Regulatory Challenges in Blockchain

UAE's #blockchain guide outlines several significant challenges facing the widespread adoption of blockchain technology. These challenges include: •Education and Capabilities: There is a lack of fundamental understanding of how blockchain works beyond its association with #cryptocurrency. This lack of awareness extends to lawmakers, hindering the development of constructive regulations. Furthermore, there is a shortage of talented enterprise-level blockchain software developers and a need for proper training programs at various levels. •Interoperability: A major concern arises from the multitude of different blockchain systems that exist, often using different languages, platforms, consensus mechanisms, and protocol schemes. The lack of a standard to ensure compatibility and harmonious operation between these different blockchains poses a significant challenge to the technology's development and adoption . This disconnection can lead to confusion and hesitation among decision-makers. •Scalability: Creating blockchain platforms that can adapt to the growing needs of companies and governments remains a critical challenge. Issues related to implementation, cost, and employee training need to be considered. The inherent technological challenge lies in the fact that every transaction adds a new block, increasing the blockchain's size and potentially leading to performance bottlenecks. Current systems like Bitcoin have significantly lower transaction processing capacities compared to traditional systems like Visa. While solutions like Sharding and off-chain transactions are being explored, no perfect solution currently exists. •Regulatory Clarity: The borderless nature of blockchain networks clashes with the lack of consistent regulatory clarity and differences between jurisdictions. As technology advances faster than regulations, risks and uncertainties persist. Many regulators lack a comprehensive understanding of blockchain and cryptocurrencies, hindering the application of cohesive regulatory approaches. The current cryptocurrency regulations are often inconclusive and scattered, with no unified international standards for cryptocurrencies or data ownership. The UAE's efforts with WEF to establish global standards are a positive step towards addressing this challenge . •Governance: Establishing policies and continuously monitoring their implementation within a blockchain network is complex, especially since it's a relatively new technology with no established "best recipe". The diverging interests of a network's stakeholders as they interact with and derive value from the network further complicate governance. Governments and industries need to be prepared to address change in a way that benefits all stakeholders without compromising the network. This includes decisions on consensus protocol changes, rules for network participation, block size adjustments, and the adoption of off-chain solutions10

FDIC Discouraged Banks from Using Public Blockchains Like Ethereum, Documents Reveal Overview: Newly unredacted FDIC correspondences obtained via a Freedom of Information Act (FOIA) request reveal that U.S. banks exploring public blockchain services faced resistance from federal regulators. The documents, secured by cryptocurrency exchange Coinbase, expose the Federal Deposit Insurance Corporation’s (FDIC) skepticism toward public blockchain networks such as Ethereum and Solana, favoring private, permissioned alternatives instead. Key Takeaways from the FOIA Documents: 1. FDIC Concern Over Public Blockchains: • In a March 2022 letter, the FDIC expressed reservations about a bank’s plan to launch a “Bank Digital Deposit” program on a public blockchain network. • While the specific blockchain remains redacted, networks like Ethereum and Solana are often used for such purposes. 2. Preference for Permissioned Blockchains: • The FDIC indicated a preference for private, permissioned networks over decentralized public blockchains. • Regulators cited concerns over transparency, risk management, and compliance in public blockchain environments. 3. Core Regulatory Concerns: • Stability Risks: The FDIC appeared concerned about volatility and potential systemic risks associated with public blockchain transactions. • Security Vulnerabilities: Public blockchains were viewed as more susceptible to cyberattacks and fraud. • Control and Oversight: Permissioned networks offer greater regulatory visibility and control, aligning better with traditional banking compliance structures. 4. FDIC’s Position on Blockchain Innovation: • The agency’s feedback doesn’t outright ban public blockchain usage but implies a strong regulatory preference for closed systems where oversight is easier. • This stance contrasts with the industry trend favoring decentralized finance (DeFi) for its openness and accessibility. Why This Matters: 1. Regulatory Friction for Banks Exploring Blockchain: • Banks aiming to leverage public blockchain networks face regulatory hurdles, potentially stifling innovation in digital asset services. • Compliance concerns could slow adoption of blockchain-based financial services in traditional banking. The Takeaway: The FDIC’s reluctance to endorse public blockchain networks reflects broader regulatory skepticism about decentralized systems in traditional banking. While this stance may slow the integration of public blockchains like Ethereum into banking services, it also underscores the need for continued dialogue, clearer guidelines, and innovation-friendly policies. As financial institutions and regulators navigate these challenges, the balance between security, transparency, and innovation will define the future of blockchain adoption in the banking sector.

