IntroductionRegulatory certainty, a prerequisite for digital payment solutionsOther noteworthy developmentsConclusion
Thursday, 14 May, 2020
The Digital Regulator
COVID-19 pandemic places digital payment regulation at centre stage
During the coronavirus (COVID-19) pandemic, the literature on digital regulations has focused on digital payment solutions, particularly, Global Stablecoins (GSCs) and Central Bank Digital Currencies (CBDCs). It is reasonable to expect that the pandemic will lead to improved regulatory certainty, which would enable the speedy market entry of digital payment solutions.
The advantages of contactless payments and digital banking solutions (web- or mobile phone-based) have emerged quite prominently in the current lockdown (characterised by limited mobility, social distancing, and contactless relationships). Yet, the fundamental opportunities for the development of GSC (i.e. inefficient cross-border payments and inclusion) and CBDC (i.e. de-materialisation of cash) have been recognised long before the pandemic. The renewed regulatory focus on digital payment solutions, due to the current pandemic, reminds us that such solutions depend on regulatory (or legal) certainty to see the light of day.
Reviewing the past 4-5 weeks, we also highlight the development of industry standards by trade associations, for security token offerings (STOs) as well as for digital assets custody; recent initiatives by the Chinese authorities to develop blockchain standards and solutions; the creation of a digital sandbox zone in Portugal; and the pivotal role of the implementation of legal frameworks in influencing success in the blockchain industry (as seen in Switzerland and Malta).
Regulatory certainty, a prerequisite for digital payment solutions
The pandemic and the subsequent lockdown has highlighted the advantages of contactless payments and digital banking solutions.
In the wake of the COVID-19 epidemic, international regulators, such as the Financial Stability Board (FSBFSBlink1), the Basel Committee on Banking Supervision (BCBSBCBSlink1), and the European Central Bank (ECBECBlink1), have focused on discussing private sector’s GSC and (retail) CBDC. A few central banks have followed suit1. Amid these developments, the Swiss FINMAFINMAlink1 announced that the Libra association filed an application for a payment system licence.
The correlation between these discussions and COVID-19 is however a weak one. CBDC and GSC cannot stop a pandemic just like paper money did not cause it. The efforts towards regulation of digital payment solutions had begun well before the pandemic was declared, based on secular trends like de-materialisation of money and the realisation of inefficient cross-border payments. The regulatory focus brought on by the pandemic reminds us that digital payment solutions, fundamentally ready and waiting from a technological perspective, depend on regulatory certainty to see the light of day.
In conclusion, the economic situation that brought about the GSC and CBDC systems was noted long before the COVID-19 pandemic. It, however, amplified the advantages and use cases of digital payment solutions, and reminded policy makers to address the regulatory hurdles that hinder such solutions from entering the market. It is reasonable to expect that the renewed focus of regulators on digital payment solutions triggered by this pandemic will enable such products to reach the market faster.
Other noteworthy developments
Trade associations provide industry standards for STOs and Digital Assets Custody.
China takes steps to develop blockchain standards and solutions.
Portugal creates a digital sandbox zone.
FINMA reported investigation into 60 ICOs during 2019, opening enforcement proceedings against three companies.
Delays in implementing the legal framework led to departure of several blockchain firms from Malta.
The review of the digital regulation literature during the pandemic has revealed a clear focus on digital payment solutions such as GSC and CBDC. While the focus is understandable, given the circumstances of lock-down and social distancing, the opportunity for digital payment solutions pre-dates the COVID-19 pandemic. Yet, the renewed attention to these topics may bring forward the legal (regulatory) certainty required for the practical solutions to see light.
We have highlighted initiatives by trade associations to standardise STO processes and Digital Assets Custody. We also looked at the different fates witnessed in ‘cryptonation’ Switzerland and ‘blockchain island’ Malta, attributable to the attitudes of commercial banks towards cryptofinance legal frameworks.
1These include the Dutch (DNB) and Chinese central banks as well as regulatory authorities in the Unites States. ↵
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