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Globalize Me: Regulating Distributed Ledger Technology

By: Roee Sarel, Hadar Y. Jabotinsky, & Israel Klein



Distributed Ledger Technology (DLT)—the technology underlying cryptocurrencies—has been identified by many as a game-changer for data storage. Although DLT can solve acute problems of trust and coordination whenever entities (e.g., firms, traders, or even countries) rely on a shared database, it has mostly failed to reach mass adoption outside the context of cryptocurrencies. A prime reason for this failure is the extreme state of regulation, which was largely absent for many years but is now pouring down via uncoordinated regulatory initiatives by different countries. Both of these extremes—under-regulation and over-regulation—are consistent with traditional concepts from law and economics. Specifically, whenever DLT implements a “public blockchain”—where there is no screening of who joins the network—both the technology and its regulation constitute what economists call “non-excludable goods.” For these types of goods, two classical incentive problems emerge: (i) over- regulation, due to the “tragedy of the commons,” and (ii) under- regulation, due to the “free-rider problem.” We argue that these problems are best solved using some form of global regulation. Comparing alternative paths to such regulation, including (i) centralized regulation, (ii) decentralized regulation, and (iii) international standards, we analyze how global regulation of DLT could be implemented using a mixture of “on-chain” (embedded in the technology itself) and “off-chain” measures. Our Article is the first to analyze why global regulation of DLT makes sense from a law and economics perspective and is also the first to provide concrete suggestions on how to implement such regulation.

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