The Blockchain Wars — The Intergenerational Fight for Freedom and Liberty
Traditional warfare is a loud and very public affair. Trade wars, cold wars, cyber wars and other subtle forms of war are less so, but they can be just as important to the preservation of freedom and liberty.
Here in 2018, as blockchain technology is emerging, it is becoming clear that the next subtle war will be over the control of blockchain technology, how it is used, how it is controlled, who controls it and who it controls, if of course, it can be controlled at all! These are the right questions to ask now and in part they will be answered by the current generation, but it is really the future generations who will live with the consequences of the decisions made over the next few years and decades as the technology starts to blend with ‘real world’ systems. It is therefore paramount that decision makers of today fully understand the threats to, and opportunities for, freedom and liberty that this wonderful technology enables.
In this paper I set out the positive (decentralised, open and inclusive) and negative (centralised, permissioned and exclusive) possibilities for the adoption of blockchain technology in the real world. I provide a high level review of the approach adopted by global developmental bodies (such as the IMF and World Bank) and I outline the different approaches nation states are taking to the technology. I foreshadow the emergence of a period that will become known as the Blockchain Wars where existing centers of power seek to usurp the technology for their own control and others seek to use the technology to enhance the economic and political freedoms of humanity. I conclude that this is an intergenerational struggle because although it will take decades to play out, decisions made in the next few years will set the scene for a long term struggle between freedom and control.
The great positive potential of blockchain is a movement towards the decentralisation of power structures. This is being done by creating decentralised systems and processes which are transparent but private, immutable, uncensorable and free from the need to trust a centralised body. This in theory should lead to greater personal freedoms, smaller governments and an environment where national borders have less friction points and concepts of nationality become more focused on important matters…such as sport!
In the well respected blockchain book, The Truth Machine, the authors remind us that :
‘Privacy exists only until the next hack. Credit card fraud is a fact of life. Many of the “legacy systems” once designed to make our lives easier and our economy more efficient are no longer up to the task.’
Also, and it’s not necessarily by design, but current systems exclude more than 2 billion people from access to basic banking facilities and an estimated 1.1 billion people do not have any form of identification documents. Blockchain projects like Humaniq (Banking the Unbanked) and World Identity Network (Blockchain for Humanity) offer great promise to solve these problems. Additionally blockchain land title initiatives such as the Blockchain, Bitcoin and Property Rights Project which is inspired by the great work of Peruvian economist Hernando de Soto offer further hope that world poverty, government corruption and the gradual erosion of personal freedoms, liberty and democracy are problems that can be solved with blockchain technology.
‘Blockchain technology has the potential to restore personal control over our data, assets, and identities; grant billions of excluded people access to the global economy; and shift the balance of power to revive society’s faith in itself.’
‘Blockchain technology could change our lives’ in many ways. The
‘Bitcoin (blockchain) is a monopoly run by a protocol, not by a managing organization. Familiar monopolies are run by managing organizations with discretion to determine and then change prices, offerings and rules. Monopolies are often regulated to prevent or at least mitigate their abuse of power.
Bitcoin is not regulated. It cannot be regulated. There is no need to regulate it because as a system it is committed to the protocol as is and the transaction fees it charges the users are determined by the users independently of the miners’ efforts.
Bitcoin’s design as an economic system is revolutionary and therefore would merit an economist’s attention and scrutiny even if it had not been functional. Its apparent functionality and usefulness should further encourage economists to study this marvelous structure.’
But of course blockchain can also facilitate criminal, terrorist and other harmful activities, Silkroad and AlphaBay are two examples of the dark side of the blockchain/cryptocurrency world, there are many other and far worse examples. So while there may be ‘no need to regulate it’, there is a need to consider how it is used and it is this how question which is so difficult to answer because there are so many unknowns at this stage that it is difficult to find that ‘happy place’ between letting the technology and use cases develop and stepping in to curtail activity and innovation. And, of course, in that ‘happy place’ lies optimal levels of freedom and liberty.
The International Regulatory Environment
International Monetary Fund (IMF)
Christine Lagarde, the current Managing Director the IMF is providing great thought leadership on this complex topic. In an address to Central Bankers at the Bank of England gathering on 29 September 2017 she noted several positive aspects of cryptocurrencies, in particular she noted how :
‘…countries with weak institutions and unstable national currencies. Instead of adopting the currency of another country — such as the U.S. dollar — some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0.’
