Embedded Supervision: Is it a Ray of Hope for Stablecoin Regulation?

Responsibility has been Delegated to the FSB

Embedded Supervision

Approach Difference


  1. On their own, the cryptographic data validation algorithms utilized in DLT-based DeFi platforms are insufficient. It is imperative that the platforms are positioned on a legal basis in order for the system to be integrated into the platform.
  2. In order for the system to be integrated into the network, the security level in the network in question must be high. It is stated that constructions (such as Bitcoin, and Ethereum) that miners or nodes cannot profit from their malicious behavior will be especially preferred.
  3. Because the expenses of implementing regulations can be quite high for businesses at times, it is aimed that this technology will automate the process and lower the expenditures.
  1. The first clause states that cryptographic approval mechanisms can only be accepted by the system when combined with legal infrastructures. For example, an asset-based token is being said to comply with this definition. In other words, because it represents a real asset, a synthetic token representing a stock or another token designed for real estate can both be tailored to legal requirements and traded through cryptographic verification.
    It is clear, especially in this article, that the FSB’s work cannot be applied to the whole DeFi sector. Because it is understood that cryptocurrencies like BTC and ETH, which are not based on a real asset and create their own values exclusively through cryptographic verifications, will not be suited for the Embedded Supervision system. It can be said that this study is more suitable for DeFi platforms where cryptocurrencies called synthetic tokens, which represent the price of an asset, are traded.
  2. Assuming that the legal infrastructure is provided, another main criterion is that miners/nodes do not profit from attacks on the network. Networks such as Bitcoin and Ethereum have long owed their ability to operate successfully to economic incentive mechanisms. Any malicious attempt on these networks would result in huge expenses rather than revenues, which would not make sense. In this study, the importance of supporting the networks where the system will be integrated with strong economic incentive mechanisms is mentioned.
  3. As a result of regulatory decisions, enterprises are obliged to establish the necessary infrastructures. Otherwise, they run the risk of being punished. The establishment of these infrastructures also means that a new and continuous cost item is dumped on businesses. Since Embedded Supervision will work on its own, such as smart contracts, it is aimed that each business will adapt to the regulation with small preparations, and thus, it is aimed to reduce costs.

Mechanism of Operation

  • On the left side of the image, the aggregation of the tokenization process is represented. Instead of cryptocurrencies like BTC and ETH, tokens should be thought of as tokens that represent a real asset, as previously stated.
  • Transactions from the left side category are divided into 3 main categories in the middle section of the image.
  • The data here, which is clustered by operations classes, passes through the controller that we see with the purple dashed line. The auditor here is the Embedded Supervision system itself. In other words, each transaction is definitely recorded by the supervisor before it is finalized and divided into more detailed categories.
  • The rightmost categories include various organizations such as tax agency, statistical agency, and exchange commissions. These organizations can approve transactions on the network with a digital signature and time stamp to finalize the process.
  • Because it is not safe for all information inside the transaction public, the transaction information is kept private, and only the relevant organization has access to the transaction’s specifics. In other words, Embedded Supervision uses an infrastructure in which the substance of transaction is hidden but the data’s accuracy can be verified using a framework similar to the Zero Knowledge (ZK) protocol, which is widely used on the Ethereum network.
  • For example, information about a bank loan should remain confidential between the customer and the bank. Therefore, none of the various organizations shown on the far right can see the content of the transaction. Only the digital key owned by the bank can see the information in that data.

Differentiation of Concepts

Stable currencies

Pilot Projects

In comparison to other regions, the EU may have a higher need for DeFi and stable money regulations. Supporting innovative sectors is vital for the EU, which has a well-developed, skilled workforce but also an elderly population. As fintech allows young and talented people to come to the EU, it is important to protect the present fintech sector while also bringing in new innovative areas like cryptocurrencies.