The governance of decentralized networks and platforms
The governance of decentralized networks and platforms is a complex and evolving field, as it involves managing and making decisions for systems that are designed to operate without central control or authority. Decentralized networks and platforms, often based on blockchain technology or similar distributed ledger technologies, are used for a wide range of applications, including Digital Currencies, Smart Contracts, Decentralized Applications (dApps), and more.
Governance in decentralized networks and platforms is a multi-faceted and dynamic field. It often involves a combination of technical, economic, and social mechanisms to make decisions that affect the network's rules and operations. Participants in these networks need to be aware of the governance mechanisms and actively participate in the decision-making processes to shape the future of these platforms.
However, there is no one-size-fits-all approach to governance in decentralized systems. Different networks and platforms may adopt various governance models depending on their goals, community, and technology. The effectiveness of decentralized governance often depends on the engagement and cooperation of the network’s participants. Additionally, navigating the challenges of governance in a decentralized context, is an ongoing and dynamic process.
The current state of Digital Currency regulation is quite varied around the world. While some countries’ Digital Currency regulations are changing often, other countries are not even looking to bring any regulation soon. Some countries like the US, UK, and Australia have taken a relative hands-off approach, while countries like China, India, and Turkey have taken a more interventionist approach. This is likely due to several factors, including the different economic and political systems in each country. There are some clear differences in how different countries around the world are regulating Digital Currency.
The Impact of Varied Digital Currency Regulations on Financial Markets
The growth of the Digital Currency market and its movement correlation with stock markets, as presented in the previous section, coupled with varied and fragmented regulations across the globe, implies a serious risk to the stability of the overall financial markets. Hence, there is a need for a strong international framework to regulate the Digital Currency industry and prevent regulatory arbitrage.
Furthermore, isolated regulations and inconsistent compliance measures/ enforcement of virtual assets regulations present a potential risk for money laundering (ML), terrorism financing (TF) and other financial crimes, such as fraud, malware, and ransomware attacks. According to the Financial Action Task Force (FATF), ‘gaps in the global regulatory system have created significant loopholes for criminals and terrorists to abuse’.
Diverse Approaches to Digital Currency Regulations in Western Countries
The Securities and Exchange Commission (SEC) of the U.S. has taken a very cautious approach, classifying most Digital Currencies as securities. The Commodity Futures Trading Commission (CFTC) has taken a more permissive approach, allowing for experimentation and innovation. Some states, like New York, have their own Digital Currency regulations, which are even stricter than the federal regulations.
However, the SEC's stand on whether Digital Currency is a security came into question, post the judgment in “SEC v. Ripple” passed by the United States Southern District Court of New York. In 2020, the SEC alleged that Ripple, the blockchain developer and creator of the XRP Digital Currency token, raised more than $1.3 billion in 2013 by selling XRP in an unregistered security offering to investors. Ripple, drawing from statements made by a former SEC director as a basis for its argument, contended that XRP should not be categorized as a security. On the 13th of July 2023, the as not considered a security when it was publicly sold on an exchange, yet it would be deemed as such when sold to institutional investors.
On the other side, The European Parliament passed Markets in Crypto-Assets (MiCA) rules to regulate the Digital Currency industry, representing the most significant attempt by global governments to regulate the growing market for digital currency. MiCa represents a step forward on a regulatory front where the US lags.
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Diverse Approaches to Digital Currency Regulations in UAE and its Sharia Influence
UAE follows a civil law system influenced by Sharia (Islamic) law. While each of its seven member states has instituted its regulations in areas where there is no federal law, the financial and capital markets are by and large, managed by the Central Bank of the UAE (CBUAE) and the Securities and Commodities Authority (SCA). The Virtual Assets Law establishes the Dubai Virtual Assets Regulatory Authority (VARA), affiliated with the Dubai World Trade Centre Authority (DWTCA), as the primary virtual assets regulator in Dubai. VARA aims to promote Dubai's position as a regional and international destination in the virtual assets sector. It will provide a full-range of services in coordination with CBUAE and SCA and is mandated with organizing and setting the rules and controls for conducting activities related to Digital assets.
Anticipated Trajectory of Regulatory Frameworks for Digital Currencies
Concerning predictions for the future Digital Currency regulations, one trend that is likely to continue is the growing number of countries introducing their digital currencies. This is being driven by a desire to reduce dependence on the US dollar, as well as to increase financial inclusion and improve payment systems. Another trend is the increasing regulation of crypto exchanges, with more countries requiring them to register and comply with anti-money laundering and know-your-customer regulations. And finally, we may see more countries cracking down on crypto's environmental impact, as it has come under increasing scrutiny for its high energy usage.
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At Vayana, we aim to provide affordable and timely trade credit to MSMEs / micro-entrepreneurs and trade-linked industries that are neglected by formal finance through a wide range of institutional and accredited lenders. We use the democratizing approach of Platforms, Pipes, Possibilities, alongside futuristic technological interventions such as blockchain, CBDC infrastructure, and tokenization, to route capital to businesses.
One of our key offerings is the Vayana Debt Platform, a comprehensive blockchain-based loan operating system for Digital Currencies / Deposit Tokens / CBDC / Fiat. It enables regulated/alternate lenders and other credit investors to lend to businesses on the Blockchain, harnessing the power of smart contracts to fully digitize their lending operations.
Views expressed in this article are of Abhinav Agarwal - Finance & Legal, Emerging Tech Platforms.
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