by Don Tapscott
One of the most important is the Internet itself—curated, orchestrated, and otherwise governed by a once-unthinkable collection of individuals, civil society organizations, and corporations, with the tacit and sometimes active support of nation-states. But no government, country, corporation, or state-based institution controls the Internet. It works. In doing so, it has proven that diverse stakeholders can effectively steward a global resource by inclusiveness, consensus, and transparency.
The lessons are clear. Good governance of such complex global innovations is not the job of government alone. Nor can we leave it to the private sector: commercial interests are insufficient to ensure that this resource serves society. Rather, we need all stakeholders globally to collaborate and provide leadership.
THE BLOCKCHAIN ECOSYSTEM: YOU CAN’T TELL THE PLAYERS WITHOUT A ROSTER
Although blockchain technology emerged from the open source community, it quickly attracted many stakeholders, each with different backgrounds, interests, and motives. Developers, industry players, venture capitalists, entrepreneurs, governments, and nongovernment organizations have their own perspectives, and each has a role to play. There are early signs that many of the core stakeholders see the need for leadership and are stepping up. Let’s review who the players are:
Blockchain Industry Pioneers
Vanguards in the industry, from Erik Voorhees to Roger Ver, believe any form of formal governance, regulation, stewardship, or oversight is not only foolish, but antithetical to the principles of bitcoin.11 Said Voorhees, “Bitcoin is already very well regulated by mathematics, which are not up to the whims of governments.”12 However, as the industry has expanded, many entrepreneurs are seeing a healthy dialogue with governments, and a focus on governance more broadly, as a good thing. Companies like Coinbase, Circle, and Gemini have joined trade organizations; and some even maintain close relations with emerging governance institutions, such as the Digital Currency Initiative at MIT.
Venture Capitalists
What started as a clique of cryptoinsiders quickly snowballed into Silicon Valley’s biggest and brightest VCs, including the venerable Andreessen Horowitz. Now financial services titans are playing venture capitalist: Goldman Sachs, NYSE, Visa, Barclays, UBS, and Deloitte have made direct investments in start-ups or supported incubators that nurture new ventures. Pension funds are entering the fray. OMERS Ventures, the billion-dollar venture arm of one of Canada’s largest public sector pensions, made its first investment in 2015. Jim Orlando, who runs that group, is looking for the next killer app that “does for blockchain what the Web browser did for the Internet.”13 Investment has exploded—from two million dollars in 2012 to half a billion in the first half of 2015.14 The excitement is palpable. Tim Draper told us that, if anything, “financiers are underestimating the potential of blockchain.”15 Vocal venture capitalists can advocate for the technology and support nascent governance institutions, such as Coin Center, bankrolled by Andreessen Horowitz. Digital Currency Group, a venture firm founded by Barry Silbert, has appointed academics and other nontraditional advisers to its board to accelerate the development of a better financial system through both investment and advocacy.
Banks and Financial Services
Perhaps in no other industry have we seen a swifter change of opinion. For the longest time, most financial institutions dismissed bitcoin as the speculative tool of gamblers and criminals, and barely even registered blockchain on their radars. Today they are quite literally “all in.” Watching this unfold in real time in 2015 was truly incredible. Before 2015, few major financial institutions had announced investments in the sector. Today Commonwealth Bank of Australia, Bank of Montreal, Société Générale, State Street, CIBC, RBC, TD Bank, Mitsubishi UFJ Financial Group, BNY Mellon, Wells Fargo, Mizuho Bank, Nordea, ING, UniCredit, Commerzbank, Macquarie, and dozens of others are investing in the technology and wading into the leadership discussion. Most of the world’s biggest banks have signed up to the R3 consortium and many more have partnered with the Linux Foundation to launch the Hyperledger Project. Banks should be included in the discussion about leadership, but other stakeholders must remain cautious of powerful incumbents looking to control this technology, just as they had to tread cautiously in the early days of the Internet.
