Maintaining an optimal balance between innovation and regulation
The speakers, however, also agreed that regulation will be critical for blockchain to thrive and for digital innovation to continue. Smart regulation will engender trust, while minimising risks such as:
- Money laundering and terrorism financing
- Cybersecurity and technology threats
- Investor harm (retail investors often put in more money than they can afford to)
- Stablecoin instability
- Financial instability (ensuring the volatility of the crypto market does not spill over to the formal financial system)
- Lack of accountability in decentralised finance (Tokenisation enables decentralised finance which removes the need for finance intermediation. This introduces risks as transactions can be carried out through smart algorithms and are often made anonymously.)
While there are worries that smart regulation could hamper innovation, the panellists believed the two can co-exist. For instance, stablecoins can be backed by full reserves in cash or a cash equivalent like gold. Being pegged to cash or commodities allows supply to be controlled, providing them with a firm value.
As an example, MAS has been working on several pilot programmes that look to combine smart regulation with blockchain innovation. One of them is Project Guardian, a programme that explores the tokenisation of financial assets and enables real-time settlements, while being implemented under strict regulations. This programme enhances security by using regulated financial authorities as trust anchors to verify entities and check their credentials. Ultimately, strict protocols must be enforced to establish accountability in a decentralised financial market.
Additionally, the panel noted that there is also a need for regulation to address the separation of concerns as many crypto companies often combine huge numbers of offerings onto a single platform, where they can play the role of a custodian, an exchange, and a trading firm all in one entity.