How Regulators Become Blockchain Innovators

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How Regulators Become Blockchain Innovators: Monetary and macro-prudential policies have traditionally been the main occupancy of central banks and financial regulators. But the recent surge in financial technologies, cryptocurrencies and digital transformation is gradually shaping strategic thinking and tinkering on regulatory innovation. 
How Regulators Become Blockchain Innovators
While regulatory reactions have been ambivalent, ambiguous and oftentimes antagonistic, it would be challenging to think of 21st-century regulation without innovation. 
Associated with the rise in digital transformation is not only a set of new (distributed) technologies and institutional mechanisms, but more importantly, the transformation and evolution of certain values, norms and beliefs about the nature of money and trust. 
Beyond money and markets, the social reconstruction and codification of trust is a fundamental inflection point in the evolution of financial services. 
While it may seem revolutionary, if not paradoxical at first hand, increasingly regulators are becoming innovators as they entertain, explore and experiment with the adoption of distributed ledger technologies (DLT), digital currencies, application programming interfaces (API), artificial intelligence (AI), augmented reality (AR) and a host of other digital technologies. 
From a population ecology perspective, what we are witnessing is a form of speciation or “polymerization” – a process whereby small nascent variations (like digital currencies) could accumulate over time into systemic changes, which hypothetically result in the emergence of novel hybrid species (think central bank digital currency). 
While it may be true that innovation usually precedes regulation, in more evolutionary terms, the regulatory landscape is undergoing a systemic transformation in nurturing trust and fostering resilience. 
Beyond digitization, developmental legacies and idiosyncrasies continue to shape this development. For instance, across the Caribbean, these pathologies include thin and fragmented financial markets and relatively high levels of financial exclusion and economic inertia. 
Thus, the confluence of both (societal) “pull” forces and (digital) “push” forces are propelling digital innovation and the transformation of Caribbean regulators as they seek inclusive sustainable growth. Clear of an industrial revolution of the fourth kind, what we are experiencing is really a societal evolution of the fifth degree. 

Larger lens 
Stepping back, history is full of accounts of the rise and fall of empires, institutions and networks expanding and transforming. 
Despite sharp distinctions in time and context, a common challenge in all such ventures has been the institutionalized dichotomy between the pressure for centralization to assure direction, consistency and control; and the countering pressure for decentralization to secure responsiveness, ownership and adaptability. 
Although the events of history may not repeat themselves, the reactions that evoke this challenging balance seem to persist through time. 
If evolutionary forces hold true, it is very likely that within a decade we will experience not only a shift from centralized control and technologies toward distributed control and shared platforms, but more importantly, a paradigm shift and the emergence of hybrid systems that crossbreed and combine the strengths of centralization and decentralization. 
Rather than juxtapose centralization and decentralization as absolutes, digital hybridization allows for a dynamically stable architecture and ambidexterity. As architects of the future, nimble regulators are likely to take the lead, as witnessed by recent accounts of innovation and experimentation by monetary and financial authorities. 
Yet, rather than maintain stability and a steady state, digital hybridization will demand resiliency and steady change on the part of these new orchestrators. Moreover, trust rather than technology will be fundamental in this transformation. 
Following the law of requisite variety, viable regulation in dynamic (distributed) environments begets regulatory resilience. In pro-active (feedforward) regulation, each systemic dynamic will have to be compensated by an appropriate response from the regulator. If we wish to maintain stability in the face of vulnerability, the regulator must be able to generate at least as many strategies as there are dynamics. 

Navigating course 
The growth in the variety of cryptocurrencies, financial technology charters, regulatory sandboxes, blockchain collaborations and experimentations with (central bank) digital currencies are early, yet they present signs of evolution in motion. It is thus no coincidence that the rise in open banking and fintech is transpiring in tandem with the application of regulatory technologies for customer due diligence. 
To maintain resilience and steady change, the unbundling and specialization of financial ecosystems requires the new (peer-to-peer) channels and (shared) platforms for reconnecting and integration. Leaning into the future and leading with foresight will require nimbleness and agility. 
(Much like Odysseus, regulators will need to sail through the Strait of Messina, thereby avoiding Scylla on the rocky cliffs and the whirlpool of Charybdis.) 
While some speculate on the demise of regulators, the art of steersmanship, and thus governance, is knowing how to adjust your sails in the midst of unexpected changing circumstances. In more evolutionary terms, it is not the strongest of species, but the most nimble that thrive on transformation.
SOURCE: COINDESK

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