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Blockchain – is there a topic more divisive in the tech world? What do the different sides disagree on, and where can they find common ground?
To get a comprehensive understanding of where blockchain is headed and what the opportunities are, we arranged a panel discussion on the future of blockchain at the Reaktor Breakpoint conference last May. During our discussion, we talked about the convergence of AI and blockchain, the merits of decentralization, what role Finland could play, and finally touched upon the coming megatrend of security tokens. Read on to find out what our four experts had to say.
The two sides: Worlds apart, working together
Ignoring the myriad sub-factions, the blockchain field divides into two main camps. On the one side there are the well-funded disruptive startups that are creating the next generation of internet applications, protocols and platforms generally referred to as Web 3.0. And on the other, the incumbents like banks and other financial institutions.
In general, the disruptive startups aim to decentralize how just about everything functions – no small task. They’re trying to achieve this through a wide variety of innovations, be it in technology, economics or governance, and they’re a part of a global, open crypto asset market worth 450, wait, 250 billion dollars.
Amidst all the speculation, scams and FUD (Fear, Uncertainty and Disinformation) lie some diamonds. Innovation is messy, especially in blockchains: it takes time and money and failures are public and many. There has been and will be immense collateral damage from this process, but the process will continue. Even now, after the latest bubble has burst.
One of our four speakers, Akseli Virtanen, Ph.D. of Economics from Aalto University lives and breathes this paradigm. His new innovative startup, Economic Space Agency, seeks to disrupt even the disruptive blockchains with its Gravity and Space technologies, which according to Akseli are in the 4th generation of trustless computation.
On the incumbent side, the companies take a different approach. Free from FUD, they’ve noticed that cryptocurrencies are too risky at their current maturity. Our second panelist Ville Sointu, the Head of DLT and Blockchain at Nordea, is a veteran of the space, and he points out that from the perspective of the banks, this technology is exciting precisely because it fosters and facilitates cooperation. It also creates better, faster and more transparent infrastructure, and at its best, removes silos. Banks simply can’t use permissionless, public chains to achieve this as laws and regulations mandate the identification of the customer at all junctions, Ville explains. “This is so that we can measure the counterparty risk,” he adds.
So long as there are no regulatory guidelines, we won’t see banks in the permissionless space. According to Ville, tech-wise the DLT side is “pretty damn boring”. The exciting part of the work revolves around networking with other financial institutions and creating clear rules for what they’re doing in the networks.
Our third specialist, Mikko Alasaarela, the CEO of Inbot, operates in the cross-roads of AI and crypto. He considers smart contracts to be programmable money. This enables independent non-human entities, that is AIs, to tap into data and algorithms. “This is one enabler for Artificial General Intelligence,” Mikko points out. Cryptocurrency based incentives are a powerful tool. For example, an AI-assisted DAO (Decentralized Autonomous Organization) could manage large populations toward specific goals.
Finally, Jamie Burke, CEO at Outlier Ventures chimes in with his view on the convergence of these different elements. “We’re building an infrastructure stack of Web 3.0,” Jamie says. He continues by pointing out that this will enable the coordination of decentralized networks through incentives. It will allow us to build a web that rivals the current platform monopolies and a very centralized Web 2.0.
Autonomous economic agents, which are representatives of a person, company or any object, can transact and discover value on your behalf. They are self-emergent. “This is the greatest experiment in socioeconomics we’ve ever had,” Jamie elucidates.
Should you redesign the whole economy or incrementally make the enterprise more efficient?
Akseli’s high-level vision is that smart contracts and tokens aren’t only programmable money but that the whole economy becomes programmable. “Future economic, financial forms become iterable design questions,” Akseli illustrates.
Ville elaborates that, before DLT and blockchain, “You couldn’t get the banks to agree on anything.” The fact that you can now cooperate and create shared infrastructure is changing the way financial infrastructure gets built. Ville sees that there are two reasons for the existence of intermediaries. First, we didn’t have the technical concepts to do anything with each other in a trustless way – without an intermediary. Second, the law defines a lot of these intermediaries, and this is now becoming a challenge. There is a legal need to have an intermediary e.g. for liability. Legacy processes have these needs as well. “Legislation progresses slowly, and the banks along with it,” Ville concludes.
