Regulate Ledgers and Not Individual Crypto Providers, BIS Study Says

Using distributed-ledger technology (DLT) to cut the cost of cross-border payments requires regulators to stop looking at individual entities like banks, and start looking at the whole decentralized network, a working paper produced for the Basel, Switzerland-based Bank for International Settlements (BIS) has found.

International standard setters are hoping to streamline current clunky and expensive systems for cross-border remittances – but to unlock the potential of blockchain-style tech, first they may need to turn away from rules that traditionally assume a single central player is in charge.

“Enhancing cross-border payments is a multifaceted problem requiring a comprehensive approach, and DLT could be one way of addressing these inefficiencies,” as noted by the working paper, written by a team led by University of Luxembourg professor Dirk Zetzsche. However, “financial law traditionally assumes that functions are concentrated in a single entity,” the paper noted.

That hits the nub of why regulators and the crypto world are often in such conflict. Traditional financial regulations are focused on institutions such as banks, and it isn’t easy to shoehorn blockchain payments or smart contracts into that model. In practice, regulators tend to look for intermediaries on to whom obligations such as anti-money laundering checks can be piled, for example those providing crypto exchange or wallet services.

That may need to change, Zetzsche said – with rules switching to a mentality where by default you regulate, not individual nodes, but the distributed system as a whole.

Existing cross-border payments, which often hinge on banks forming “correspondent” partnerships with overseas equivalents, allow them to charge “oligopolistic rents” that let them push up prices for the ordinary user, the paper said.

But “DLT could be used to create competition” among payment service providers by allowing people to easily select the best deal on the market, the paper said. The study also cites as a benefit easier client identification, meaning more people get into the financial system without raising money laundering risks.

Regulations should focus on the ledger when looking at issues like how the system takes decisions and manages risks, and in any other case where it would improve efficiency due to DLT’s transparency or security, the authors argue – with developers setting out the exact details in advance in a Plan of Operations that regulators have to approve.

DLT isn’t the only way to cut the cost of cross-border transfers. Another recent BIS paper examined the impact of more prosaic changes, like having central banks stay online at night and on weekends.

But international payments – making it easy to send salaries home to the developing world via remittances, for example – were a key motivation for stablecoin projects such as the now-abandoned Libra, then renamed Diem. Global regulators may be starting to hear the message.