A stylized ‘crypto-asset’ regulatory framework (‘Framework’) is presented and described below. It is designed to capture the regulatory permutations and implications of the most prevalent and evolving forms of tradable value created through the use of evolving cryptographically-based (‘crypto’) schemes, as well as their stylized position in a financial ecosystem. The most prevalent of these value-based schemes are based on what is now known as distributed ledger technologies (DLTs), with the main type of DLT in use known as ‘blockchain’ technology.
Value-based applications that can be derived or generated from use of DLTs are known in this Framework as (private) cryptoassets. They can be distinguished from (public) applications of crypto-based value such as those planned by sovereign states for use as legal tender.
The main focus of the Framework is on these evolving ‘private’ use of crypto-assets and their representation as cryptographically-secure and traceable ‘tokens’ of value. These tokenized assets can be traded – that is transferred or exchanged - within regulated or unregulated exchanges, or directly, securely and independently between parties without the need for a centralized exchange. Together they form what could be termed the ‘crypto-economy.’
All these developments challenge the four corners of existing legal and regulatory frameworks with, as yet, no global unanimity as to which regulators have oversight over all or some components of these crypto-assets. The overall goal of any regulation would be to fasten the activities of the most proximate regulators to particular asset classes or value transfer/exchange mechanisms so as to avoid regulatory arbitrage. Where there are no proximate regulations to do so, regulatory sandboxes by the most proximate regulators could be employed.
The Framework presented below is designed to systematize the evolving asset types – both crypto-based or via linked funds - and their place in a financial ecosystem, assess the most proximate regulators, as well as describe their ostensible interlocking relationships. The stylized framework can then be ‘super-imposed’ onto a particular jurisdictions’ legal and regulatory environment and then used as template for allocating regulatory responsibilities. Laws and regulations as well as an enabling environment could then be developed to allow these crypto-assets to be further integrated into a financial ecosystem. Some individual components of this stylized Framework are already in use or have been announced in part in a number of jurisdictions.
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