Mahonen blockchain 2018
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Blockchain technology allows for decentralized organizations run through smart contracts without centralized governance. This could transform business models by facilitating long-term financing through mechanisms like crowdfunding and new forms of cooperatives organized as decentralized autonomous organizations (DAOs). However, DAOs operate in a regulatory grey area without protections of traditional legal structures, and complex algorithms may be difficult to oversee, raising issues around accountability, fraud, and compliance with laws. Greater transparency and oversight of algorithmic decision making may be needed.
Mahonen blockchain 2018
- 1. Blockchain – Consequences for supervision and governance SMART - Sustainable Market Actors For Responsible Trade Jukka Mähönen• University of Oslo 29.05.2018 Twitter @UniOsloSMART #SMARTproject
- 2. SMART analyses the regulatory complexity within which European market actors operate. With a focus especially on international supply chains of products sold in Europe, the aim is to find out what prevents and what promotes a shift towards sustainable development. SMART is funded by the European Union
- 3. Structure What is a blockchain? Where it is used? Where it can be used? Decentralised autonomous organisations
- 4. Introduction Blockchain - distributed ledger technology (DLT) DLT: a decentralised transaction register distributed among network participants, with transactions taking place directly between end users Blockchain one type of DLT a digital system, based on the Internet and a network of computers to share and continually reconcile the shared version of truth
- 5. Blockchain represents a revolutionary system of tracking and maintaining the integrity of data safe from tampering by other individuals or centralized governance mechanisms governments, banks and corporations a ‘trustless network’ as the parties can transact even though they do not trust each other no trusted third party or intermediary that approves or denies transactions as it is in the centralized governance models
- 6. In blockchain devices, in many cases millions, in the network running complex algorithms responsible for validating transactions and uploading new blocks to the chain which implements a public ledger
- 7. Introduction Lots of talk of blockchain – especially from cryptocurrency point of view (»Bitcoin») However, the less exotic use of blockchain is in ordinary business – how to make value chains more efficient? Logistics and transport Energy production «Internet of Things» (IoT)
- 8. Introduction Generally, very positive atmosphere for blockhain in Europe European Commission (FinTech Action Plan, 2018) European Parliament EU Blockchain Observatory & Forum (just starting) ESMA New threat: General Data Protection Regulation (GDPR) Conflict with the non-tamper nature of blockchain
- 9. Regulatory philosophy in Europe: Digital Single Market “It is not smart to regulate the technology per se, but rather its uses and the sectors that adopt this technology in their business models. Consumer protection and investor protection come first.” Applying the blockchain model to energy use, supply chains and governance would benefit businesses and citizens But uses other than for crypto-currencies need to be promoted Getting the rules right could make the EU a global leader
- 10. Digital Single Market On the other hand, the Commission FinTech Action Plan (2018) Standardization of the technology itself?
- 11. Use of blockchain / DLT Norges Bank (2018) gold and diamond sales, loan syndication, trade financing, securities trading and settlement infrastructure, international payments, know-your-customer systems and other processing and sharing of information payment systems for the general public probably do not represent the simplest application of DLT greatest potential in settlement systems, particularly in conjunction with other financial infrastructure (securities settlement, currency settlement) involving central bank settlement
- 12. Use of blockchain / DLT The Bank of England’s future settlement system is to be compatible with potential DLT-based securities settlement systems (Carney 2018) UK Cryptoassets Taskforce (HM Treasusry, Financial Conduct Authority, Bank of England) Blockchain-based decentralized securities exchanges (Singapore?) Monetary Authority of Sinagapore: an attempt to ease market access for small- scale exchange platforms
- 13. Crucial spots: Blockchain platforms Consumer protection Platform cooperatives (see below) Public use of blockchain
- 14. Public use of blockchain Land registries (India) E-citizenry (Estonia) Reporting and assurance (RegTech) (Big4) Digital invoicing to fight tax evasion (China) Initial coin offerings (ICOs) (Russia) Central bank digital currencies? (CBDC)
- 15. Public use of blockchain European Financial Transparency Gateway? EU Public Blockchain initiative? (FinTech Action Plan: COM will consult Q2/2018 publicly on further digitisation of regulated information about companies listed on EU regulated markets, including the possible implementation of a EFTG based on DLT
- 16. Hotspots Unregistered securities trading Are blockhain «tokens» «securities»? (MAS of Singapore) Two sides: allowing DLT securities exchange platforms as long as they are under supervision Tax on Cryptocurrency Trades? (India)
- 17. Lot is happening but what does this mean for business models? Problems of mainstream business models Lack of long-term financing Bank financing hard without collaterals, especially after financial crisis Short-termism of venture capitalists and private equity providers (in hurry to cash out) Problems of listing (IPOs)
- 18. Business models Intermediaries short term demands Institutional investors as pension funds and hedge funds Intermediaries v. ultimate beneficiaries International financial accounting standards leading to short-termism (mark-to-market valuation) Big4
- 19. How to tackle problems? New contract-based business forms Stay private (Silicon Valley start-ups) Crowdfunding Neo-cooperatives Problems in tackling problems
- 20. Still dependant on institutions Institutional private equity investors Start-up scene dominated by a clique of venture capitalists with privileged access to equity Platform providers Banks Financial institutions (eg payment service providers) Tech giants (Alphabet, Amazon, Facebook) New technology: In many new financing and business solutions DLT or blockchain is a crucial tool
- 21. Smart contracts the key? During the last few years, self-enforcing digital smart contracts organised with blockchain technology have created new possibilities for organizing businesses A radical interpretation of smart contracts would reduce the contract to the code, effectively declaring the code as the law itself: self-contained, self-performed and self-enforced Smart contracts are used in value chains, usually through IoT, automatically confirm transactions As such, blockchains an alternative to ownership ledgers based on classical fifteenth century based double-entry bookkeeping
