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Embedded Supervision: How to Build Regulation into Blockchain Finance

Raphael Auer

No 371, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

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 tokenized 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 decentralized 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.

Keywords: tokenisation; stablecoins; asset-based tokens; cryptoassets; cryptocurrencies; regtech; suptech; regulation; supervision; Basel III; proportionality; blockchain; distributed ledger technology; central bank digital currencies; proof-of-work; proof-of-stake; permissioned DLT; economic consensus; economic finality; fintech; compliance; auditing; accounting; privacy; digitalisation; finance; banking (search for similar items in EconPapers)
JEL-codes: D20 D40 E42 E51 F31 G12 G18 G28 G32 G38 K22 K24 L10 L50 M40 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2019-10-01
New Economics Papers: this item is included in nep-acc, nep-cba, nep-law, nep-mac and nep-pay
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DOI: 10.24149/gwp371

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