Embedded Supervision: How to Build Regulation into Blockchain Finance

Abstract

The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, i.e., a regulatory framework that provides for compliance in tokenised markets to be automatically monitored by reading the market's ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralised market is modelled that replaces today's intermediary-based verification of legal data with blockchain-enabled data 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.

Inside the Regulatory Sandbox: Effects on Fintech Funding

“…Our paper contributes to the current debate on public policies to foster innovation (OECD, 2017;Auer, 2019). 6 A recent literature has established that fintechs face serious obstacles to raising capital (Block, Colombo, Cumming and Vismara, 2018;Haddad and Hornuf, 2019), despite the fact that their innovation provides value to innovators and investors (Chen, Wu and Yang, 2019).…”

A Survey of Fintech Research and Policy Discussion

“…For instance, a close to real-time surveillance system is proposed by the Bank of England when discussing the future of regulation. 58 Auer (2019) proposes a new concept called Embedded Supervision (ES) and shows that DLT could be used to ensure high-quality and low-cost compliance. The ES would allow supervisors to verify compliance with regulatory goals by reading the market's distributed ledger without the need for businesses to actively collect, verify, and deliver the data, therefore, reducing the costs of regulations.…”

Recommendations contributing to the development of financial technology (Fintech) in Vietnam

“…Fintech also helps to change financial, human resources in the future. You are good at professional skills and understand and do information technology-related jobs by Auer, R. (2019) [1] . We only encounter two-way relationships between financial institutions in the traditional financial market, including banks, investments, insurance, securities, financial companies, and customers.…”