On the other hand, in a blog post on 13 March 2018 Ms Laguard posted that before we get to the potential benefit of cryptocurrency we should ‘…take a step back and understand the peril that comes along with the promise…’. She goes on to discuss the perils of money laundering and ‘how to deal with cryptocurrencies and other electronic assets.’
I think this is a backtrack to her London address and if so it is disappointing, I feel as though someone has ‘gotten to her’ and I am afraid that it will not be the last time we see this ‘let’s slow down and regulate’ type of approach in this space.
Bank For International Settlements (BIS)
Out of 193 countries in the world, only 60 are members of the BIS, the central bankers bank, so to be clear, they do not speak for the 2 billion people in the world without access to bank accounts, their views, as important and well informed as they are, are formed through the lenz of their 60 member countries.
The BIS have a number of committees with working groups on many aspect of blockchain technology, including central bank issued cryptocurrencies and the financial stability issues of protocol based cryptocurrencies.
Their February 2018 report on Sound Practices on Implications of fintech developments for banks and bank supervisors is a good analysis of the risk and opportunities (to banks and their communities) presented by blockchain technology.
Aside from a number of blog posts explaining the blockchain and it’s potential, I have not been able to find any significant project or practical research work done by the World Bank (of course this does not mean there is none). Given that their mandate is to ‘…End extreme poverty…and promote shared prosperity…’ and that the potential use cases for the technology in the developing world are significant, particular in terms of preventing corruption (one of the World Bank’s main strategies to eliminating poverty) I would hope that they have many such projects well underway.
A statement in February, 2018 Jim Yong Kim, the President of the World Bank, is, I think, ill informed and it does not give me great hope for the future adoption of this technology by one of the worlds most important development organisations, he stated that:
‘In terms of using bitcoin or some of the cryptocurrencies, we are also looking at it, but I’m told the vast majority of cryptocurrencies are basically Ponzi schemes. It’s still not really clear how it’s going to work.’
But then again, the World Bank itself has been the subject of serious accusations of corruption and dysfunction (before Jim Yong Kim’s time) not so long ago.
The United Nations are ‘…all over it…’. There are too many papers, committees, seminars and conferences to cover in this paper. There is no talk of regulation or curtailment of its potential, this is good news.
International Organisation of Securities Commissions (IOSCO)
This body is the trade group for securities regulators around the world, ASIC of course represents Australia at this body. In February 2017 IOSCO issued a 75 page report on fintech, which covered in Chapter 5 blockchain technology. The short advice to regulators at that time was be informed of the rapid technological developments in the sector, engage with existing, new and emerging market participants, but refrain from heavy regulation pending a clearer view of how the technology will manifest itself in the sector. In other words, don’t kill innovation with regulation.
Country Specific Regulatory Highlights (excl tax)
Ever since being involved in the blockchain space I have felt that I am part of some sixties style do good movement, I am completely drawn to the positive possibilities of the technology, this is how the whole Bitcoin thing got started and there are dozens of projects with humanitarian objectives. I love this space.
But I also fear, that blockchain technology could be used as the ultimate big brother enabler. Governments could seek to prohibit the use of the technology for any services they deem to be contrary to ‘public interest’. For example, a crypto national currency could be issued by a central bank (at the exclusion of all others) this would give that central bank complete visibility of every citizens bank account balance, income and expenditures. The same government could require all its citizens to hold a personal data box (medical records, qualifications, etc) on a blockchain which the government has access to at any time, ‘in the interests of national security’.
This aspect of blockchain technology will be a rich area of research for anthropologists and political scientists for decades to come, but it is not just an area of academic interest, it is a matter of our freedom and liberty and Now is the time to be informed about this and to take action to protect and indeed enhance those freedoms and liberties.
Of course each country has its own personality when it comes to dealing with emerging technologies and we already know those personalities. What we don’t know is to what extent they will be able to impose their personalities on the technology. We may be surprised (unpleasantly) to find that some countries (where we expect liberty) may be scared by the degree to which this technology can further the cause of liberty and seek to covertly curtail the technology through laws justified on the basis of national and public interest.
In this next section I cover at a high level the regulatory environment of selected countries.
The Reserve Bank of Australia
As a member of the Bank of International Settlements the RBA has participated (together with ASIC) in a working group of the Committee on Payments and Market Infrastructures examining blockchain and it’s implications.
