The latest report from the OECD's Global Blockchain Policy Forum underlines the opportunities for blockchain to support cross-border economic activity, and the need for international cooperation to realise these benefits and mitigate risks to global governance. OECD's Oliver Garrett-Jones unpacks what this means for governments and industry, and where international efforts are headed.
The way governments think about blockchain has evolved markedly in the last few years. The public sector now has a much deeper understanding of the impacts and implications of a technology defined by its decentralisation, distribution and automation. The financial sector has served as blockchain's testing ground, and activities in this tightly regulated space have illuminated some of the core policy and regulatory challenges. National strategies from countries like France, Australia, India and Germany have demonstrated governments' interest in harnessing blockchain for innovation and growth.
This evolution has also spurred policy activity at the international level. Multilateral efforts at the Financial Action Task Force and Financial Stability Board have yielded rules and guidance to manage certain risks around crypto-assets, while a number of countries have pursued bilateral co-operation to link blockchain pilots across borders. Yet despite these developments, many public sector initiatives and policy responses don't fully reflect the international implications and challenges of blockchain technology – and so risk creating a fragmented policy environment which could elevate risks and diminish opportunities. Governments should be applying a stronger international lens to activities around blockchain, and there are three good reasons for doing so.
1. Strengthen beneficial economic linkages
Blockchain is shaping up to be a useful technology to help strengthen beneficial economic linkages between countries at a moment when such linkages face more precarity than any other time in recent memory. From trade flows to capital flows to labour market mobility, blockchain is being tested or applied today to drive efficiency, connectivity and openness in the way countries do business with one another.
Yet these benefits are not assured, and often depend on a wider legal and regulatory context. Blockchain's use in trade, to streamline border procedures and track the movement of goods, illustrates some of the challenges here. This is one of the most promising applications of blockchain technology, but widespread adoption is hampered by divergent data standards and systems that can't talk to one another, while some jurisdictions still require paper forms and cannot legally recognise electronic signatures.
2. Ensure digital innovations respect global priorities
The innovations spurred on by new technologies, including those enabled by blockchain, must not run counter to global priorities like sustainable development, climate action and fighting illicit financial flows – and, ideally, help move these priorities forward. The possibility that activities on blockchain networks might undermine such important goals is a much-discussed concern in policy circles and in wider public discourse because of the threats to multilateral co-operation, rule of law and the social contract.
One headline-grabbing issue here is the energy use, and subsequent climate impact, of big public blockchain networks like Bitcoin and Ethereum. This issue has nuances – it is specific to only a subset of blockchain networks, and we also need to consider the percentage of renewables in the energy mix being used, and the development and adoption of less energy-intensive network protocols. But at the moment there is too little data for policymakers to make an accurate assessment of the hazards, and too little transparency in the crypto-asset industry around responsible business conduct practices and the management of Environmental, Social and Governance (ESG) risks to provide assurance to the public. Governments should be clearly articulating their expectations around such issues, and industry players need to openly address concerns if they hope to enjoy a supportive public policy stance and a strong social license.
3. Foster responsible blockchain innovation
We want to foster responsible blockchain innovation and, as an inherently global technology, part of this means working towards a more coherent international policy environment. Interoperability, for example, is a precondition to many of the cross-border benefits which governments can work together to support, while consistency in policy approaches between countries can help provide a level playing field, avoid regulatory arbitrage, prevent poor conduct spilling over from other jurisdictions, and give certainty for innovators.
Developing a blueprint for governments
Blockchain can present some novel questions and challenges for policy makers, but many blockchain issues are simply digitalisation issues, and oftentimes governments don't need to reinvent the wheel to respond. Best practices and policy tools around international regulatory co-operation, agile rulemaking and adapting to digital transformation already exist to support national and international approaches, and many of these are housed at the OECD. The same is true of international standards on business conduct and market integrity, which are technology and sector neutral and so cover activities on blockchain networks.
At the same time, there are a number of issues which are specific to the technology which should be addressed by governments, such as the obvious requirement for decentralised networks and services to comply with local laws, and the need for transparency and accountability in the governance of distributed systems. Experience from crypto-asset markets, where service providers often plead ignorance to applicable financial regulations, also underline the value of public authorities setting specific expectations for market participants when it comes to emerging technologies, and to clearly articulate regulatory perimeters – even if these ought to be reasonably assumed.
Achieving this at the necessary international level will require a concerted effort between countries, and the OECD has developed a blueprint to do exactly this. The OECD Recommendation on Blockchain and Other Decentralised Ledger Technologies is expected to be adopted by OECD ministers at their Ministerial Council Meeting this week, and is set to be the world's first international policy standard on blockchain technology adopted by governments.
The Recommendation contains principles to guide governments towards a common framework for blockchain adoption and innovation, as well as principles directed to all blockchain actors to ensure market integrity, efficiency and fairness. It will drive the OECD's work on blockchain in the years ahead as a foundation for international co-operation on this emerging technology, and an important tool towards a consistent, innovation-friendly international policy environment – and we'll be taking this agenda forward in our annual Global Blockchain Policy Forum this September.
Blockchain at the frontier - Impacts and issues in cross-border co-operation and global governance
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