Connecting systems: interoperability as a foundation for a robust and lasting digital landscape
In the rapidly evolving world of digital assets, spanning from bitcoin to securities and beyond, global consensus on their classification remains elusive. This spectrum of novel instruments, including tokenised commodities and hybrid instruments, presents a challenge for regulators worldwide.
As we transition from analogue to digital money, there exists a generational opportunity to reimagine financial architecture. This transformation offers the potential to build interoperable systems, or risk replicating the existing fragmentation in digital form.
The speed of financial innovation, propelled by the crypto-internet, outpaces the evolution of regulation. This temporal mismatch creates a complex landscape, where principles-based convergence in regulation provides flexibility while ensuring core protections. This approach allows jurisdictions to adapt implementation to local contexts, maintaining compatible outcomes.
Regulatory interoperability, founded on technical standardisation, is crucial for harmonising regulations. The Bank for International Settlements' (BIS) work on central bank digital currencies (CBDCs) demonstrates the achievability of technical interoperability between different CBDC systems.
Cross-border pilot initiatives, involving multiple regulators, are established for innovative projects, fostering interoperability. The BIS, in addition to bridging the regulatory framework, also provides the functional parameters for harmonising regulatory requirements and organisational measures across countries.
The Financial Action Task Force's travel rule for crypto transactions, while addressing legitimate concerns about illicit finance, varies significantly in implementation. This imposes compliance costs that ultimately burden consumers and limit innovation.
International bodies, including the Financial Stability Board, are working to evolve their coordination mechanisms for the digital age, bridging the gap between principles and practice. Granular technical standards are necessary for the implementation of high-level guidance.
Without interoperability standards, we risk creating digital versions of the same friction-filled correspondent banking system we seek to transcend. Interoperability is not just an operational necessity; it is the foundation for an inclusive, innovative, and resilient digital financial future.
Interoperable frameworks democratise access to global financial infrastructure, addressing existing inequalities and exclusion of smaller economies and underserved populations from digital finance benefits. Mutual recognition agreements offer immediate progress in advancing regulatory interoperability, allowing non-EU entities market access through compliance with equivalent standards.
The internet's development offers both cautionary tales and inspiration. Technical standards enabled global connectivity, but regulatory fragmentation still complicates digital governance decades later. As we navigate the digital transformation of money, it is essential to learn from these lessons.
Professor Christoph Kreiterling, a Research Fellow at University College London's Centre for Blockchain Technology, emphasises the importance of this journey. His work at Trier University of Applied Sciences focuses on Technology Assessment and Sustainability Communication. As we move forward, his insights will undoubtedly guide us towards a more connected, equitable, and resilient digital financial landscape.
