Since 2015, when bitcoin became an issue for regulators like the state of New York, the regulation of cryptocurrency (the G20 now calls it as a crypto asset) has been discussed in many places, mainly at bodies like the Financial Stability Board (FSB) and the Financial Action Task Force (FATF).
However, Facebook’s Libra cryptocurrency has changed the landscape, ensuring a massive number of debates on regulation are likely ahead. To be sure, these debates will be about the size of companies specializing in internet technologies more than they are about technology architecture.
Yet, throughout the history of crypto asset and blockchain, regulators have been considered an enemy, even as most governments have sought new financial innovations based on the blockchain.
The main issue is, we still don’t have proper communication channels among stakeholders in this ecosystem. Regulators don’t have a functional language to talk with open-source engineers. Open-source engineers sometimes do not want to speak with regulators.
Business entities wish to use new and immature technologies by avoiding frictions with regulation. Citizens need transparency to business entities, but there are no standard criteria to ensure transparency of business. Generally (and I hope) regulators don’t want to discourage innovation, and open-source engineers don’t want to facilitate crimes. The goals of both are almost the same.
But, to make the situation more productive, we need to solve this communication problem. That is now beginning to happen.
Historical discussion at the G20
On June 8 and 9 of this year, the G20’s financial ministers and central bank governors met in Fukuoka, Japan, bringing together a group of 20 governments that discuss issues related to economics.
The FSB, FATF and the International Organization of Securities Commissions (IOSCO) are the organizations which form regulations under G20 leadership. Before the G20 financial track, the FSB published an insightful report titled “Decentralized financial technologies: Report on financial stability, regulatory and governance implications.”
This report emphasized the importance of multi-stakeholder discussions, and that regulations and laws are not an 100 percent perfect tool for forming a healthy ecosystem. It concluded contributions from all stakeholders, including open-source engineers, are essential.
On June 8, the G20 held “G20 High-level Seminar on Financial Innovation Our Future in the Digital Age” to discuss the issue of multi-stakeholder governance.
This was indeed the genesis block of discussions by different stakeholders, including Klas Knott, the vice-chair of FSB, Brad Karr, managing director of IIF (a world group of established banks), Adam Back, the famous cryptographer and Jun Murai, the famous “Internet Samurai” who developed the first-ever inter-university internet communications network in Japan.
The author pictured with Klas Knott, Brad Karr, Adam Back and Jun Murai.
Knott firstly explained the FSB report and the views of his fellow regulators, including their regulatory goals. He went on to discuss many potential applications of decentralized finance, including financial inclusion. Back explained how blockchain technology is an excellent tool to achieve regulatory goals.
I discussed how multi-stakeholder discussion would facilitate healthy permissionless innovations in decentralized finance. We further agreed that the multi-stakeholder discussion is essential for decentralized finance to be made real.
As a result of this seminar and G20 discussion, the following historical sentence was written in the official communique.
“We welcome the FSB report on decentralized financial technologies, and the possible implications for financial stability, regulation and governance, and how regulators can enhance the dialogue with a wider group of stakeholders.”
What multi-stakeholder governance means
In general, governments tend to keep their right to control everything. The internet, which creates a global space of communication, was the first challenge to this order. Here, “global” is different from “international,” because it is independent from the nation.
The internet is also one of the most successful cases of multi-stakeholder governance.
Even in the case of the internet, the government tried to be the only entity of governance, but the effort failed; governments are one of the stakeholders of Internet Governance Forum (IGF) and Internet Corporation for Assigned Names and Numbers (ICANN).
This structure is an excellent foundation that facilitates a huge amount of permissionless innovation, but is also compliant with regulations. A similar situation will happen in finance, and this is the reason why the FSB and G20 are working toward the communique, through the involvement of multi-stakeholders might imply reducing their power of governance.
Here, stakeholders include open-source developers, regulators, business entities, consumers and academia, who are all seeking to solve the current chaos in terms of regulation and innovation in finance. I think it is good to start with have common understandings of regulatory goals; they are financial stability, consumer protection and preventing crimes.
Multi-stakeholder discussion on these goals will create healthier governance than regulation.
Academia facilitates the dialogue
Unfortunately, communications among stakeholders are not sufficient at this moment. However, we need more calm dialogue based on shared understandings and based on academically reviewed pieces of evidence.
One piece of good news is there are several existing initiatives which facilitate discussions among stakeholders. The Scaling Bitcoin workshop was established in 2015 to create a forum for technology discussions led by academics. Likewise, regulators today discuss their work with academics and economists.
Financial innovation workshop at this year’s G20.
This in mind, I believe academia can serve as a good trust anchor and neutral foundation to connect all stakeholder in one place.
A group of universities (currently 31 universities from 14 countries) called BSafe.network has started a new initiative to facilitate multi-stakeholder discussions based on its global neutrality. Right after the G20 financial track meeting, BSafe.network held a multi-stakeholder workshop “G20 meets G-20” with the University of British Columbia. It was the first event of a preliminary series of multi-stakeholder discussions.
A similar workshop, “Decentralized Financial Architecture Workshop,” will be co-located with Scaling Bitcoin 2019 Tel-Aviv, and we hope to see real engagement between regulators and bitcoin engineers.
Observing the current debates on Facebook’s Libra, I conclude we need more moderated and academia-backed discussions to make innovations healthier. The fact is, the Libra Association does not explain how their architecture achieves regulatory goals. Common understandings on regulatory goals and architecture among all stakeholders are essential to start a regulation discussion.
This is a good test case to apply the multi-stakeholder governance.
It may be more difficult than the case of internet governance to establish a formal body for multi-stakeholder discussion on finance. It might take more than a year. However, I believe the historical message triggered by the G20 and a series of workshops will open the door to a new era of a healthy blockchain ecosystem.