Developers
Developers in the community are split on basic technical issues, and the community is expressing a need for coordination and leadership. Gavin Andresen, the bitcoin core developer at the center of the block-size debate, told us, “I’d prefer to stay in the engine room, keeping the bitcoin engine going”16 rather than spending every waking moment advocating his position. However, given the lack of clear leadership, Andresen has been inadvertently cast in the spotlight. In the summer of 2015, he told us, “My job over the next six months is to focus on bitcoin’s technical life, making sure bitcoin is still around in two or three years for those businesses to happen: micropayments, stock trading, or property transfer, all these other things,” which involves a lot of advocating and lobbying. To him, the Internet governance network is a useful starting point. “I always look for role models. The figure role model is the IETF.”17 How the Internet is governed is “kind of chaotic and messy,” he said, but it works and it’s reliable.
Academia
Academic institutions are funding labs and centers to study this technology and collaborate with colleagues outside their silo. Brian Forde told us, “We started DCI to catalyze some of the great resources we have at MIT to focus on this technology, because we think it’s going to be one of the most important technological transformations over the next ten years.”18 Joichi Ito, director of the MIT Media Lab, saw an opportunity for academia to step up: “MIT and the academic layer can be a place where we can do assessments, do research, and be able to talk about things like scalability without any bias or special interests.”19 Jerry Brito, one of the most prominent legal voices in the space—first at the Mercatus Center at George Mason University and now as director of Coin Center, a not-for-profit advocacy group—said, “Governance comes into play where there are serious decisions that need to be made, and you need a process for that to happen.”20 He recommended starting with the Hippocratic oath: first, do no harm. The current bottom-up approach that bitcoin’s core developers are using “is showing a little bit of its rough edges right now with the block-size debate. It’s going to be very difficult to get any consensus,” Brito said. “We want to help develop that forum and foster a self-regulatory organization if it comes to that.”21 Notable universities such as Stanford, Princeton, New York University, and Duke also teach courses on blockchain, bitcoin, and cryptocurrencies.22
Governments, Regulators, and Law Enforcement
Governments all over the world are uncoordinated in their approach—some favoring laissez-faire policy, others diving in with new rules and regulations such as the BitLicense in New York. Some regimes are openly hostile, though this is increasingly a fringe response. Likewise, the industry is splitting into factions, those who support the new rules and those who do not. Even those who resist government intervention acknowledge that their enthusiasm to wade into governance debates is a net positive. Adam Draper, a prolific VC in the industry, acknowledged, albeit reluctantly, “Government endorsement creates institutional endorsement, which has value.”23 Central banks globally are each taking different steps to understand this technology. Benjamin Lawsky, former superintendent of financial services for the State of New York, said strong regulations are the first step toward industry growth.24
Nongovernment Organizations
The year 2015 proved transformative for the burgeoning constellation of NGOs and civil society organizations focused specifically on this technology. Though Forde’s DCI is housed within MIT, we include it here. Other such groups include Brito’s Coin Center and Perianne Boring’s Chamber of Digital Commerce. These groups are gaining traction in the community.
Users
This means you and me—people who car
e about identity, security, privacy, our other rights, long-term viability, fair adjudication, or a forum for righting wrongs and fighting criminals who use technology to destroy what we care about. Everyone seems divided on basic taxonomy and categorization: Does blockchain refer to the bitcoin blockchain or the technology in general? Is it big “B” Blockchain or little “b” blockchain? Is it a currency, commodity, or technology? Is it all of these things or none of these things?
Women Leaders in Blockchain
As many have observed, the blockchain movement is overpopulated with men. In technology and engineering, males still outnumber females by a wide margin. However, high-profile women are founding and managing companies in the space: Blythe Masters, CEO of Digital Asset Holdings; Cindy McAdam, president of Xapo; Melanie Shapiro, CEO of Case Wallet; Joyce Kim, executive director of Stellar Development Foundation; Elizabeth Rossiello, CEO and founder of BitPesa; and Pamela Morgan, CEO of Third Key Solutions. Many of them have suggested the industry is very welcoming to all voices, male and female alike. Venture capital in blockchain is also gaining in diversity. Arianna Simpson, former head of business development at BitGo, is now an investor in the sector. Jalak Jobanputra is an investor whose VC fund focuses on decentralized technology.
