On the 13th of September, the Centre for European Policy Studies (CEPS) held a task force meeting on the topic of blockchain. Martin Schmalzried, Policy and Advocacy Manager at COFACE-Families Europe was invited to provide his insight on the potential that blockchain technology brings from the point of view of civil society and his expertise on financial inclusion/access to financial services for all.
What is blockchain? What are crypto-assets?
Before diving into observations and recommendations, it is important to underline that at this point, blockchain technology, even though it has been widely mediatised, is not well understood by people. The image that most people have of this technology is a highly speculative, very risky “get rich” scheme in the form of Bitcoin. This is a main problem for blockchain technology to have a positive impact on society.
Thus much more effort needs to be done in informing and educating people about what blockchain is and how it works, in order to maximize some of the most positive societal outcomes.
Private vs. Public blockchains
There are two main types of blockchains: private ones and public ones. In private blockchains, some central authority maintains control over which computers are allowed to maintain/edit the blockchain and so, maintain control over the blockchain itself (relatively easy to reverse a transaction or “rolling back” the blockchain). In public blockchains, the software which enables computers to maintain/edit the blockchain is released to the public and is open source, meaning anyone, anywhere, can participate in “securing” the blockchain (and get remunerated for it, aka becoming a “miner” and receiving crypto-assets as payment for that activity).
Private blockchains will not have major societal implications since they can be fully integrated into the existing ecosystem of private banks and private companies.
Public blockchains, on the other hand, have profound potential to transform the way people collaborate and exchange goods and services across the Internet and in real-life.
Enabling a peer-to-peer sharing economy and beyond
While there are many different sub-categories of public blockchains and their associated crypto-assets, some dealing with payments (Bitcoin Cash, Litecoin…), some purely speculative and seemingly geared to become a store of value (Bitcoin), the more interesting sub-category which will have profound implications is labelled “utility tokens”.
These are crypto-assets which are used to pay for a decentralized service. As an example, the crypto-asset “Siacoin” is used to pay for renting decentralized cloud storage in a circular/sharing economy between people willing to purchase decentralized cloud storage and people willing to rent the unused space on their hard drive.
Crypto-assets can also enable the emergence of decentralized commerce which could not emerge due to the lack of a decentralized payment system. Initiatives like Open Bazaar for instance, rely on crypto-assets as a means of payment, allowing for anyone to sell anything without intermediaries (open bazaar is a “client” type application which directly connects to other “clients” without transiting via a centralized server).
Finally, the technology behind blockchain can enable citizens to easily create and start using a shared currency based on a monetary system commonly agreed by the community. For instance, creating a local currency to be used in a town or region, creating a currency which implements principles like Universal Basic Income, but adopted on a voluntary basis between like-minded people/communities.
Regulation: start with dialogue
Since public blockchains are decentralized, it is near impossible to pin point liability and legal obligations to an organisation or people. Bitcoin is a case in point: the original creator is still unknown, and he stopped contributing to the further development of the Bitcoin blockchain, which is now maintained by a self-organised community of developers.
Attempting at regulating such public blockchains in the same manner as a private blockchain could lead to another “Napster” fiasco. Napster was one of the first peer-to-peer file exchange service. It was successfully shut down by public authorities but shortly after, hundreds of “similar” applications emerged with less transparent origins and a more or less hidden community of developers.
In a similar way, implementing regulation which is either incompatible with the technology or imposes severe restrictions or even a ban on public blockchain projects will only contribute to driving the development of these public blockchain projects underground, exposing regular users/consumers to even more potential scams/fraud.
Thus regulation of public blockchains should always start with a dialogue between regulators, user representatives and a representative from the community of developers involved in maintaining and updating the code of the public blockchain projects. These meetings could lead to the publication of guidelines to meet certain requirements of existing regulation (especially consumer protection).
As an example, one proposal to solve the increased number of fraudulent ICOs (initial coin offering – a way to raise capital for a new public/private blockchain project) was proposed by one of the head developers of the Ethereum blockchain and consisted in a system which would allow “investors” to release the funds collected based on the advancement/deliverables of the project (commonly known as the DAICO solution). This has remained a proposal and has not yet been implemented. Public authorities and user representatives could be instrumental in accelerating the adoption of such proposals in public blockchain projects.
Informing and educating citizens about how blockchain technology works, the difference between private and public blockchains, the different types of crypto-assets and the potential dangers/benefits of engaging/buying/investing into public blockchain projects should be a priority. At this stage, very little people understand how the technology works and have only heard about it as a “make it or break it” scheme to get rich quick, which is extremely detrimental to the technology. The main message that should be delivered to citizens is to only engage in projects that they understand and that they intend to use themselves (for instance, buying a crypto-asset which allows to buy a specific good/service). The real value of crypto-assets, in the long term, will be driven by whether people are interested to use the service provided (payment, purchase of decentralized services etc).
Finally, it is undeniable that regulation has an impact on the public blockchain ecosystem. Regulators should focus on developing a legal framework which takes into account the specific nature of public blockchains in order to decrease the sentiment of uncertainty which would greatly stabilize the “market”. Legal uncertainty is one of the factors contributing to the high volatility of crypto-assets.
A vision for the future
It is important to have a global and long term vision of how blockchain technology could transform society for the better.
Blockchain technology could lead to the creation of the first fully decentralized world computer (for instance, by integrating several powerful computers in each home, with heat recovery technology), followed by a decoupling of screens and processing power. To this end, governments could impose a tax on “mining farms” to avoid a re-centralization of computing power and a waste of energy.
Some projects like Duniter hint at the possibility to create an entirely different monetary system where money creation is controlled by the users directly.
The societal implications and changes that public blockchains bring should not be underestimated and need to be examined very closely as they will have a profound impact on the economy, governance, democracy, etc.
COFACE-Families Europe will continue to monitor the development of public blockchain projects in order to ensure that they meet the core values it defends.
For more information about the event, please contact Martin Schmalzried: email@example.com