In October 2017, the Reserve Bank officials advised a Parliamentary Hearing into payment systems that:
There have been substantial increases in the prices of cryptocurrencies like bitcoin and ether over the past year. Most of this seems to relate to speculative demand and in particular the use of digital currencies as the means of participation in Initial Coin Offerings. The use of bitcoin and other digital currencies as an actual method of payment remains relatively limited in Australia, as elsewhere. From the Bank’s payments policy mandate, digital currencies do not currently appear to raise any pressing regulatory issues.
Continuing with the ‘she’ll be right mate’ approach, in a December 2017 speech about the possibility of a cryptoAUD Chairman Philip Lowe advised.
‘One class of technology that has emerged that can be used for payments is the so-called cryptocurrencies, the most prominent of which is Bitcoin. But in reality these currencies are not being commonly used for everyday payments and, as things currently stand, it is hard to see that changing. The value of Bitcoin is very volatile, the number of payments that can currently be handled is very low, there are governance problems, the transaction cost involved in making a payment with Bitcoin is very high and the estimates of the electricity used in the process of mining the coins are staggering. When thought of purely as a payment instrument, it seems more likely to be attractive to those who want to make transactions in the black or illegal economy, rather than everyday transactions. So the current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment.’
Australian Securities and Investment Commission (ASIC)
ASIC have a mandate to regulate securities and other financial products, so to the extent that any particular cryptoasset is a security or financial product, they will have jurisdiction. They have released a helpful information sheet setting out guidance about the potential application of the Corporations Act 2001 to businesses that are considering raising funds through an cryptoasset issuance event.
At the time of writing ASIC do not consider cryptocurrencies to be a financial product.
Australian Cash Transactions Reporting Agency (AUSTRAC)
The Australian cash transaction agency requires cryptocurrency exchanges to register with them and comply with standard reporting and know your client rules and procedures.
When thinking about China we must think about a few different versions. China the communist party government, China the private companies, China the state owned enterprises and China the people. Of course what matter most for regulations is China the Government.
Unsurprisingly China has had a start-stop-no-go approach to blockchain. On the one hand the people and the companies (state owned and not) are very involved with cryptocurrency and blockchain on the mining side, the investment side and the development side. On the other hand the Chinese currency is very heavily regulated, the government controls the internet, it is very difficult for foreign issuers to raise money in China through China’s public exchanges and China is one of the most powerful centralised governments in the world.
This said, some very significant blockchain investment houses in China including Fenbushi Capital. Also it has been noted that the People’s Bank of China have announced that they want to launch their own digital currency as soon as possible (this though I would not take this as a good sign, it would just allow them clear view of all their citizens banking details).
Like many others, China wants both centralised control and the benefits of blockchain technology, these objectives are however (in my opinion) incompatible and only time will tell which way they decide to go.
The European Commission has been researching the possibility of blockchain technologies since early 2016. In announcing the establishment of the EU Blockchain Observatory in February 2018 the Commissioner for the Digital Economy and Society Mariya Gabriel noted that:
I see blockchain as a game changer and I want Europe to be at the forefront of its development. We need to establish the right enabling environment — a Digital Single Market for blockchain so that all citizens can benefit, instead of a patchwork of initiatives. The EU Blockchain Observatory and Forum is an important step in that direction.
The future for blockchain adoption in the EU zone is bright.
Despite being the location for one of the first collapsed crypto exchanges in world (Mt Gox) the Japanese Government has made Bitcoin legal tender and it now has one of the highest adoption rates in the world.
Although not currently at the forefront, I am expecting Japanese companies and projects to emerge in leadership positions.
Russia is possibly the most interesting jurisdiction of all to consider as it’s leader is having something of a personality conflict with regard to this technology.
Vladimir Putin is painfully aware that Russia missed the internet boom and is looking for the next leapfrog technology to catapult Russia economically and he has found blockchain technology. The problem he has however is that the key properties of blockchain is everything Russian politics is not.
Vitalik Buterin, the founder of Ethereum, the second biggest cryptoasset in the world, was born in Russia and lived there to the age of six. Vladimir and Vitalik met in June 2017, it was a brief meeting and the 22 year old Vitalik is reported to have said about the meeting that ‘I fully intend to refuse any requests to facilitate dictating, killing or oppressing people,’.
