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Blockchain has the characteristics to excite and confuse at the same time, leading policymakers and regulators alike to react in similar but distinct ways. This emerging technology—probably best known as the underlying technology of crypto-assets like Bitcoin—creates decentralised, open, public platforms for anyone to transact directly with anyone else. Without needing a third-party intermediary to complete transactions, and largely anonymous, it is in stark contrast to our pre-existing processes that depend on identifiable, accountable parties. On the blockchain, there are no payment providers to send and receive funds, no banks to check identities, no one to step in if things go wrong. Our regulatory frameworks, models of market supervision and even our legal system itself depend on identifiable, accountable parties. So blockchain-based transactions pose a fundamental question to the manner in which state interventions are carried out, creating a conundrum for governments.
In practice, however, very few blockchain networks or applications are truly decentralised. Private blockchains, used mostly in enterprise settings, by design restrict access and decision-making to only those registered. Even among public networks that claim or imply high levels of decentralisation, there are often people or organisations that actually have some level of control or oversight. For example, OECD research has underlined that in Decentralised Finance (DeFi) markets, developers can (and do) hold administrative rights of protocols, and the voting power to change protocols can be (and are) concentrated in the hands of a few; yet such arrangements are seldom disclosed or well understood by users. There are also a host of service providers that have sprung up around decentralised blockchain markets, like exchanges and wallet providers, who are important gatekeepers to the crypto-asset world.
Headline grabbing incidents distract from the potential of blockchain technology, as well as creating a negative image of the technology. There are real positive use cases in finance that could eventually reduce costs and improve efficiency.
And yet some blockchain markets remain chaotic, volatile and at times lawless, especially for crypto-assets. During the Initial Coin Offering boom in 2017, the estimated level of scam offerings went as high 81%. More recently, design flaws in TerraUSD—a DeFi “stablecoin” purportedly pegged to the US dollar—led to the protocol’s collapse, with USD 40 billion in losses borne largely by retail investors. Governance and conduct challenges aren’t restricted to financial settings, and the market for Non-Fungible Tokens (crypto-assets often associated with digital art) is also rife with theft, copyright infringement and market manipulation.
These headline grabbing incidents distract from the potential of blockchain technology, as well as creating a negative image of the technology. There are real positive use cases in finance that could eventually reduce costs and improve efficiency: for example, tokenisation allowing instant payments and settlements and expanded market access for investors, or distributed ledgers providing payment rails for more efficient cross-border transfers. The OECD has also chronicled blockchain’s promising uses beyond finance for trade facilitation and supply chain transparency, and the growing applications for decentralised public sector service delivery, among others. This potential has prompted countries as diverse as Australia, Colombia, France, Germany, India and Nigeria, as well as the European Commission, to establish dedicated blockchain strategies.
When it comes to balancing the opportunities of blockchain with the potential for policy challenges and market failures, OECD member countries have taken a clear stance with ministers highlighting the need to “develop and strengthen standards for new and emerging technologies that reflect our shared values”. This means governments fully expect to see guardrails in place to guide technological innovation in a way that preserves core elements of social and economic governance. For OECD countries, this includes principles of market integrity, the rule of law and governments’ ability to offer basic protections and guarantees to their citizens.
The Age of Unpeace: How Connectivity Causes Conflict by Mark Leonard, Author, The Age of Peace; Co-Founder & Director, European Council on Foreign Relations
This sentiment was the motivation for the OECD’s latest policy standard, the Recommendation on Blockchain and Other Distributed Ledger Technologies, which was adopted by OECD countries in June 2022 and will be launched this week at the annual OECD Global Blockchain Policy Forum on 28–29 September. This is the first government-backed standard for blockchain, and represents a high watermark for the OECD’s longstanding and continuing work in this space.
This new Recommendation lays out governments’ expectations for all actors involved in blockchain systems, whether public or private sector, to support market integrity, good conduct and inclusive innovation. It also reflects a commitment from OECD members and other adherent partners to work towards a policy environment that promotes beneficial blockchain innovation, and to ensure coherence and cohesion in policy approaches internationally—a critical element given the cross-border dynamics of blockchain applications.
Importantly, the Recommendation offers high-level, principles-based guidance focused on meeting outcomes rather than setting rules. It leaves room for innovation, and acknowledges that blockchain technology brings opportunities to deliver new forms of governance that can meet the requirements of traditional markets but in different ways; embedded supervision could automate monitoring of financial risks through smart contracts built into a DeFi ecosystem, for example. This guidance provides policymakers and innovators alike with a framework to address questions and challenges that could arise as blockchain innovation continues.
The OECD will continue to leverage its analysis, standard setting and convening powers to solve blockchain’s riddles and make it fit for the future.
The agenda for this year’s Global Blockchain Policy Forum underlines the value of such a framework. The emerging Web3 ecosystem looks set to bring together a number of disparate blockchain uses into a connected, integrated, decentralised ecosystem, which some expect to form the foundation of the internet’s next major evolution. The continuing adoption and innovation in crypto-asset markets is reaching the point where some of the assumptions underpinning our global financial governance system may need to be revisited.
As a technology’s impact grows, there will be a greater need to better understand how to harness it. The OECD will continue to leverage its analysis, standard setting and convening powers—through evidence-based policy, good governance, engagement and collaboration—to solve blockchain’s riddles and make it fit for the future.