The Italian Experiment: A courageous step in cooperation-based crypto regulation
Jan 13, 2025
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3
min read
Italy's creative approach to crypto-asset regulation combines private and governmental oversight. Is this the model for world financial stability?
By Paweł Sternicki
Regulators worldwide have been unable to keep up with the explosive growth of crypto-assets for years. Although the Digital Financial Package (DFP) of the European Union represents a major advancement, important issues still need to be addressed, such as how to deal with decentralized finance (DeFi) or non-fungible tokens (NFTs).
As a creative answer to this uncertainty, the Bank of Italy's ground-breaking Memorandum of Understanding (MoU) on smart contracts established a participatory regulation strategy. This concept seeks to combine public control and commercial innovation in collaboration with top academic institutions. The outcome? An adaptable structure that promotes legal certainty and technical neutrality.
Why Now? The Immediate Need for Change
The demise of cryptocurrency behemoths like FTX and Terra/Luna highlighted the market's inherent hazards and instability. Crypto popularity, however, exploded. The EU responded by introducing:
MiCA (Markets in Crypto-Assets Regulation), which establishes rules for crypto-asset issuances, such as stable coins and utility tokens, while leaving NFTs and DeFi largely unregulated.
DLT Pilot Regime that encourages the tokenization of traditional financial instruments like stocks and bonds, aiming to balance innovation with market integrity.
DORA (Digital Operational Resilience Act), which dictates cybersecurity measures for financial entities, including those in crypto.
However, as demonstrated in the Italian case, these top-down regulations frequently miss the subtleties of blockchain and crypto technologies, at the same time leaving the unregulated markets at risk of becoming unstable.
Participatory regulation, which blends aspects of government supervision, co-regulation, and self-regulation, might offer the compromise required to maintain stability without limiting innovation.
The Key Features of Italy’s Participatory Model
Smart Contracts with Guardrails - by standardizing the terms under which smart contracts operate, the MoU aims to create a safer playground for blockchain applications.
Bridging Public and Private Expertise - Italy’s experiment integrates the strengths of private tech companies and academic research while granting oversight to regulators like the Bank of Italy.
Flexible Regulation - unlike rigid top-down laws, this model adapts to the dynamic nature of crypto technologies, ensuring innovation isn’t stifled.
The Path Ahead
While participatory regulation has great potential, it also has a set of drawbacks. Critics argue that if private entities have too much influence over public policy, there is a risk of regulatory capture. Others draw attention to the difficulties of implementing such frameworks on a global scale in the future, particularly given the decentralized nature of cryptocurrency.
However, as international authorities race to balance the risks and rewards of cryptocurrency Italy's experiment provides a preview of what cooperative, flexible, and resilient financial regulation may look like in the future.
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