Our aim is to establish a regulatory experiment for Blockchain-based social and environmental financing, a.k.a a Regulatory Sandbox for Impact Investing. Regulatory experiments[1] that help to define, refine, and learn about practices and processes, anchored in Cardano solutions, that can demonstrate functional and regulatory equivalence to existing financial market regulation.
The first step to achieving that goal is to develop, in consultation with regulators, a blueprint for regulatory experiments (in New Zealand) with blockchain-based social and environmental investing as the motivating purpose. In conjunction with New Zealand Government agencies and State-Owned Enterprises, we will research and write a blueprint for creating a regulatory sandbox. The final result will be a published report and associated web and video marketing collateral used to promote the blueprint in New Zealand and abroad. Helping to build an ecosystem of public officials interested in championing legislation in New Zealand and beyond.
To help contextualise the blueprint, three case studies will be researched and developed:
1. Payments for ecosystem services will explore the use of market mechanisms for financing biodiversty threat surveillance, management actions, and biodiversity outcomes[2].
2. Using fractional ownership of digital cultural assets (as NFT) to represent extra-legal property rights in a way that protects and funds creative sector products; Representing indigenous property rights that fall outside existing intellectual property rights regimes[3][4].
3. Demonstrate the potential for network organisational models— DAO-2-DAO integration— to enable pluralism[5] in appropriations and funding of value-based care pathways.
The blueprint will, through research, consultation, and workshop sessions explore current and proposed approaches to Blockchain regulation with a focus on the APEC region (with a primary focus on New Zealand, Australia and Singapore).
NOTE: For readability references are provided in the attached PDF.
Specialists in regulation, lawyers, and politicians: The research and writing team are professionals in law, legal scholarship, public finance, policy, blockchains, and software engineering.
Appropriate and effective regulation is essential to open and free societies that adhere to rule-of-law. Like the Internet and the Web before, Blockchain technology challenges the effectiveness and applicability of legal regulations. Compared to prior technologies, by design Blockchain networks have one distinctive feature, they facilitate transactions across jurisdictions[6]. Cryptocurrencies, Fungible and Non-Fungible Tokens, DeFi, and DAOs all challenge the existing legal order in different ways, thus are considered alegal[4] - pushing and pulling at the boundaries of legal systems. However, it is difficult for legal regimes to adapt to alegal technologies. Through our unique mix of experience (senior government/legal/technical) and via consultation across our professional networks, the research team aims to provide a pathway for regulators to navigate the alegality of blockchain in a way that supports perminissionless innovation.
A positive environment for adoption: We face significant social and envirnomental challenges now and into the future. If we want to live on spaceship earth[7], the change has to occur from the centre and at the edge. Our moon-shot is to figure out how to enable more effective local change by bringing impact investment to Cardano. Using tokens and market mechanisms, Blockchains can enable new operational forms of common and public good financing[8]. Using new digital capital allocation approaches to finance networked organisations (DAOs) and develop digital Public-Private Partnerships[9] that drive social and environmental change. Despite the potential for financial and regulatory transparency offered by Cardano, financial market regulations can make financing social and environmental impact programmes too cumbersome to pursue efficiently.
Collaboration key to creating favourable regulatory environment(s): One approach to solve the tension is to create experimental regulation[10], carve out exemptions, or both; Time-boxed legal regimes for regulatory experiments based on legal effectiveness, evidence-based lawmaking, temporary legislation, and regulatory innovation. Such sandboxes are often explored in the compliance heavy financial sector[11], although they are applicable in many other domains too.
Proof-of-Stake (PoS) and Cardano: Blockchain technology and Domain-Specific Languages (DSLs)[6] have affordances that can significantly lower the burden of regulatory oversight, disclosures, and reporting[12]. High-assurance 3rd Generation Blockchain Networks such as Cardano also provide a much stronger guarantee of information integrity, which is necessary for regulators. Cardano's commitment to Patent-free, Open-Source Software, Proof-of-Stake green consensus mechanisms[13], and concrete moves towards decentralised community governance, also provide arguments for sustainable long-term operation needed for digital public infrastructure. These are all a reasonable basis to experiment with regulations in public and common good financial innovation.
Adoption of Cardano in jurisdictions: The blueprint’s focus is on New Zealand regulation, an APEC Commonweath country with a common law jurisdiction. As a founding member of the Digital Nations[14], New Zealand Government initiatives are often exemplars for other Governments to follow [15]. It is a small country that considently ranks 1st for ease of doing business, high transparency, and low corruption. The legal-order is progressively blending western and indigenous (Māori) jurisprudence which highlights a willingness for legal innovation.
The medium-term goal is simple: get New Zealand market regulator and tax authority to acquiescent to regulatory experiments for impact investment. With longer-term potential for the New Zealand Government to export its trusted jurisdiction, through Blockchain technology, to other countries[8][16].
Regulator/Agency Interest: It is difficult to determine New Zealand regulators' appetite for legal and fintech innovation. In general, they have been responsive to working with and helping technology innovation; however, the hype and stigma of crypto-currencies and NFTs may make them more conservative than usual. Economic issues resulting from COVID and world events will overshadow other priorities agencies may have also. We will address any potential engagement issues early in the project life-cycle by immediately contacting the respective agencies upon confirmation of funding. The team has professional experience and influence in the domain under consideration, increasing the likelihood of engagement. The research, consultation, and writing can proceed with minimal involvement from regulators; however, the mid-term objective and impact will be less.
Scheduling and Team Commitments: The team will be working part-time on this project, juggling other commitments. Contribution and time will vary, making scheduling challenging to arrange. Virtual workshop sessions will mitigate some of the schedule coordination issues. We plan to also consult with different stakeholders outside of the group. Arranging these sessions even virtually will need some schedule flexibility. Inevitability, due to unforeseen circumstances, there maybe be delays. Hence delivery timeframes will be flexible. Upon confirmation of funding, we will plan out the schedule of activities in a more detailed manner to give us a better sense of the blueprint's expected delivery date.
Breadth of subject domain: We've allowed six months to complete the necessary setup, research, consultations, workshops, and writing. However, blockchains as regulatory technology [8] are in the irruption phase[17] of deployment, and the subject traverses many domains of expertise. That will make it hard to research, distil and integrate material that is suitable for framing a regulatory sandbox. The timeframe and budget may both be short. We've addressed these factors with the team's mix of experience, which is antidisciplinary, and team members have worked together previously on similar projects [2].