Inside the European Blockchain Sandbox Best Practices Report 2nd Cohort: 5 Stats You Need to Know 1. 80+ Regulators Engaged Across Europe - The second cohort of the European Blockchain Sandbox saw over 80 national and EU regulators take part—double the number from the first cohort. - Each use case attracted an average of 8 regulatory authorities, far surpassing the original 1.5 target. 2. 20 Use Cases Covering 17+ Regulatory Areas - From GDPR, MiCAR, and AML to AI, e-voting, and battery passports, the cohort explored compliance across 17 core EU legislative domains. - These use cases went well beyond crypto, touching ESG, customs, cybersecurity, and sustainability. 3. Deep Tech Convergence on the Rise - Blockchain is no longer a standalone topic: DLT + AI + IoT combinations are becoming the norm. - The EU’s regulatory sandbox model is evolving to address the complexity of intersecting technologies—especially in areas like the AI Act and eIDAS 2.0. 4. Smart Contracts Under Scrutiny - Smart contracts were discussed in nearly every regulatory area—from GDPR compliance to digital identity, ESG reporting, and MiCAR. - The report highlights growing demand for standardisation and legal clarity for smart contract infrastructure across the EU. 5. Regulatory Innovation with Real Impact - Changes introduced based on first-cohort feedback—like regulator-only meetings and centralised expert briefings—boosted engagement. - These tweaks contributed to overwhelmingly positive feedback and will now be a permanent feature. So What? The EU’s Blockchain Sandbox isn’t just a talking shop—it’s becoming the blueprint for tech-forward regulation. With real regulator engagement, wide industry representation, and a focus on cross-border and cross-sector issues, this initiative is shaping how Europe regulates emerging technologies. If you’re building in Web3, plugging into this dialogue matters more than ever. Great work European Commission, Bird & Bird and OXYGY

Most people think that a large wave of enforcement actions is a sign of a regulatory framework that is healthy and active. I disagree. A large wave of enforcement actions can also result from a regulatory framework that is unclear, inconsistent, and overly restrictive to the market. This is what is happening in the crypto market in the U.S. 1) Unclear regulations - The United States is struggling how to fit crypto into a regulatory framework from almost 100 years ago. The Securities and Exchange Act of 1936 never anticipated digital assets, cryptocurrency, or blockchain technology. Trying to apply this framework to a technology for which it was not intended is tough. Both regulators and the industry struggle to make sense of it all. 💡Solution: A digital assets-specific framework. For the crypto industry to have a clear understanding of digital asset regulations, a new regulatory framework is required. 2) Inconsistencies in decisions- Inconsistent application of regulations creates confusion. It remains unclear to many lawyers and Web3 founders what the exact threshold is for a digital asset as a security and how to ensure complete compliance. 💡Solution: No more regulation by enforcement. The industry learns very little when selective enforcement occurs. Instead, the U.S. Securities and Exchange Commission should issue circulars, rules, procedures, and regulations that enable effective compliance implementation. 3) Stifling innovation - All companies look for jurisdictions that provide the best environment for business - this includes considerations around transparent, clear, and implementable regulations. The United States is at risk of losing the best digital asset innovations to other markets that have prioritized setting up a digital assets framework. 💡Solution: Foster innovation through digital asset working groups and other B2G collaborations. The only way to make a regulatory framework that fosters innovation is to invite the industry to join in its creation. Regulations are meant to protect the market and only a deep understanding of how that market works can support that goal. As I engage in conversations with both regulators and the industry, I see that there is potential for a win-win. The only question is how long that will take. What are your thoughts on the current state of regulatory development in the digital assets space in the U.S.? https://lnkd.in/d5RdSPHz #cryptoregulations #legalcompliance #law

A few take-aways from today's SEC Crypto Task Force roundtable on DeFi. It was reassuring to hear Chairman Atkins, and the other SEC Commissioners, emphasize in their opening remarks the need for consideration of digital asset issues through notice-and-comment rulemaking. This is a pro-crypto Administration and an pro-crypto SEC. But the agency leadership recognizes the right way to make major policy changes is to go through appropriate processes, work through the issues, and acknowledge the risks that regulation seeks to address. They may not strike the balance I'd like, but they understand they need to strike a balance, not just fan the flames of crypto activity as indiscriminately and quickly as possible. (Although I'm worried, as I'll explain later.) That commitment was reinforced by the Crypto Task Force staff. As I knew going in, this isn't a group of ideologues or techbros parachuted in to override the experts; it's mainly career staff who have been working on the issues for years. The conversation among the panelists covered a variety of topics, not all directly related to DeFi or the issues within the SEC's mandate. (Some of the biggest concerns for DeFi involve financial crime and money laundering, which are largely under the Treasury Department.) We had a good back-and-forth on disclosure-based regulation as a substitute for conduct mandates, the significance of non-custodial operation in DeFi, the importance of regulating activities rather than artificial service categories, opportunities to use decentralized and cryptographic identity technologies, enabling tort law to serve as a check on bad actors, and other ideas. This is clearly an area ripe for regulatory innovation and experimentation. Finally, more than one panelist argued that memecoins are a perversion of crypto's potential for real innovation in financial markets. This was in connection with blaming the last Administration for pushing developers away from productive activities. The current President's memecoin ventures went unmentioned. It's important to distinguish uses of blockchain and digital assets that can provide real value from those that are gambling and best, and fraud at worst. I hope the serious public servants at the SEC can maintain that focus; I worry about what happens if it runs into conflict with the financial interests of the occupant of the White House.