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A version of this article was originally published in Elevandi.

The Europe chapter of the Capital Meets Policy Dialogue at the Point Zero Forum in 2023 yielded important insights from business leaders, regulators, investors, and others. The speakers and panelists brought a wide range of views about the implications of digital assets and of generative AI for finance, its regulation, and the larger economy. Three themes came to the fore:

  • The industry and regulators are still working their way through very fundamental structural decisions about regulation and policy in these areas. This is partly due to the early stage of development and partly because there is such a wide gulf in understanding between the technological entrepreneurs and the regulators and policymakers.
  • Entrepreneurs in this area must become substantially more realistic about regulatory issues. At the same time, there are also some unrealistic viewpoints in the official sector that need to disappear.
  •  Communications will be very important in bridging the gaps in understanding to ensure a high level of innovation that is produced safely.

We are still debating the basics of regulation for digital assets and — in even more rudimentary fashion — for AI. Navin Suri (Advisor to the Board of Directors, Elevandi) and Rafat Kapadia (Head of Investments, Elevandi) discussed a number of core regulatory questions at their panel. These issues have been tackled in other regulatory fields and it’s important to also look to those previous learnings, rather than falling into the trap of designing bespoke regulatory structures because of the novelty of the technology.

Five challenges faced by regulators

  1. Regulations must try to keep up with the speed of development in digital assets and generative AI
    Regulation and related policy will always run behind developments out in the world. Changes take time to manifest themselves; there may be some delays before regulators focus on them, they then take time to understand those changes and formulate responses. Stakeholders are then given time to respond to regulatory proposals while businesses also take time to implement responses to the new regulations. Lobbying or legal actions may also slow down responses further.
  2. The benefits of innovation must be captured while maintaining acceptable levels of risk
    This is virtually the definition of what good regulation is about yet there is a great deal to be learned from past regulatory experience. We should not waste those lessons by acting as if digital assets and generative AI are the first areas to ever need regulation.
  3. Both regulators and entrepreneurs need to be flexible
    There is simply far too much uncertainty to proceed with plans that are dependent on a particular potential future to occur. Panelists presented some different views of the future, and we don’t know who will come closest to being right, although we can be certain they will all be wrong to some extent.
  4. There must be deeper and better interactions between the public and private sector
    This is especially important in nascent technological areas where there is still so much to decide and where change is particularly rapid. There needs to be guardrails to avoid excessive closeness between officials and those they oversee, and to minimize other causes of overly lenient regulation. However, there is substantially more room for communication and cooperation than we have availed ourselves of so far.
  5. Well-designed regulatory structures can avoid regulatory arbitrage or a “race to the bottom”
    Again, this is a concern in virtually every area of regulation and not unique to digital assets or generative AI. Many of the regulatory tools available to deal with the speed of innovation will also serve to reduce regulatory arbitrage by avoiding locking regulators into overly specific structures with overly specific powers, leaving holes to exploit.

The importance of cooperation for future regulatory success

One of the obstacles to dealing effectively with these five challenges to good regulation is the wide gap in understanding between many entrepreneurs and the regulators and policymakers who will determine their fates to a large extent. The burden of accepting reality is heaviest on the entrepreneurs, since policymakers generally hold the trump cards, so the future reality may come closer to their wishes. However, regulators and other policymakers sometimes cling to their own versions of unreality — and they need to let go of these misconceptions.

The final overall theme to emerge from the Capital Meets Policy Dialogue is that communications between the public and private sectors must be widened and improved. First, we need to squeeze out at least the most unrealistic views from both sides to concentrate on the real issues and possibilities for improvement. Second, sound development of both the digital asset and generative AI sectors requires work from regulators and from those they will regulate. There is much still to build in these ecosystems, and it will require cooperation from all sides to create sound and lasting foundations.

Read the original full report, here.