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How regulation can spur growth in Web3, AI and digital assets

What rapidly evolving technology means for regulators, and the importance of embracing communication, collaboration and clear governance.

The future of payments won’t arrive in a flash, fully formed at the tips of our fingers. It requires innovation, ingenuity, and perhaps most importantly, a sturdy foundation upon which it can be built.

This is the role of regulators, who play a crucial role in laying down frameworks that encourage innovation. In a recent whitepaper, The Future of Payments: Trends Report, I broke down the regulatory challenges and opportunities posed by thrilling new technology like Web3, AI and digital assets.

Here are some key takeaways about how regulators can help usher in the future of payments.

Who is paving the way to innovation in digital assets?

There’s a global race for jurisdictions to put licensing frameworks in place, with industry, governments, and regulators working in collaboration with international standard-setting bodies to develop future regulatory frameworks.

Take Markets in Crypto Assets Regulation (MICA), for example.  This is a landmark piece of regulation as it’s the first harmonised EU regulatory framework for digital assets.

This means we will likely see increased institutional activity in the EU – often a consequence of greater market certainty, legal clarity and less regulatory fragmentation.

And a harmonised approach to devising future regulatory frameworks will be key to avoiding regulatory arbitrage and jurisdictional shopping.

As for the jurisdictions that are paving the way when it comes to the regulation of digital assets, the UK, UAE and Singapore are clear standouts.

Singapore’s digital asset regime is under the existing Payment Services Act – a different approach to Europe, for example, where there is bespoke regulation. They have also announced a stablecoin framework allowing Singapore-referenced stablecoins or any linked G-10 currencies to be issued in the country. This provides a roadmap around stablecoins – an essential part of how the industry works, especially in relation to payments and settlements.

The UAE, meanwhile, is seeking to be at the forefront of digital asset innovation, with both the VARA regime in the Emirate of Dubai and ADGM in Abu Dhabi freezone the most pro-digital asset and understanding of regulators. The ADGM in Abu Dhabi has a particularly sensible approach to approaching the marketing of crypto assets with risk disclosures, achieving a balance between consumer protection and retaining marketability. In short, the government has a clear blockchain and digital asset strategy and are extremely supportive.

Finally, the UK has clearly announced its ambition to establish itself as a digital asset hub, with the Government recently announcing policy recommendations for a future regulatory framework.

But how are digital assets changing, and what are the challenges this poses for regulators?

How has the digital asset industry evolved?

Beyond the greater focus on the importance of regulation in the industry, exchanges are now evolving – moving away from vertically-integrated business models.

There is pressure to do things in a stabler, safer way with greater guard rails and protections for the users, including segregation of client funds, and creating a point of accountability.

As for where digital assets are becoming increasingly popular, adoption is growing in both in the institutional and retail sectors. The latter now leads the way with the highest number of companies accepting digital assets with more businesses across industries offering them as a means of payments rails.

In the last twelve months we have seen a significant uptake in businesses wanting to use digital assets to reduce costs and increase efficiency, and going forward there is huge potential for the underpinning technology to boost efficiency and cut costs in public services such as the NHS.

This expansion in use also extends to a government level – several governments of countries with unstable fiat currencies have adopted their own digital asset currencies. The rise of these currencies has certainly pushed many countries to now explore the benefits of central bank digital currencies (CBDCs), with over 130 countries at a development, pilot or consultative phase.

But digital assets are only one of the evolving technologies regulators must grapple with.

How can regulators adapt to Web3 technologies?

Technology poses a challenge for regulators, for several reasons.

First, it moves extremely fast, so by the time regulation is in place it may be outdated. Second, many jurisdictions have different approaches to regulating technology, resulting in fragmentation. Finally, the borderless nature of the internet makes it challenging to enforce regulation and find the central point of accountability.

And as the functionalities of the internet have increased, so too have the legal and regulatory risks. This is particularly true in Web3, where regulatory frameworks have not yet been built.

This has highlighted the importance of clear governance systems, digital trust and identity. And this is a broader challenge with Web3, which operates in a decentralised and permissionless manner, making oversight and enforcement challenging.

Thankfully, initiatives like regulatory sandboxes – spaces for businesses to test products – have huge benefits, acting as a middle ground where innovation can take place.

To build a safe space for the future, an ongoing dialogue between regulators and the Web3 community will be essential. Ultimately, the unique characteristics of Web3 technology, and the absence of an existing framework, make the adoption of a risk-based and proportionate approach to regulation the most logical step forward.  

Finally, it’s vital for the Web3 community to recognise the importance of consumer protection and market stability, and in the absence of an existing framework, develop industry standards based on these principles.

To find out more about the trends defining payments, download: The Future of Payments: Trends Report.