Swiss National Bank’s central bank money system that settles assets on a public blockchain. But Swiss trading participants, such as banks and institutions, are not yet apt to handle on-chain cash settlements.
According to the experts, over 40 banks in Switzerland use cryptocurrency infrastructure. A clear separation should be made by using a smart contract layer for logic of asset issuance and settlement.
🔹 Liquidity Pools (LPs):
High efficiency in price and data but a robust governance framework is needed.
2. Risks:
🔹Operational risk:
What can be done if a public blockchain collapses?
Use of transferable smart contracts and open-source software, across blockchain networks as a highlighted solution. Institutional-grade Layer 1 blockchains as a potential middle ground.
🔹Legal & political risk:
Since several jurisdictions are involved, technical terms are interpreted differently. Global harmonisation for the documentation is needed. Also, permissioning at a smart contract level or a wallet level can be implemented, if there is no other solution.
3. Practical regulatory perspective:
Swiss regulator FINMA maintains a neutral stance and advocates that technological solutions should remain a choice of market participants. Regulatory challenges such as conditions for the “valid transfer” of a digital asset and circumstances for qualifying a digital asset as a “custodial asset” were emphasized. International efforts on AML & CFT controls are required. It was stated that it should be not on a token level, but at smart contract level.
Albeit, standards currently contain relatively simple regulations, and the practical application will require more detailed regulation in the long term.
📌So, where should the focus of regulatory efforts be?
On detailing standards to claim general applicability but compromising all jurisdictions.
or
General, principle-based standards, less detailed but more flexible.
Both approaches demand a high level of international collaboration.
Read more: Regulated Activities On Public Blockchains
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