U.S. Playing Catch-Up in Blockchain Techonology and Regulation

Two regulatory bodies released position papers in January on the relatively new area of “blockchain” technology, as described in an American Banker article.  According to the piece, both reports “supported the technology’s potential for reducing costs, improving security and transparency, and enhancing financial services industry logistics.” What may be most interesting is that while one position paper was published by U.K.’s Government Office for Science, the other publication was issued by Vermont, “a state with a lesser claim to regulatory leadership and located far from any financial center.”

This fact reflects the “sharp divide between the regulatory environments in Europe and the United States” and the article highlights the fact that in the U.K., discussions about the new technology and applications “is entering mainstream public policy circles, whereas in the U.S. the topic is “‘still on the fringes.’”

The different level of attention is partly due to the difference in regulatory structure in the U.S. and abroad. According to the American Banker article:

Overseas, the arrangement of regulators is simpler, with authorities clearly defined, whereas the U.S. structure favors overlapping authorities of many agencies that often breeds inaction. U.K. regulators can truly shape new regulations, whereas the jurisdiction of their U.S. counterparts is unclear.. For example, the recent U.K. report on blockchain explores the possibility of a new form of regulation that would focus on rules governing the technical code behind a blockchain system. Last April, the European Securities and Markets Authority also issued a paper outlining basic questions and asking for industry comment on virtual currency as well as distributed ledger technology. The ESMA is currently evaluating the comments.

A potential problem for U.S. players could be the “notable impact if European regulators address certain critical unresolved issues ahead of the U.S.”  Before moving to the regulation phase, the first step might be to determine whether the technology requires new regulation. As described in the U.K. paper, the Government Office of Science addresses the potential difficulty of regulating a “decentralized ledger that does not have a physical owner.” And from a practical perspective the article also raises the question of “how regulators both in the U.S. and abroad will apply privacy and anti-terrorism laws to blockchain systems.” Furthermore, while “some jurisdictions – such as NY State – have acted to license bitcoin exchanges, nothing of the sort has been proposed for the blockchain itself.”

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