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How Regulators Become Blockchain Innovators

Monetary and macro-prudential policies have traditionally been the main occupancy of central banks and financial regulators.But the recent surge in financial technologies, cryptocurrencies and digital transformation is gradually shaping strategic thinking and tinkering on regulatory innovation. While regulatory reactions have been ambivalent, ambiguous and oftentimes antagonistic, it would be challenging to think of 21st-century regulation without innovation.Associated with the rise in digital transformation is not only a set of new (distributed) technologies and institutional mechanisms, but more importantly, the transformation and evolution of certain values, norms and beliefs about the nature of money and trust.Beyond money and markets, the social reconstruction and codification of trust is a fundamental inflection point in the evolution of financial services.While it may seem revolutionary, if not paradoxical at first hand, increasingly regulators are becoming innovators as they entertain, explore and experiment with the adoption of distributed ledger technologies (DLT), digital currencies, application programming interfaces (API), artificial intelligence (AI), augmented reality (AR) and a host of other digital technologies.From a population ecology perspective, what we are witnessing is a form of speciation or "polymerization" – a process whereby small nascent variations (like digital currencies) could accumulate over time into systemic changes, which hypothetically result in the emergence of novel hybrid species (think central bank digital currency).While it may be true that innovation usually precedes regulation, in more evolutionary terms, the regulatory landscape is undergoing a systemic transformation in nurturing trust and fostering resilience. Beyond digitization, developmental legacies and idiosyncrasies continue to shape this development.For instance, across the Caribbean, these pathologies include thin and fragmented financial markets and relatively high levels of financial exclusion and economic inertia. Thus, the confluence of both (societal) "pull" forces and (digital) "push" forces are propelling digital innovation and the transformation of Caribbean regulators as they seek inclusive sustainable growth.Clear of an industrial revolution of the fourth kind, what we are experiencing is really a societal evolution of the fifth degree.