From Global to National: Blockchain Development and the Policy Environment

Keynote address by Greg Medcraft, Director, Directorate for Financial and Enterprise Affairs, OECD

Blockchain Adria Conference "From Concept to Revenue", 25 March 2021

There is no doubt the use and utility of blockchain and other decentralised technologies have grown rapidly in recent years, driven by potential gains in productivity, efficiency, resilience and transparency.

These gains come in large part from the new ways of transacting and exchanging information enabled by blockchain, embodied by the rise of decentralised markets, autonomous organisations and the ability to turn physical assets and objects into digital goods.

While many of the products and services transacted on blockchain networks are not fundamentally new, these markets do have novel dynamics and differ in important ways to traditional means of doing business – and so they pose new issues and questions around market governance and regulation.

It means that when we’re talking about moving from concept to revenue in blockchain innovation, we’re not just talking about technology. The policy environment is also of critical importance, and this is what the OECD is most focused on, through its Global Blockchain Policy Centre.

Today to I will:

1. Highlight the regulatory context of digital assets in finance – because this is blockchain's most developed area of use and so holds lessons for the technology’s future in other sectors;
2. I’ll reflect on how this might indeed flow through to developments in those other sectors; and
3. I’ll highlight what we can do at the national level to start developing a consistent global policy environment.

1. Regulatory context of digital assets in finance

I’ll observe again that so far digital assets and other blockchain-based financial innovations are not fundamentally new products – they are just new ways of doing old things.

For example, tokenisation merely replaces one digital technology with another – that is, replacing centralised electronic book-entries in securities registries with cryptography-enabled securities based on a distributed network.

This means regulators should be able to apply a largely technologically neutral approach in regulating these new products in order to meet mandates like financial stability, market integrity and promoting competition.

However, either because of the unique characteristics of blockchain networks, or because of the entrance of non-traditional actors and business models into such a highly regulated industry, there are additional areas that need to be considered.

I want to highlight six conclusions from the OECD’s research into digital asset products and practices and our close engagement with industry.

1. It can be difficult for market participants to know with certainty whether certain digital assets fall within the regulatory perimeter – and we’ve seen this at play with high profile sanctions against blockchain-based finance companies in the US in recent months;
2. There are potential gaps in the regulatory treatment of assets which may give rise to regulatory arbitrage opportunities.
3. Existing regulation may need to apply to new actors, such as trusted third parties guaranteeing the accuracy of information going on-chain.
4. New requirements may need to be considered to achieve regulatory mandates, such as interoperability between DLTs or gateways linking the on-chain and off-chain environments.
5. New risks may arise from the application of DLT technologies, like novel operational risks.
6. Regulatory or legal ambiguity around asset tokenisation can create uncertainties and risks for participants in tokenisation markets and undermine the smooth functioning of such marketplaces.

2. Blockchain development in other sectors

While policymakers have been most concerned with financial markets, blockchain innovation, including tokenisation of non-financial, real world assets, has been accelerating in other sectors – and this brings me to my second point on developments elsewhere in the economy.

Market regulators and supervisory bodies in other areas of the economy may run into some of the same challenges as financial regulators when looking at how new decentralised activities interact with existing laws and regulations – specific examples include:

1. determining the ownership of tokenised real-world assets – which could in turn become a financial market issue;
2. the legality of smart contracts;
3. accountability in networks, such as a single accountable point which is often required in existing regulatory regimes such as corporate governance rules, but which don’t exist in new business models like Decentralised Autonomous Organisations; and
4. scope for successful judicial intervention or redress, particularly in in open public networks.

When we consider the policy environment shaping blockchain innovation and influencing adoption, it goes well beyond financial regulation. We need to take a whole-of-economy perspective.

This will be most effective if it is done in reference to global developments and with an eye to cross-border consistency – and the OECD has been focused over this year on helping governments do exactly that.

3. Globalising the national policy environment

We have drawn from dozens of OECD research papers and hundreds of hours of industry consultation to develop guiding principles and recommendations for both actors using and designing blockchain systems, and for governments in developing the policy environment around those systems.

For blockchain actors, we need to codify a set of expectations that address many of the issues I’ve mentioned, including:

1. Complying with relevant policy, legal, and regulatory requirements – and this extends to more decentralised and public networks;
2. Governance, accountability and transparency – including the need to be open and inclusive in the design of network protocols and incentives;
3. Interoperability – between blockchain and non-blockchain networks, to support the flow of data, encourage competition, and empower individuals’ control over their personal data; and
4. Digital security – which is about understanding the risks and taking responsibility for business continuity and the treatment of personal data.

For governments,  we’re seeing a need to:

1. develop coordinated policy strategies concerning blockchain – which are innovation friendly, and takes into account the technology’s cross border nature;
2. support blockchain research, development, and investment;
3. strive to build skills and capacity around blockchain – including through education and training;
4. create an enabling policy environment – which means consulting widely on regulation and rules, and developing institutional capabilities and mechanisms to best understand and address the technology’s impact on policy priorities – for example regulatory sandboxes and innovation labs; and
5. cooperate internationally on blockchain – including driving consistency in national approaches and promoting fair and open processes for global technical and ethical standards.

This kind of guidance would set a common foundation for blockchain policies, ready to be expanded upon for issue and sector-specific regulation or guidance – for example, the OECD already has a policy toolkit for tokenisation slated for release later this year.

As I said, this guidance is still under development. We’re launching a public consultation on the final shape of this guidance next month, but wherever we end up it will stand as a much needed common, global reference point as governments develop national strategies – and a key building block in making the global national, and the national global when it comes to blockchain.

Click here to learn more about the OECD's work in tokenisation and blockchain policy.