Policy Developments around Blockchain

Blockchain, which we know as a technology providing distributed ledger capabilities and was seen as a solution for everything requiring a contract, got systematically limited to cryptocurrency, a word that has come to mean everything that technology can do in the world wide web as well as the dark web. 

Today, the world appears to be shifting away from the cryptocurrency used for money laundering to a Crypto 2.0 that will assist strong anti-money laundering rules. Experts are increasingly of the view that blockchain and crypto could potentially create a fairer and more inclusive financial system, these need to be built in collaboration with banks and linked to a sovereign currency. 

Given this background, let’s examine some of the policy level changes that came into being over the past twelve months across the world. Of course, the effort here is to bring forth the shifts and not elaborate on them or even analyze their pros and cons, which we believe can be set aside for another post in the none-too-distant future. 

Europe’s DLTR Law

The European Parliament passed a regulation on May 30, 2022 to establish and regulate a temporary pilot for marketing infrastructures operating on distributed ledger technologies (DLT). It forms a part of the EU’s Digital Finance Package that comprises two more legislations – the Market in Crypto-Assets Regulation and the Digital Operational Resilience for Financial Sector Regulation. These are likely to follow soon. 

The first of these legislations establishes a regulatory framework that allows for DLT testing as well as developing crypto assets through tokenization. These instruments currently fall outside scope of EU’s existing financial services laws. The new law addresses issues such as investor protection, market integrity, energy consumption and financial stability. 

Stablecoin and the unstable reactions

President Biden issued an executive order on March 9, 2022 on Ensuring Responsible Development of Digital Assets, containing policy objectives related and directed agencies and other branches of the executive to act in consonance to develop a coordinated government approach to meet these objectives. 

The purpose was to reign in Stablecoins, which had a market cap of $127 billion as of October 2021. The US Congress got its act together to ensure that Stablecoin was brought under Federal law and on April 6, a draft discussion of a Bill was released, aiming to establish a regulatory framework for its issuers. 

The Bill exempts Stablecoins from the definition of ‘securities’ and provides a framework with three licensing options, viz., (a) money transmitting business (b) national limited payment stablecoin issuer and (c) insured depository institution. Per the earlier executive order, the Fed will also continue its CBDC research towards a Treasury-led interagency working group. 

Singapore takes the plunge

On September 15, 2022, Singapore’s Monetary Authority (MAS) launched the Financial Services Industry Transformation Map 2025 that provides a framework of strategies to develop the country as a leading global financial center through enhanced payment connectivity to build a responsible digital asset ecosystem. 

It also laid out clear strategies to explore DLT in use cases such as cross-border payments, trade finance, and capital markets, besides supporting tokenization of financial assets. The policy supports a central bank digital currency (CBDC) and public-private collaboration to develop the infrastructure required to deliver such a currency. 

However, the first off the blocks in 2022 was the Securities and Futures Commission of Hong Kong which issued a joint circular with the HK Monetary Authority on intermediaries that can undertake virtual asset-related activities. Per the statement, intermediaries distributing virtual assets need to comply with the SFC’s requirements for sale of the products. 

India sets the ball rolling with its CBDC

The RBI launched its first retail CBDC pilot on December 1, 2022 with eight banks in tow. The pilot would cover 13 cities and follows RBI’s pilot of the wholesale Digital Rupee that began a month earlier for trading in government bonds. The wholesale pilot will later be expanded to cover more use cases, including money market instruments.

RBI deputy governor T Rabi Sankar is confident that if there is anything that a private crypto can do, the government would be able to create a product that can do it without the associated risks and in a safer format in fiat money backed by the government and issued by the central bank. This is essentially what we are doing with the CBDC experiments, he says.