When it comes to governance and stewardship of this global resource, women have taken the lead.
Primavera De Filippi, faculty associate at the Berkman Center at Harvard and a permanent researcher at the National Center of Scientific Research in Paris, is a tireless advocate of blockchain technology and has emerged as one of academia’s clearest and most eloquent voices on governance. She is organizer, instigator, and promoter of dialogue within the ecosystem. With lawyer-turned-entrepreneur Constance Choi, another vocal proponent in the industry, De Filippi has led a series of blockchain workshops at Harvard, MIT, and Stanford, as well as in London, Hong Kong, and Sydney. They have brought together diverse stakeholders from the industry and beyond to debate big issues. Nothing is off limits, and the events often mash up people of different backgrounds, persuasions, and beliefs.
Elizabeth Stark is another emerging star in governance. The Yale Law School professor has taken up the mantle of convener-in-chief for the industry. Like another prominent woman—Dawn Song, MacArthur fellow and computer science professor at Berkeley, and an expert in cybersecurity—Stark comes from a distinctly academic background but has other ambitions. She organized Scaling Bitcoin, convening developers, industry players, thought leaders, government officials, and other stakeholders in Montreal. A “constitutional moment” for the sector, Scaling Bitcoin was credited with clearing logjams in the block-size debate. Today she is also leading as an entrepreneur, collaborating on the development of the Bitcoin Lightning Network to solve the blockchain’s scalability issue.
Perianne Boring, a former journalist and TV reporter, is the founder of the Chamber for Digital Commerce, a trade-based association in Washington, D.C. Within a year, CDC has attracted a high-profile board (e.g., Blythe Masters, James Newsome, George Gilder). The movement needed “boots on the ground in Washington to open a dialogue with government,” she said. With her background in journalism, Boring focused on messaging, positioning, and polish. Her organization is “open to anyone who is committed to growing this community,” she said, and is now a leading voice in policy, advocacy, and knowledge in the burgeoning blockchain governance ecosystem.25
This growing chorus of leaders lobbying for governance is as prescient as it is urgent. When we talk about governing blockchain technology, we are not talking about regulation, at least not exclusively. For one, there are serious limitations to using regulations for managing an important global resource. As Joichi Ito said, “You can regulate networks, you can regulate operations, but you can’t regulate software.”26 So regulations will be one of several important components. Blockchain is not like the Internet because money is different from information. Blythe Masters, consummate Wall-Street-insider-turned-blockchain-pioneer, expressed her concern: “Newcomers are simply able to do things that regulated institutions are not able to do, but one needs to think very carefully about why those regulations exist, and what purpose they serve, before one can conclude that exposing consumers to unregulated financial activities is a good thing.”27 Ultimately, the debate is not about the kind of society we want but about the opportunities for leaders to steward an important global resource.
A CAUTIONARY TALE OF BLOCKCHAIN REGULATION
Benjamin Lawsky, the former superintendent of financial services for the State of New York (NYDFS), was once the most powerful bank regulator in the United States. To Washington insiders, Lawsky was known for his early morning selfies on his daily jogs around the city. But to the titans of Wall Street, he was a gutsy, ambitious (not to mention overzealous) scrapper who would routinely take the fight to any bank he thought was misbehaving and seek his just deserts.
