The emer­gence of so-cal­led “decen­tra­li­sed finan­ce” (DeFi) and a shadow finan­cial sys­tem of cryp­to­cur­ren­cy exch­an­ges and sta­b­le­co­in issuers rai­ses the chall­enge of how to app­ly tech­no­lo­gy-neu­tral regu­la­ti­on so that simi­lar risks are sub­ject to the same rules. This paper makes the case for embedded super­vi­si­on, ie a regu­la­to­ry frame­work that pro­vi­des for com­pli­ance in decen­tra­li­sed mar­kets to be auto­ma­ti­cal­ly moni­to­red by rea­ding the market’s led­ger. This redu­ces the need for firms to actively coll­ect, veri­fy and deli­ver data. The paper explo­res the con­di­ti­ons under which dis­tri­bu­ted led­ger data may be used to moni­tor com­pli­ance. To this end, a decen­tra­li­sed mar­ket is model­led that replaces today’s inter­me­dia­ry­ba­sed veri­fi­ca­ti­on of legal data with block­chain-enab­led cre­di­bi­li­ty based on eco­no­mic con­sen­sus. The key results set out the con­di­ti­ons under which the market’s eco­no­mic con­sen­sus would be strong enough to gua­ran­tee that tran­sac­tions are eco­no­mic­al­ly final, so that super­vi­sors can trust the dis­tri­bu­ted ledger’s data. The paper con­cludes with a dis­cus­sion of the legis­la­ti­ve and ope­ra­tio­nal requi­re­ments that would pro­mo­te low-cost super­vi­si­on and a level play­ing field for small and lar­ge firms.

Quel­le /​ Link: Embedded super­vi­si­on: how to build regu­la­ti­on into decen­tra­li­sed finance