In Akseli’s view, the conventions of economic organization are quickly changing. He draws a parallel between what is happening now with the rise of the joint stock companies in the first half of the 19th century. “The rise of joint stock companies and stock markets in the 1840s transformed capitalism,” Akseli details, “and by the 1850s the owners no longer had enough capital to fund the next round of the company. The revolution started in Great Britain, where they abandoned two hundred years of law-making. Joint stock companies were considered speculative and destructive. They were not allowed – until they changed the law. Then it became possible to gather huge amounts of capital from different sources to fund your company.”
You could parcel the ownership into small packages – stocks – and trade in the secondary market. At the same time, there was a fundamental transformation in the concept of money as paper money replaced gold in business. Money gained new features e.g. as credit. There was also a need to integrate massive amounts of people into the emerging factory of production. “The transformation ahead of us now is at least as significant,” Akseli declares. “These cryptographically enabled, decentralized, economic organizational systems will change what value, production and money are, as well as how people relate to this mode of production,” he concludes.
On the importance of decentralization
Ville still believes in the promise of decentralization, but he claims to have become jaded due to all of the negative side effects. “Regulation is the answer to this problem,” Ville claims.
“But regulating it so that you have to be based in the Silicon Valley in the U.S. in order to be successful shouldn’t be the goal either,” Mikko points out and continues, “We need to find ways to encourage more equal-opportunity participation in the global economy. We need be able to offer the high street the same high-yield investment opportunity that is currently only offered to the upper echelons of society. An example of this is equity investments in startups – which tokens enable.”
Jamie opens that decentralization is, in fact, a spectrum, not a binary choice. In some use cases it makes sense to have a federated, permissioned model; in others, a permissionless one. And sometimes, a hybrid in-between. Regulated on-off ramps need to have a degree of centralization. Having invested in the space for over four years, Jamie offers a broader view of the market: He thinks that for the past year, ICOs got out of hand, and there was momentum trading in the market. “The true opportunity for this space is that we can now tokenize ownership in these systems,” Jamie claims.
Akseli continues: “The first generation of internet protocols like HTTP required a data layer on top of them for any kind of application functionality. The data needed to have these centralized keepers of the state of it. Like what the banks are doing, they’re keeping the state of the data centrally controlled because we didn’t know how to keep the state of the data controlled in a decentralized way.” But we now know how to do it, and it’s going to change things.
“There’s also the option of progressive regulation. I’m part of the European Union Blockchain Observatory with Jamie, where we’re looking at blockchain use cases and transition scenarios. The Blockchain Observatory was formed to advise the European Commision on blockchain technology, and I’m there as a representative of the Nordic banks,” Ville adds. “There are other bankers in the Blockchain Observatory too, as well as crypto experts, and this enables a dialog of what it means to create a decentralized digital economy in a legal and compliant way. Is the right way to go forward with policy and regulation? It’s not about trying to force the new players into the old regulation; instead, it’s about what we can do to adjust the regulation so that we’re all on the same, even playing field,” Ville points out.
Is the security token trend going to change everything?
Jamie points out that the interests of the EU are not different from that of the innovators. We’ve handed over ownership of the current web to a few U.S. companies and there’s a top-down battle on data privacy and monopolies. The EU wants an alternative to that, and a more decentralized web serves the Union’s agenda. “Ville, you’re right that some ICOs are in breach of securities through naivety or blatant denial. But that does not mean that they’re all securities. Even the U.S. Securities and Exchange Commission (SEC) has announced that there could be something like a utility token,” Jamie states and continues:
“The point is, how is it promoted? If you’re marketing something with the expectation of profit, it doesn’t matter what the technology is, it’s a security. Beyond that, as a utility driver, does it have demonstrable utility at the point of sale? Is it actually being used for that intended purpose? Is the price of using it correlated to the service that you’re offering? Most forward-looking regulators spot that opportunity. We don’t need new laws for that. We already have fraud and security laws – it’s a well-trodden path.”
