Waiting for a revolution
Blockchain may be the talk of the town, but before the industry starts moving ahead, it has to figure out in which direction it will go
Regulation, time-scales and plain old logistics were on the agenda at the London Blockchain Week conference, where techies and financial market experts gathered to discuss all things distributed.
Making an impromptu appearance on an afternoon panel, Luis Carranza, fintech entrepreneur, founder of London Fintech Week and organiser of the event, noted that people tend to say blockchain is at the stage that the internet was in the early 90s. He said, however, that he believes it to be “more like the technology in the 70s and early 80s”.
He said: “It’s way earlier than it feels like, but it’s going to move a lot faster once it starts.”
One aspect that is holding this development back is the uncertainty that remains around how blockchain should be regulated, and attendees heard that this is something that should be at the top of the agenda for start-ups.
Edan Yago, CEO and founder of Epiphyte Corporation, suggested that in blockchain and cryptocurrencies, regulation has been “maybe the most critical thing for us to think about”.
Hogan Lovells partner John Salmon also used the internet as a point of reference, but as an example of how regulation of blockchain is likely to go.
When the internet was becoming more widely used, some believed it should be stringently regulated, while others argued it shouldn’t be regulated at all. Eventually, Salmon said, it emerged that “most of the laws and regulations that we already had could be applied to the internet”.
Existing financial rules will apply to blockchain, but new ones may need to be created, too. At present, it is difficult to predict “how exactly it will work”, Salmon said.
Another speaker, Richard Levin, shareholder at law firm Polsinelli, warned entrepreneurs that if they are not thinking about regulation at present, they “really ought to”.
Innovators in the financial services sector have a responsibility to try to help regulators understand what they’re working on. It’s important to “have the dialogue and try to shape the regulations that you will have to live with”, he said.
Salmon agreed with this, conceding that, although the industry can be critical of regulators, they have “quite a tough job”.
Financial services regulators have historically been concerned with the resilience of the financial system and protecting consumers, but now they also have to worry about maintaining competition and monitoring innovation.
Using the Financial Conduct Authority as an example, Salmon noted that the UK regulator has opened up and is willing to discuss new innovations. “We need to help them understand these things,” he said.
Levin added to this, pointing out that, in this industry, companies have to think about the regulations in every jurisdiction in which they potentially have clients. For example, he said: “In the US, it’s a rat trap.”
According to Levin, the US Securities and Exchange Commission considers digital assets as securities in some contexts, while the Commodity Futures Trading Commission considers them as commodities, and the Treasury and Internal Revenue Service consider them as property.
“And then you have 50 state regulators who also want to get their clutches on you,” he said.
In other jurisdictions, such as Singapore and the UK, “they’re being pragmatic”. However, although we tend to think about regulatory arbitrage in terms of one country against another, Levin suggests that companies should also consider arbitrage between competitors.
If a company chooses to be regulated and is willing to be the first to be regulated, that sets a precedent for regulation, and begs the question of why their competitors are not doing the same.
“It’s not always a bad thing. It can give you a competitive advantage over other firms, because you chose to do embrace regulation early.”
On a panel on the tokenisation of assets and value, speakers turned their attention to security of blockchains.
One speaker, Hugh Madden of Equichain, placed importance on ensuring confidentiality in blockchain technology, saying: “The way the world is going, there is almost no such thing as private data.”
Although transactions on a blockchain should only be accessible to authorised participants in that transaction, it is also important to make sure that there is a data store that has policy support for jurisdictional data rights—making sure that no data ends up somewhere it shouldn’t, he said.
Dimitri De Jonghe, a core developer at Bigchain DB, took this further, warning: “Don’t put private stuff onto public blockchains”.
While current cryptography may be secure for the next 20 years or more, anything that is put on the blockchain now is not guaranteed to be protected against the technology of the future.
Marta Piekarska, security architect at Blockstream, added to this, reiterating that whatever is put on to a blockchain stays there. At some point in the future, the cryptography could be broken and “what we thought was private and encrypted stops being private and encrypted”.
“What are the consequences of putting something on a blockchain? We have to stop thinking in terms of computers that we know today.”
Putting things like health or identity information on a ‘secure’ blockchain could seem appealing, however the industry should work to define and address these security issues first.
Another panel discussion focused on the differences between different blockchains in the industry, with speakers concluding that financial services providers require their own blockchains to suit their specific needs.
Griffin Anderson, head of blockchain accounting at ConsenSys, said that 2018 will be the “breakout year” for the technology. This is when institutions will start putting real blockchain solutions into practice to improve business processes, he said.
Anderson also suggested that “almost all” Fortune 500 companies will likely have a business process that can be transformed by blockchain, but that each will require slightly different functionalities.
Megan Reynolds, business development manager at Crowdcube, agreed that distributed ledger technology is still in its early stages, although she noted that there has been a focus on the technology itself rather than on the market for it. “It’s an amazing technology that is without a market,” she said, adding that, particularly for start-ups seeking crowdfunding, “we will have to see that first”.
Similarly, Richard Muirhead, general partner at OpenOcean, noted that it can be difficult for technology start-ups to identify the market they are targeting. He said: “It takes a lot of work and luck to find the right combination of capabilities and features. It’s as much about what you leave out as what you include.”
Looking to future uses of blockchain and distributed ledger technology, Anderson suggested that the first ‘tokenised’ assets have begun to arrive, which represent “ownership of an underlying entity”.
This, Anderson suggested, can be applied to fungible assets but also to non-fungible assets such as vehicles. Tokenising assets “changes that marketplace as people adopt digital assets and trade them” and can “really add a lot of liquidity in the market”.
ConsenSys is in the early stages of working on this, Anderson said, adding: “It’s going to be a really fun ride.” AST