Appointed by friend and longtime political ally Governor Andrew Cuomo, Lawsky was the first ever to hold the office of top watchdog of the state’s chartered banks. In 2012, only one year into the job, he made headlines when NYDFS reached a $340 million settlement with U.K. bank Standard Chartered PLC for its handling of more than $250 million in transactions from Iran, prohibited at the time by U.S. and E.U. sanctions. In the process, NYDFS scooped the Justice Department, which was seeking a similar penalty.28 To those who thought bank regulations were too lax, he was the new sheriff in town, a fearless leader and reformer of an industry run amok. To the banks, he was quickly becoming Public Enemy Number One. Lawsky was just getting started.
It was mid-2013 Lawsky was at his desk, probably working on another blockbuster case against the big banks, when an economist on his staff knocked on his door to discuss some unusual inquiries. According to a few lawyers on the street, several client firms were transacting in some strange new virtual currency called bitcoin. Lawsky’s first reaction was “What the heck is bitcoin?”29 The economist went on to explain that these companies had customers who were buying, selling, trading, and paying for goods and services with this digital dollar and that the lawyers, ever cautious, wanted to know whether this kind of activity qualified as money transmission, and if so, what to do about it. In New York, money transmissions are typically regulated at the state level; and so the NYDFS, as the state regulator in New York, had a duty to regulate any entity engaged in money transmission. But how? Lawsky hadn’t even heard about the technology, and he had a sneaking suspicion this would be a very different kind of challenge.
Almost immediately, Lawsky was confronted with a problem that has become all too commonplace, that disruptive technology does not fit neatly into existing regulatory boxes, a hallmark of the digital age. In his mind, bitcoin didn’t fit at all. Bitcoin is global in reach; federal and state governments would be limited in the scope of what they can do to govern and regulate it. Moreover, the technology is peer to peer and decentralized. Regulators make a living monitoring large intermediaries. Their centralized ledgers contain troves of data, ideal for building cases. And in the digital age, officials in government are rarely, if ever, in possession of all the information needed to make decisions in the public interest. Often, they lack resources to govern it effectively and can be ill informed about innovation. Lawsky was coming to terms with something that governments and regulators of digital technologies had wrestled with for twenty years. Thanks to luck, foresight, and a different regulatory framework, the Internet was able to grow and thrive. Cryptocurrencies were another example of how digital technology is wresting control from traditional decision makers, including governments.
Still, Lawsky had a job to do. Upon reviewing the existing statutes, he found them woefully inadequate. The department initially wanted to regulate this technology by enforcing rules written around the time of the Civil War. Those money transmission laws couldn’t possibly address any kind of digital technology like the Internet, let alone digital currencies or cybersecurity. “The more I learned, the more interested I got
in how powerful this technology is, and I saw all the various applications and platforms that were going to be built, over time,” he said. If he “could get regulation right, to make sure the bad stuff we didn’t want to see happening in the ecosystem was avoided, and at the same time not have regulation be too overbearing, then we had a real chance of helping a very powerful technology make serious improvements to our system.”30 Lawsky concluded, “Maybe we need a new type of regulatory framework to deal with something that is just qualitatively different?”31 His proposal, the BitLicense, was the first serious attempt to provide a regulatory lens onto this industry. A controversial piece of law, it revealed how even well-intentioned regulations can produce unintended consequences. When the BitLicense went into effect, there was a mass exodus of companies such as Bitfinex, GoCoin, and Kraken from New York; they cited the prohibitive cost of the license as a main cause. The few that stayed are well-capitalized and more mature businesses.
The benefits, such as improved oversight and consumer protection, are significant. Licensed exchanges, such as Gemini, have gained ground, perhaps because their institutional clientele know they’re now as regulated as banks. But with fewer competitors, will the BitLicense stifle innovation and cripple growth? Brito argued that the BitLicense misses the mark by applying old solutions to new problems. He cited the BitLicense rule that if you take custody of consumer funds, you need to get a license. “With something like bitcoin and other digital currencies, you have technologies like multisig [multisignature] that, for the first time, introduce the concept of divided control. So if the three of us each have a key to a multisig address that needs two out of three, who has custody of the funds?”32 In this case, the concept of custody, once very clear in the law, is now ambiguous.