According to Akseli, the distinction between utility and security will not even matter in a year. Akseli quotes Nobel-winning economist Myron Scholes on the Black–Scholes option pricing theory: “Equity and debt are specific categories in history. They’re going to change. They’re already blurring because of derivatives.” He then continues that there will be better categories, features and attributes in the technology of funding. Tokens are something new; they’re not equity and they’re not debt. They’re like a hybrid and we don’t yet know what they are exactly. “It’s interesting that we can play part in the creation of these new things,” Akseli enthuses.
Mikko comments on the actual securities token situation, pointing out that in the U.S., securities tokens are a big trend because of the SEC. They’ve made a lot of tokens out to be securities and there aren’t many options left. For that reason, Mikko believes there will be growth in the securities token markets, and there will be exchanges and offerings. “But there’s also a place for utility token ICOs,” according to Mikko. “There needs to be equal opportunity for participation. We need to be able to crowdfund projects,” Mikko adds.
Jamie chimes in with his two tokens on the topic:
“The fact that the U.S. is being so regressive in its approach to this new innovation is Europe’s opportunity. It’s no coincidence that the top five venture capitalists in the U.S., like Andreessen and USV, are asking the SEC for a non-exclusive safe harbor. Because they’re hemorrhaging talent outside of the U.S., they are losing the next Web 3.0 cycle to Europe. If you look at China, they cannot adopt any form of crypto assets in a decentralized fashion because they have to control capital flight. This is the main driver for their economy. India, on the other hand, is fighting the cash economy. The U.S. has this restrictive accreditation that you need to have a million in the bank; Europe doesn’t. The EU has well-established crowdfunding laws – it’s a real opportunity.”
Akseli expands the concept further: “I don’t think we’ve seen anything yet.” He points out that we’re in the very beginnings of exploring what we can use tokens for, and they’re clumsy in their current form. As a country, Finland should look further, as there is a new economic space opening up. There will be new economic agents and new formations. Finland should regard itself as a safe haven for this type of innovation. We should nurture it. “Things work here. We have great infrastructure and great engineers,” Akseli points out.
Finland’s cooperative law: a ready-made legal framework for decentralization?
Ville envisions that “Finland could be EU’s most progressive country when it comes to legislation – the place where the good projects come.”
Ville says that Finland should remain a neutral and trusted country, a place where we do proper due diligence on projects. “If you’re able to come through Finland, then it should mean that you’d have a level of reputation built into the proposition. Branding Finland for legal players would be the smart thing to do,” he states. Whether we’re moving fast enough remains to be seen.
Akseli continues: “The new cooperative law in Finland (Osuuskuntalaki in Finnish) is unlike anything else anywhere else in the world, and it could provide an opportunity to start that reputation-building. From our perspective, it’s a ready-made legal framework for launching decentralized, co-owned applications. That’s going to be a huge competitive advantage for us as a country.”
Jamie adds that the cultural acceptance of collective ownership has benefits, and he thinks it’ll become a more common method of organization for Web 3.0 because it’s decentralized. “It’s a more natural fit. And a country like Finland that has established collective ownership both culturally as well as from a corporate structuring, governance, reporting and disclosure perspective, will go a long way.”
Jamie sees that the biggest opportunity is in the collective ownership of AI. “The combination of DLT and AI – nobody’s done it yet, therein lies the opportunity,” Jamie says.
By the end of the panel discussion, it feels like everyone could agree on at least some things. The opportunities opened up by the security token trend are rife for both the disruptors and the incumbents, and there seems to be some agreement around the role the EU and Finland could play. Whether we can seize the moment remains to be seen.
Together with spacegrade.co, Reaktor helps its clients navigate the complex blockchain paradigm and create new business around it. If you want to stay ahead of the disruption, get in touch: firstname.lastname@example.org.