How much do you know about decentralisation and its implications? Can decentralisation solve every problem in our society? In this #TBT, we recap some highlights of the panel discussion at the event Decentralisation and the Future of Fintech, which was hosted at the Paypal Innovation Lab in Singapore on 14 December 2017.
The panel discussion, which was moderated by Vinay Mohan (Director of APAC Operations, ConsenSys), brought together a unique mix of insiders with different backgrounds - Michael Oved (Co-founder, Airswap), David Moskowitz (CEO, Indorse and Attores), Dr. Eliza Mik (Assistant Professor of Law, Singapore Management University) and Simon Hawkins (Counsel, Latham & Watkins). Prior to the panel discussion, Michael gave a keynote presentation on Airswap.
Below are selected edited excerpts of the panel discussion relating to decentralisation:
Vinay: David, what is the point of decentralisation? Is it a means to an end or an end itself?
David: I don’t think decentralisation is the end in itself. Instead, I focus on the actual benefits of decentralisation, which can be seen through two points of view. Firstly, the technological aspect – decentralisation creates redundancy, security and the ability to have peer to peer (P2P) transactions. Secondly, the political/ social aspect - decentralisation can enable P2P transactions without a central authority sanctioning the transactions. Decentralisation reduces authoritarianism and the ability of any one actor to control you. You may be interested in decentralisation because you are interested in the benefits and features that consumers can enjoy. I see that as an end, and decentralisation is the means to an end.
Vinay: Michael, what in your view is a true representation of decentralisation technology?
Michael: The first demonstration of decentralisation is bitcoin, which was a truly decentralised system for a long time. Bitcoin eventually became a game of hash power, which gave many miners a lot of control. This resulted in obtaining consensus, another characteristic of decentralisation, to be very hard. Ethereum is great in all the same ways, and doesn’t have the problem of miners. However, it can be argued that Ethereum governance is centralised because all the code updates are initiated by the Ethereum Foundation. I actually think that this kind of leadership is probably necessary at this point.
Setting aside its issues, Tezos is a proposed blockchain that is very interesting because the governance mechanism is in the protocol itself. Essentially, the tokens in the protocol can decide what sort of updates should happen. Hopefully, the project progresses to a point where we can see something that is truly decentralised.
Vinay: Turning our attention to someone who is a self-proclaimed sceptic. Eliza, do you think we are at a place where we can safely say that this is a paradigm shift?
Eliza: I kind of disagree with the question in the first place - which paradigm shift? I don’t understand the value of decentralisation in the context of fintech. Decentralisation is sometimes the ideology, and sometimes it is the technology. I suspect that decentralisation has the ideological/theoretical background of disintermediation. However, we forget that intermediaries, such as banks, add value. Firstly, they stabilise the system and are entities that bear liability and absolve risk. When it comes to money, I don’t want a decentralised system. I want somebody to control and somebody I can sue in case my money, private key or pin is lost. I want to be able to go to the branch to recover those without much trouble.
Vinay: Simon, you advise a number of high profile clients, many of which are traditional centralised institutions with decades of legacy behind them. Do you get a sense from them that there is something to be worried about?
Simon: In terms of blockchain, businesses are trying to harness the benefits of blockchain. I wouldn’t say that they are worried about decentralisation, but they are looking to harness fintech and blockchain ledgers to increase their margins, increase efficiency, reduce back office staff, and enhance compliance and KYC processes which cost them a huge amount of money. There is a huge ICO boom going at the moment, but I don’t think any of the banks are thinking that the capital markets are going away, because they aren’t. The change in financial services is more on the retail and trading side.
Vinay: What do you think is necessary for economies like Singapore or Hong Kong to succeed?
Eliza: I think Singapore is doing the right thing by keeping a low profile and not regulating too much. There are consultation papers, but these are not hard law. The worst thing would be to jump on the bandwagon and start regulating as it was for the Internet – everyone wanted to regulate the technology. The best thing is to observe and learn from the mistakes made by other jurisdictions. When the average investor (i.e. a non-technology oriented person) starts going into ICOs, blockchains and bitcoins, then maybe the government should be more hands-on and intervene.
Vinay: Simon, what are you seeing at the regulators in Hong Kong?
Simon: In Hong Kong, the regulatory approach is rather hands-off until people really start losing money. With the ICOs, 2018 may well be the year of enforcement by the regulators. We’ve heard an anecdote about at least one Hong Kong and Singapore ICO where the Securities & Futures Commission of Hong Kong (HKSFC) intervened. The HKSFC thought that the ICO was a securities offering and requested the issuer to provide a reasoned legal opinion as to why the issuer thought the ICO was not a securities offering. The HKSFC also notified Monetary Authority of Singapore (MAS) about the same ICO. But how does an issuer reverse an ICO that is found to be a securities offering? This is a very difficult question.
On decentralisation and fintech, regulators acknowledge that they need to get people with different skill sets into the mix. We are also seeing some interesting collaborations, such as the Fintech Career Accelerator launched by the Hong Kong Applied Science and Technology Research Institute and the Hong Kong Monetary Authority. I think the regulators recognise that regulation will change, and technology will too. But when we are talking about technology being internet banking versus the complete disintermediation of the financial services sector, these are very different propositions and I don’t think they recognise that.
Vinay: What will be the future of decentralisation and what are the top 3 game changers?
Michael: First thing we have seen is access to capital – VCs are also scrambling to handle this. Accounting will also change when everything is on a blockchain ledger. As smart contracts become more developed, it will move into legal work, making it more coded.
David: More types of intellectual property/ICO models going onto the blockchain (such as CryptoKitties) and decentralisation of exchanges.
Eliza: Permissioned ledgers, permissioned ledgers, permissioned ledgers. I’m terrified because people want to delegate everything to technology. But technology is reliant on coders, and coders/ people and fallible. Not every problem on earth can be solved by code.
Simon: Having P2P networks and creating more access will be a real game-changer. In financial services, using blockchain for KYC can save a huge amount of money.
Questions from the Audience
Audience: What do you think the failure of blockchains may be?
Michael: The failure of blockchains will be them becoming centralized. The immutable nature of blockchains also cause some fear. For example, stolen cryptocurrencies are lost forever unless there is a hardfork. The immutable nature of blockchain is a barrier to mass adoption. There needs to be some mechanism such as vaulting or other mechanisms to discourage people from stealing.
Audience: Will quantum computing combined with AI hack current decentralisation?
Michael: Quantum computing is not only deadly to blockchain but many things we do. Being able to break the encryption of anything is a powerful weapon. Nothing will be private over the internet anymore. Quantum-generated encryption is one of the top things that should be researched.
David: I see blockchain being a solution to future AI. With cryptographic private keys to your assets, you can control your assets and prevent future AI from messing with your assets (especially digital assets). I agree with Michael that it is important to find a solution to quantum computing.
Decentralisation has great potential in streamlining and improving business processes. However, as there are still several unresolved issues such as accountability, its manner and extent of application is still very much in an experimental stage. Permissioned ledgers whereby a business or authority maintains some form of overall control, could lead the way in introducing decentralisation to the masses. In a permission ledger system, a person/entity may be required to satisfy certain requirements before being approved as a validator node of the ledger. A simplistic analogy - to qualify as a voter in the presidential election, an individual must be at least 21 years old and be a citizen of the country.
Ripple, a company that uses cryptocurrency (XRP) for interbank cross-border payments, is a great example of how permissioned ledgers can be adopted. As at July 2017, the XRP Ledger ecosystem has 55 validator nodes, including Microsoft and the Massachusetts Institute of Technology (MIT).