- 22. Smart contracts Blockchain can be called a ‘triple-entry accounting’: all accounting entries involving outside parties are cryptographically sealed by a third entry, the chain of validated prior transactions Blockchains offer advantages in cost, speed, and data integrity compared with classical methods of proving ownership used for recording ownership rights to variety of endowments, from real estate to financial instruments, vehicles and works of art as well as public records as birth certificates, drives licenses and university degrees
- 23. Decentralised autonomous organisations In the last phase, a firm itself is decentralized from the traditional public and private governance system The firm run through a network of blockchain smart contracts as a desentralized autonomous organisation (DAO) or decentralized autonomous corporation (DAC) as programs including the required rules and decision-making apparatus for an organization eliminates the need for public (as law) or private (as legal personality) institutional and human (as board and management) governing roles
- 24. Decentralised autonomous organisations agency costs from incomplete contracting that are created through agency relationships between investors of different capitals, boards and managers mimics a traditional organisation but replaces law and humans with its respective technology and code The Code / architecture in the regulatory ecology model (Lessig, van der Velden) Replacing law, market, social norms
- 25. Why blockchain, smart contracts and DAOs? Natural tools to self-govern and self-enforce value networks Especially complex circular economy business models Lack of capital one of the most important barriers to the adoption of sustainable and circular economy
- 26. Why blockchains? Shifting from a linear to a circular business model requires novel innovations in distribution planning inventory management production planning management of reverse logistics networks High upfront costs and long payback period
- 27. Why blockchains? Implementing a circular economy business model also demands continuous monitoring and improvement of the products’ lifecycle, resources must be allocated to keep all stakeholders committed Blockchain technology might give tools to solve these problems
- 28. Blockchain in finance Blockchain-based cooperativism can give ordinary people a possibility to invest start-ups directly Two examples Crowdfunding Neo-cooperatives
- 29. Crowdfunding Blockchain enhances crowdfunding – enabling long-term financing No need for platform intermediaries as trusted third parties Banks and payment service providers Especially developing economies Direct customer support into the business model Blockchain based DAOs give a genuine new possibility to build a smart P2P contract between the participants
- 30. Crowdfunding Blockchain can be used to store information without relying on any centralized server or intermediary but relying instead on the contribution of every peer in the network in order to deploy a fully decentralized database, whose security and integrity is ensured by cryptographic algorithms Blockchain technologies eliminate the need for intermediaries, by enabling the establishment of a genuinely decentralised crowdfunding operating autonomously on top of a P2P network
- 31. Crowdfunding In a blockchain based crowdfunding platform all relevant services and corresponding transactions are stored in the blockchain
- 32. Neo-cooperatives Next step from crowdfunding is to institutionalize it but not necessarily to a traditional cooperative enterprise but as a decentralised cooperative organization Smart contracts including ethical algorithms of sustainability can give new possibilities to cooperativism and self-governance, difficult to incorporate into existing limited liability entities A smart contract governing the whole value chain, connecting it to one network through IoT, might for instance limit or prevent purchases from a cooperative store if a member’s carbon footprint grows too big or if there are too many new purchases without circulation of previous purchases
- 33. Neo-cooperatives Cooperative membership and share ownership itself can be designed to be fluid and automatic depending on factors such as contributing to use of shared property or purchases from a cooperative based agri-food industry or a shared autonomous vehicle pool If a member does not carry her responsibilities or do not fulfil set rankings or optimal choices, measured according to factors in smart contract, membership rights could be revoked automatically, or membership terminated without any human interaction through a predefined smart contract
- 34. DAOs from regulatory prespective DAOs (like many blockchain-based initiatives) exist in a regulatory grey zone that may not offer liability, protection or accountability guarantees particularly when they are not explicitly grounded in existing legal systems There is also legal concern over equity offerings may place DAO- «companies» within the existing securities market requiring registration and conformity with a number of rules and obligations
- 35. DAOs from regulatory perspective By operating outside of a regulatory framework blockchain-based organisations that are not incorporated or legally recognised may be at risk of investment fraud and malicious hacks their members could be exposed to liabilities as partners What is the answer?
- 36. DAOs from regulatory perspective Some have called for greater oversight and transparency in algorithmic decision-making and interactive modelling The complexity of advanced algorithms makes it difficult even for developers to fully understand their governing rules, and to check their legal compliance, for example with anti-discrimination and transparency laws Self-running and self-enforcing organisations could also challenge traditional notions of legal personality, individual agency and responsibility.
- 37. DAOs from regulatory perspective Problems DAOs could be programmed to trade in illicit goods or banned products Even where anonymity is not guaranteed, the efficient, automatic and distributed structure of the underlying blockchain could make it difficult for regulatory bodies to enforce the law and shut operations down Victims of crime at the hands of a DAO may also find it difficult to recover damages, or to obtain an injunction against the malicious DAO, where the capacity to engage such measures is not specifically encoded within its structure
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- 39. Thank you! jukka.mahonen@jus.uio.no Twitter: @jukkamahonen SMART is funded by the European Union under the Horizon 2020 programme, grant agreement 693642. The contents of this presentation are the sole responsibility of the SMART project and do not necessarily reflect the views of the European Union.