Blockchain and Financial Regulation: A Critical Review of Legal Approaches

Blockchain technology has rapidly transformed the architecture of modern financial systems by introducing decentralised, transparent, and cryptographically secure mechanisms for recording and validating transactions. Initially conceptualised as the underlying technology for cryptocurrencies, blockchain has evolved into a foundational infrastructure supporting a wide range of financial innovations, including decentralised finance (DeFi), smart contracts, stablecoins, tokenised securities, and cross-border payment systems. These developments challenge traditional financial regulatory frameworks that are premised on centralised intermediaries, jurisdictional boundaries, and institutional accountability. As blockchain-based financial activities continue to expand globally, regulators face the complex task of balancing technological innovation with the imperatives of financial stability, consumer protection, market integrity, and regulatory compliance. The decentralised and borderless nature of blockchain technology creates significant legal and regulatory challenges. Unlike conventional financial systems, blockchain networks often operate without identifiable intermediaries, making it difficult to assign legal responsibility, enforce compliance, and apply existing licensing and supervisory mechanisms. Issues related to jurisdiction, governance, accountability, and dispute resolution are further complicated by the pseudonymous or anonymous nature of blockchain participants. Additionally, blockchain-based financial platforms raise concerns regarding anti-money laundering and counter-terrorism financing, data protection and privacy, cybersecurity risks, and systemic financial instability. High-profile failures of cryptocurrency exchanges, algorithmic stablecoins, and decentralised protocols have underscored the urgent need for effective regulatory oversight while simultaneously revealing the limitations of traditional legal approaches when applied to decentralised systems. The paper further explores the tension between innovation and regulation, emphasising the risks of both regulatory overreach and under-regulation. Excessively restrictive regulatory frameworks may stifle innovation, deter investment, and undermine the potential benefits of blockchain technology, including enhanced efficiency, financial inclusion, and transparency. Conversely, insufficient regulation exposes consumers and markets to fraud, manipulation, and systemic risk. The paper concludes by advocating for adaptive, technology-neutral, and risk-based regulatory frameworks that recognise the distinctive features of blockchain technology while upholding core principles of financial regulation. It emphasises the importance of international regulatory coordination, regulatory sandboxes, and flexible compliance mechanisms to ensure effective oversight without hindering innovation. By critically evaluating existing legal approaches, this study contributes to ongoing scholarly and policy debates on how law can evolve to govern blockchain-enabled financial systems in a manner that promotes innovation, safeguards fundamental rights, and preserves financial stability in an increasingly digital global economy.