Functional Approach

Definition ∞ A Functional Approach to regulation categorizes and regulates financial products or services based on their inherent characteristics and risks, rather than their specific technology or legal form. This method aims to apply consistent rules to similar activities, regardless of the entity providing them. It seeks to avoid regulatory arbitrage and ensure that new innovations are appropriately overseen. This approach prioritizes the activity over the label.
Context ∞ In the context of digital assets, a functional approach is advocated by many regulators seeking to establish a coherent framework for cryptocurrencies and blockchain-based services. News often highlights the challenge of fitting novel digital assets into existing regulatory boxes, making this approach appealing for its flexibility. By focusing on the functions performed by a digital asset, such as payment, investment, or utility, regulators can apply relevant rules from traditional finance, promoting supervisory consistency and mitigating risks across the evolving crypto landscape.