Gabrielle Patrick is a UK & US lawyer specializing in cryptofinance and distributed ledger (DL) technology. She is the co-founder and general counsel of Epiphyte, which enables instant settlement of trades and transactions using DLs.
In this feature, Patrick provides an on-the-ground look at a recent EU Parliament event that focused on digital currencies and blockchain tech.
In an unprecedented move, the EU Parliament hosted a non-commercial roundtable on cryptocurrencies and blockchain last week. The purpose was to educate members (MEPs) on the world of blockchain technology and set the stage for future regulatory agendas.
Taking part were representatives from the EU Commission, the Bank for International Settlements, the World Bank, the United Nations, Europol, ESMA, the UK Treasury, the Bank of England, Nasdaq, as well as startups Blockchain and Epiphyte. The event was facilitated by the European Digital Currency & Blockchain Technology Forum, a public policy platform for virtual currencies and distributed ledger technology.
The tenor of the discussion was one of overwhelming support for the blockchain sector, with the expressed intent to not prematurely regulate or over regulate.
Conducted under Chatham House rules, an emphasis was placed on today being the best opportunity for descriptive – and not prescriptive – regulation, when we are moving from an analog world to a digital world and from siloed banking to networked banking.
The true discussion now is not really about the bitcoin blockchain or distributed ledger technology, but shared ledgers that allow interconnected financial services.
The roundtables explored how cryptocurrencies have sparked an examination of the issuance of money itself and the structural instability of financial systems. Since monopolies rely on a lack of inter-connectivity and diversity of systems, they are structurally unstable – and cryptocurrencies can see the end of a 300-year old bank debt monopoly.
Epiphyte led the discussion on using shared ledgers as an enhanced regulatory reporting and oversight tool. Even though this aspect has been overlooked in the past in the bitcoin/blockchain dialogue, it is one that deserves significant attention.
For the first time, we see a technology that allows for a single, standardized view of data that can be updated in real time across multiple silos of global institutions, and that can be accessed with multiple digital keys creating different permission levels under different schemes tailor-made to regulatory needs.
From a legal point of view, there was discussion on the exact governance of shared ledgers.
What we are seeing now are different types of ledgers which provide a menu of governance options – public law, private law, algorithmic governance or programmable systems/behavior.
This menu of governance has been presented to us in this way for the first time. Laws also need to catch up. For example, there's a need to legally recognize the possession of stocks and bonds using shared ledgers, and the finality or transfer of assets on those ledgers.
As analyzed during the roundtables, regulation needs to support innovation, not be overly burdensome and above all, constitute clear policy goals.
It was observed that shared ledgers and cryptocurrencies were invented long after the regulatory goals which fostered the current regimes were created.
Therefore, what must be kept in mind is whether the current regulatory goals are limiting creative disruption and, if they are, what changes are needed. Also, roundtable participants described shared ledgers and cryptocurrencies as a nascent but disruptive innovation, so that there must be a dedicated effort to identify gaps in current regulations and determine how to fill those gaps without premature or overly burdensome regulation.
While there have been signals to regulate bitcoin exchanges and wallets, it is important to distinguish between custodial and noncustodial wallets and the grey areas of multi-signature custodianship.
Regulators commented that with new innovation brings new risks, but that cryptocurrencies and shared ledgers represent a cheap and efficient global payments infrastructure, the use of which should not be over regulated at this time.
The roundtables explored a variety of topics, such as the need for a government-issued cryptocurrency that enables the instant settlement of transactions, the amount of integration work needed now to implement the technology, and the lack of any evidence that cryptocurrencies pose a systemic risk or are a good conduit for money laundering.
Perhaps the most powerful message of the EU Parliament-hosted conference was that we need a permissionless environment in order to truly innovate, and that premature regulation would only stifle the use of cryptocurrencies and shared ledgers.