What principles should be followed in the regulatory framework of financial supervision with distributed ledgers in the market? Here are four principles:
The first principle of embedded supervision requires a correct understanding of what DLT-based transactions can achieve, and what they cannot. The embedded supervision is currently only a part of the overall regulatory framework based on legal systems and enforcement agencies.
The second principle believes that the embedded supervision can be applied to markets that can achieve economic finality, that is, an economic incentive mechanism functioning to ensure the final outcome of transactions in a decentralized market, which constitutes the core theoretical achievement of this article.
The third is that when designing embedded supervision under the premise that the economic market has reached a consensus, regulators need to take the impact of their own behavior on the supervision market into consideration. Regulated companies will incur involuntary costs in complying with regulations.
The fourth relates to broader social goals in designing embedded supervision. The goal of the regulator is neither a specific market structure nor a specific form of transaction. It is to establish a stable financial system to provide consumers and enterprises with high-quality services at the lowest cost.
These four principles show that, based on the existing supervision system and operating principles, embedded supervision can effectively supplement and update the regulation, reduce current economic compliance costs, and provide a fair competition environment for all types of enterprises.