Governing the Blockchain Wild West

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Posted on July 6, 2017

“Whatever the particular policy issue is, if you don’t understand the technology and you don’t understand the implications, you’re setting yourself up for failure.” – Jerry Brito, Coin Center

Understatement of the year: Bitcoin has a huge public perception problem. The first thing that comes to mind is organized crime, black markets, and notorious Internet hackers using the digital currency to hide their exploits. Yet—at the time of writing— the token stands at a value of CAD $3,300 with a market cap of $42 billion.

More importantly, the underlying technology behind Bitcoin—blockchain—is quickly gaining traction among the business community in Canada and around the world. In its 2017 Global Fintech Report, PricewaterhouseCoopers says funding in blockchain companies has increased 79% year-over-year to US $450 million, and that 77% of financial institutions surveyed expect to adopt blockchain internally by 2020.

So what exactly is blockchain? And why should you care about it?

Blockwhat?

It’s a common reaction. Very few people know what the blockchain is, and the few who do are not always adept at explaining it to the average person.

Blockchain technology can best be described as an online distributed ledger, like a record book kept by a decentralized network of computers. Transactions are encrypted and recorded to this ledger, then “blocked” into a set, with each block verified by “miners” or computers who automatically and permanently timestamp and validate each set of transactions. As each block of transactions is verified, they become linked or chained to the previous block, making it nearly impossible to steal, erase or modify previous transactions.

Forget the technicalities of the network, think about what having this technology really means.

To date, we could only send digital copies of information over a network; now we can actually send digital value—without the need for a middleman. Anything of value can be openly, securely, and directly transmitted to anyone, anywhere, anytime, in a matter of minutes, and in some cases, seconds—payments; property titles; birth, death, and marriage certificates; citizenship and voting privileges; supply chain and inventory tracking; charitable donations; contracts; and anything else of value that can be expressed in computer code.

The state of blockchain technology today is much like the Internet in its early days: waiting for a plethora of user-friendly applications and innovations. Even for those of us who use the Internet every single day (and perhaps every minute), we hardly give a second thought to the infrastructure, software, and circuits in our smartphone or laptop that enable this technology. In fact, in 2017, it’s strange to say I “surf the Web”. We talk about our Internet usage almost exclusively in terms of the applications we use the most—Facebook, Instagram, Gmail, Tumblr, etc. Many of us would be hard-pressed to explain what the Internet is exactly, but we know we need it in our everyday interactions.

Similarly, whenever blockchain goes mainstream, we won’t give a second thought to the mechanics, but rather, associate our everyday transactions with those future killer apps on our connected devices. As digital economy gurus Don Tapscott and Alex Tapscott have said, we are quickly moving from the Internet of Information (i.e. email, social networking) to an Internet of Value (i.e. Bitcoin, smart contracts), and that has exciting implications for the future of blockchain technology.

A Tale of Two Disruptors

Among the many clouds of uncertainty that hang over this nascent technology, there is one that is darker than the rest: regulation. Blockchain is still developing the kind of governance structures that we take for granted in the current Internet infrastructure. In a few years, the blockchain ecosystem will face a crossroads in Canada and around the world. Blockchain companies will need to decide whether to collaborate or fight regulators.

Regulators are already starting to pay attention to the impact of digital currencies and other blockchain technologies on financial markets and local economies as they gain traction among investors and even mainstream consumers. Like fellow disruptors Uber and Airbnb, blockchain companies have been able to thrive and grow quickly by operating in a relatively unregulated environment.

The financial industry is highly regulated and will view blockchain companies as direct competitors to their business, operating outside the law and cutting into their customer base and profits. As the taxi industry and hotel industry have done before them, large financial institutions will need to decide whether to level the playing field either by embracing this new technology, or attempting to shut it down and ban it using traditional legal, regulatory and political levers.

Enter a tale of two disruptors.

Ridesharing service Uber used its popularity with consumers and its relative size to aggressively fight regulation and taxi lobbies in multiple jurisdictions. However, the multi-front lawsuits and public fights were extremely costly for the company.Sexual assault cases and incidents of racial profiling also amplified negative attention. At the same time, there was little public sympathy or patience for the unpopular taxi companies and backwards-thinking politicians at city halls worldwide. In the best cases, reasonable rules were put in place, but at what reputational cost to all involved?

Home-sharing giant Airbnb took a different approach. It worked collaboratively with regulators in different jurisdictions to share local, aggregate, and anonymized data about its home-sharing communities and joined the public discussion on how best to shape rules for its platform. Airbnb told city councils point-blank that it wanted to be regulated and taxed, and thereby legalized and legitimated. There continues to be debate surrounding its impact on affordable housing and irresponsible guest behaviour, but for the most part, Airbnb has tried to be a good neighbour to regulators and politicians in the governance of home-sharing platforms.

Blockchain technology can take important lessons from both of these disruptors’ experiences.

Do No Harm

All technology is dual use; that is to say, the technology itself is neutral until an actor uses it for helpful or harmful purposes. For the moment, experts have recommended that governments take a “light touch” to regulating blockchain, noting that any action might stifle the creative development of this ground-breaking technology.

Blockchain experts argue the benefits of blockchain technology far outweigh the drawbacks. All the same, blockchain will come with its own challenges for businesses. The Internet still has issues such as tax obligations, data breaches, money laundering, fraud, criminal financing, privacy, and others yet to manifest. Blockchain’s challenges will open up public debate on how best to govern this technology and expose both disruptive and disrupted businesses to reputational risks as they find their footing within this new wave of innovation.

Start-ups, companies, and investors will also need to learn how to navigate the regulatory environment and communicate with a public that does not quite yet understand what impact the technology will have on their everyday lives.

If you want to be ready for the Internet of Value, you’ll need the right expertise to bridge the gap between government, public opinion, and technology. If you have questions on the implications of blockchain for your organization, please reach out to the Navigator team.

Image credit: Uwe Falkenberg

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