“I’m willing to bet my career that whatever country gets this right will become the next global financial center.”
-Perianne Boring, Chamber of Digital Commerce
In 1993, Pindar Wong, cofounder of VerFi, helped bring a revolutionary new technology — the Internet — to Hong Kong.
He doesn’t regret his Internet pioneering days. But he certainly regrets, by his own admission, what the Internet has become.
“Which is why,” he said, “I’m devoting so much energy to blockchain. In repentance.”
Blockchains, put simply, record and facilitate transactions between identities (via public keys) through group consensus. This allows for a level of privacy and security in the fintech world that’s previously been impossible.
At its core, though, decentralized tech is nothing new.
Consensus is what makes decentralized technologies — and healthy ecosystems in general, for that matter — work.
“Decentralized technologies,” says Wong, “rely on a consensus algorithm. In society we already have a consensus algorithm. It’s called money.”
The consensus in Brazil, for example, is I need a specific security access token — called the real (pronounced ree-al) — in order to have access to the Brazilian economy.
Last night, as a perfect example, I was down to my last 5 reais and realized I’d forgotten my debit card at my Airbnb. Without the right consensus algorithm, which happens to be a little piece of paper with Portuguese writing on it, I was locked out of the economy until I went back to my Airbnb, grabbed my debit card and found an ATM.
“Blockchain,” said Wong, “provides a huge simplification of that infrastructure.”
Which is why Brazil’s first blockchain conference, Emerging Links, from which, upon writing, I report to you today, is such a monumental event for the country.
“We are very proud,” says Nana Baffour, CEO of Brazilian technology investment firm, Grupo Cimcorp, and co-chair of Emerging Links, “to be able to provide the market and our customers with a conference of this level and to contribute to the dissemination of knowledge in an innovative and promising technology such as Blockchain. We believe this conference can act as a catalyst for the market to understand better the potential of Blockchain.”
The trustless playground.
The big promise of blockchain technology is it creates what blockchainers call “trustless” environments on the Internet.
But, Wong hedges, this description is somewhat of a misnomer. It’s not that trust is nonexistent or unnecessary, it’s just the trust has been pushed elsewhere — to numbers.
“Your life,” he said, “is going to rely on the unbreakability of these cryptographic locks. It’s not that it’s trustless. It’s that we trust mathematics. We’re trusting the power of mathematics. And that the implementation of mathematics will be correct.”
Rather than relying on humans to be infallible, we rely on the fact that computers are always going to get the same result when one is added to one.
Numbers, as they say, don’t lie.
And with the infallibility of numbers at our helm, we can do some pretty interesting things.
For example, we can program these numbers today to do very specific things in the future when certain conditions are met in the real world.
This is what is meant by a “smart contract.”
Smart contracts, as defined by Nick Szabo nearly twenty years ago, are “a set of promises specified in digital form.”
In essence, smart contracts allow for neutral, self-governed systems that have no need for any central authority. In a trustless environment, where we don’t know one another and have no reason to trust one another, we can trust the smart contract to execute the terms upon which we agree.
In the Old World, the execution of contracts relied heavily on human infallibility. But humans, alas, are not infallible. And when humans prove fallible, as they infallibly will, a lengthy, costly and often damaging process has been a necessary evil in order to enforce the terms of the contract.
With smart contracts, though, the terms can be outsourced to a neutral and, virtually infallible (in theory), third party. The cost of enforcing this contract becomes negligible and the collateral damage, if there is any at all, is pushed to the edges.
Further, with the use of what are called “oracles,” we can attach these smart contracts to real-world data, having them execute when certain conditions are met. Any form of public data can be integrated into a smart contract. To name a few: election results, weather conditions, sport event results and commodity prices.
The most immediate use case of oracles are prediction markets, which is being spearheaded by the Augur project.
You might be wondering…
How will smart contracts be regulated?
On this topic, one speaker, Chris Odom, said, quite frankly: “I don’t think regulators are going to have anything to do with smart contracts other than the ones they’re invited into.”
What will blockchain regulation in general look like?
Regulation is a very tricky and contentious subject in the blockchain world.
One, the underlying ethos of blockchain technology, by and large, spawns from an attitude of anti-regulation.
Governments, moving forward, will have a very hard time regulating individual, peer-to-peer private cryptocurrency transactions and contracts. The only regulatory reach they’ll firmly have in this space are in centralized exchanges and above-ground blockchain startups.
Centralized exchanges, though, are already (slowly but surely) beginning to fall by the wayside. Decentralized exchanges, and blockchain-centric platforms in general, can exist everywhere and nowhere in the world, which raises a lot of questions (some of them seemingly unanswerable) about jurisdiction.
This, of no surprise, strikes fear into the hearts of many regulatory agencies. And creates an environment of distrust in these technologies.
But here’s the rub…
Blockchain startups, if forced to operate within a harsh regulatory environment, again, frankly speaking, will either go underground or move to a place that’s more blockchain-friendly where they can operate out in the open without fear.
In the United States, unfortunately, as Perianne Boring pointed out, because of our strict regulatory environment on financial services in general, we are at a major disadvantage.
There are over 100 financial regulators in the U.S., each with their own agendas and jurisdictions. (I believe this is what, in modern Internet parlance, we call a “HAM.”)
If they choose to come down hard on bitcoin and blockchain technologies, or refuse to simplify the rules dramatically, it will guarantee the U.S. falls behind on this trend. This will also virtually guarantee the U.S. gives up its global economy leader status, too.
“The cat,” Perianne Boring said, “is out of the bag. The toothpaste is out of the tube. There’s no going back.”
In the end, though, regulators will recognize these technologies actually make us safer and, by nature, protect us from harms caused by centralized architecture.
The traditional model, made up of centralized exchanges and databases, creates vast amounts of insecurity, forcing us to waste time, energy and money on patching up holes in our current house-of-cards infrastructure.
Decentralized tech allows us, through what Wong calls the “depacketization of risk,” to bake a high level of security into the cake, thus freeing up those resources to flow into more innovation.
“I’m willing to bet my career,” said Boring, “that whatever country gets this right will become the next global financial center.”
Some countries, like Canada, are embracing regulatory sandboxes — pseudo-regulation-free zones where blockchain startups are free to experiment.
By allowing blockchain startups to operate in a relatively regulation-free environment, countries can set themselves up to be an important players in the burgeoning blockchain space.
Blockchain technology is building the future global economy.
The most innovation will flow to those countries most willing to adopt a deft, light touch and, yes, a laissez-faire attitude.
Emerging countries, like Brazil, have a rare opportunity to take advantage of this coming transfer of legacy wealth and get ahead of even the most advanced economies in the coming decades.
How, then, can a nation can attract the right brains? Three words…
Let it be.
Managing editor, Laissez Faire Today