In a March 2018 video, which I think may become quite a historical moment, Vladimir Putin makes is very very clear that Russia intends to be a significant player in blockchain and take the initiative before others….he states that ‘…he who are late in this race they instantly….I want to underline it….In any case VERY FAST, will be under the full dependence from the leaders of those processes.’….’Russia can not allow this…’.
It is possible to put a positive or negative spin on the above quote. I don’t know, but if it comes to a choice between centralised and power and economic growth, I think I know which side will win.
Having lost its role in life as a confidential banking center, Switzerland has taken the initiative to become the crypto capital of the world and they have made great progress in this regard in terms of having friendly regulators who are open to change and innovation. In February 2018 FINMA (Swiss regulator) issued a simple, clear and encouraging guidelines setting out a framework for initial coin offerings. The Canton of Zug has become known as crypto valley.
We fully expect Switzerland to be a beacon for open blockchain technology well into the future.
Similar to Switzerland but perhaps a little more conservative, particularly with the regard to any technology which can disrupt government centralisation. There is a very robust blockchain development community in Singapore and many good projects have been initiated by young Singaporean scientists and mathematicians from local universities.
Taiwan, Hong Kong and South Korea
I lump these jurisdictions together as they are similar in terms of their level of technology adoption and regulatory environment, they are in the same part of the world and share similar but different geopolitical situations.
They all have large, energetic and innovative blockchain communities. There have been some regulatory rumbles in South Korea lately but they have died down and seem to have disappeared, at least for the time being.
I believe these jurisdictions will continue to be supportive of blockchain technology.
The US is the deepest and richest capital market in the world by a very long stretch. Anything which has even the slightest potential to change that (which blockchain could do) will be challenged and if possible crushed. At the same time, the US is currently the largest economy in the world, due in a large part to its dominance of the internet landscape and they have the opportunity to do the same in the blockchain space.
They say that blockchain will be to the banks what the internet was to the post office. It is very clear to me that there will be significant disruption to the businesses of financial market participants, but for those who move in time, there are great opportunities. We expect that regulators, lawmakers and existing market participants will work directly and indirectly with each other to ensure as far as possible that the US maintain its position as a both a technology and financial powerhouse. We have seen a micro example of this playing out already with the Goldman Sachs USD 400m acquisition of US crypto exchange Poloniex. We expect they will become the first US Securities Exchange Commission licensed crypto exchange in the world and that this will pave the way for a tsunami of US based cryptosecurity transactions in 2018 and beyond.
The concerning and scary part is that US lawmakers have more recently become less inclined to adopt new thinking and with this technology in particular new thinking is needed as it is difficult to conceptualize. A bad law here, an unintended consequence there, could set back the development of the technology (that’s concerning) with unknown consequences (that’s scary because it could be developed further by countries with growing power and less freedom).
This said, it is pleasing to note that in the 2018 Economic Report issued by the Joint Economic Committee Congress of the United States it was noted that ‘These new innovations and markets presented America’s regulatory and legislative institutions with unique challenges as well as technology that could revolutionize the world’s digital landscape and economy.’
And that ‘Government agencies at all levels should consider and examine new uses for this technology that could make the government more efficient in performing its functions’.
But this is not just about Governments
Blockchain technology is disrupting existing centers of power and some of the biggest centers of power are corporations. As I was writing this paper, it was noted the Google, Facebook and Youtube all stopped allowing content which contain the words: initial coin offering; cryptocurrency; bitcoin etc.. Have they done this as responsible corporate citizens concerned for the safety of investors, or have they done it to protect their own business from being disrupted by this technology. None of these companies seemed to have any concern about political content and fake news around the 2016 US election or the Brexit vote.
In this paper I have set out the magnitude of the potential for blockchain technology to be a force for freedom and liberty in the world. I have noted that it could also be a force for control and oppression of all peoples in the world. I have set out a high level assessment of the current global regulatory environment and I have foreshadowed the coming Blockchain Wars.
I have asked myself if I am being overly dramatic and in some ways I hope that I am! But the conclusion I have arrived at, after many hours of reading, is that what I have outlined above will play out over the next few decades. And that the Blockchain Wars (as they may become known) will be the most important intergenerational fight for liberty and freedom we have ever seen.
I am an optimist and my strong conviction is that at the end of the Blockchain Wars, this wonderful new technology will reach its potential and that the world will be a better place for it having done so. I hold this conviction because it has been demonstrated time after time that no matter the barriers, good technology, human ingenuity and freedom wins out in the long term.