Encryption regulation should take a risk-based approach

Encryption regulation should take a risk-based approach

Above all, it’s necessary that there is clarity around what rules apply to cryptoassets, particularly when they are used for payments. Clear definitions with sufficient guidance as to when and how these rules will be applied will be key. Regulatory frameworks for cryptoassets should set out clear standards and expectations for financial institutions, crypto service providers and other players that look to support crypto-related payments. Crypto-based payments should not be subject to overlapping, duplicative or conflicting rulesets. Establish regulatory clarity for payments Focus on risk

Given the need to update crypto regulation, overcome regulatory fragmentation and foster innovation, it’s important that policy-makers and regulators engage with industry to design workable regulatory solutions. The most effective rule-making usually happens when the public sector collaborates with the private sector. The private sector can help policy-makers and regulators better understand the industry, technology and ecosystem and work directly with them to craft rules and standards that achieve regulatory objectives without hampering innovation or resulting in unintended impacts. But each country is approaching crypto regulation differently. Some are amending existing regulations, while others are introducing entirely new pieces of legislation. Some countries are focusing more narrowly on regulating specific types of cryptoassets and activities (such as stablecoins for payments) whereas others are looking to capture the entire crypto sector within one all-encompassing regulation. Even within individual countries, regulators and policy-makers sometimes take different views on how to regulate the same cryptoasset or crypto-related activity and who has authority to regulate them.

As an initial starting point to drive such public-private collaboration, we’re proposing a set of six key considerations that we believe are critical when evaluating and designing new rules for cryptoassets: These challenges have resulted in gaps, ambiguities and uncertainty about which set of rules apply under what conditions and which regulators have jurisdiction to enforce them. As a result, regulators and policy-makers around the globe are looking to update their frameworks appropriately.

Depending on the nature of the legal claim a cryptoasset represents and the set of rights it provides to the holder to redeem or convert it, regulations should consider whether deposit insurance is available. They should set standards around the composition and liquidity of the reserve assets. Rules should establish the legal nature of crypto-based payment mechanisms to define the rights that holders of tokens have and how they are able to enforce those rights. This is important not only to distinguish it from existing forms of money, but to ensure that individuals can easily redeem or convert their tokens for other forms of money, like cash or traditional commercial deposit money. Promote fair competition Regulations should establish standards aimed at protecting consumers who choose to make payments that involve cryptoassets. Consumers need to be empowered to make informed decisions around how they pay for goods and services. As such, consumers will need to be adequately informed of the differences between different crypto-based payment mechanisms, as well as between crypto-based and traditional forms of payments, especially when they could be exposed to harm.

Incorporate strong consumer protections Rules and safeguards should be designed to correspond with the risk introduced by the payment mechanism and activity performed. As such, crypto regulation should take a risk-based approach to establishing rules for crypto-related payments. Establishing principles-based rules that allow controls to be tailored to the specific risks created by crypto-based payments will be most effective in achieving regulatory objectives. And by focusing on regulating risk, rather than specific technologies, the rules will be more flexible, adaptable and resilient to ensure continued technological advancement.

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