A report on the Smart Economy conference in the European Parliament in Brussels, providing some insight on the stance of regulators and lawmakers regarding Crypto Currencies and Smart Economies.
From the 2nd through the 4th of may NEO, NEX and CoZ organised a Smart Economy Expo at the European Parliament to educate law makers and regulators on Smart Economies, digital identities and compliance regarding regulations.
On the 2nd of May a conference was held by several speakers including Da Hongfei Co-founder of NEO, Fabio C Canesin Co-founder of NEX, Cătălin Sorin IVAN with the European Parliament and Peter Kerstens Advisor to the European Commission.
Cătălin IVAN initiated the conference stating parliamentarians in the European Parliament are struggling to understand what blockchain is, but not for lack of trying. That said, out of 751 members only about 25 are actively educating themselves on Blockchain.
"We are trying all the time to fix what went wrong in the past and we don't look at all in the future. We don't try to understand, to anticipate how our societies will look like in ten years from now. We just try to fix what went wrong at the last financial crisis
"For me it is very challenging to discuss about a technology that don't need trust, it is trustless. In these times when there is no trust in banking institutions, in politicians, in European institutions, talking about trustless technology is quite challenging" said Cătălin.
Luckily, this conference was set up by Cătălin to tackle these challenges and insecurities.
"We are discussing a lot in the European Parliament about financial inclusion, about banking the unbanked. But basically we don't have the tools to do that. But there are some projects, not in Europe but in Asia mostly trying to deal with banking the unbanked, with financial inclusion. And I can tell you they're quite successful, as a member of ECON committee, dealing with economic topics, I came across with the concept of Smart Economy, and I read more [...] about digital identity, digitalisation of facets, about smart contracts creating, making this mechanism work. So that's why I invited here the people behind the concept of smart economy."
Fabio C Canesin | credit: Thomas Lobker & Nikolaj-K from NEO discord.
Fabio C Canesin is up next, discussing the working of a Decentralised Exchange, or in his words a Non-Custodial Exchange. Fabio started off talking about the issues of custody and ownership of funds, to which blockchain offers a solution.
Even though financial inclusion is mostly dealt with thanks to blockchain technology, exchanges are still a weak point in this new ecosystem, with alleged 'hacks' that lost investors millions and questionable policies surrounding financial security of funds stored on exchange wallets.
Decentralized Exchanges are the next step in financial inclusion, using smart contracts to provide trustless transactions.
"A vending machine is somewhat already a smart contract, you put a coin in [...] and somehow inside the machine they detected that you put the coin and they're going to send you the soda that you wanted."
This simple explanation really shows how little lawmakers and regulators know about P2P technologies like the NEO Smart Economy. This isn't necessarily a bad thing, it means regulations won't be implemented until both the technology and the knowledge of lawmakers and regulators has grown. That said, some alarming things were said by Cătălin after Fabios talk;
"This technology should be and must be regulated, and the problem is regulators is this: we have responsible regulators trying to understand it, to work on it, to create impact studies to try to understand what would happen if this technology would be implemented in different fields of activity. This is happening in the European commission and we're trying to that also in the Parliament but there are two different other kind of regulators, and we call them ignorants. They reject the technology from the beginning because they don't understand it and they like things like they're working now, they don't want to change anything. But they're erasing it because they like the technology they don't understand it, they don't know how this technology will impact the societies."
Although this sounds very bad in terms of adoption, this technology is designed in a way that it cannot be stopped because of preferences of mere, as Cătălin put it, "ignorants". People like Cătălin are trying to get lawmmakers, parliamentarians and high officials educated and more familiar with the technology.
Fabio then proceeds to explain different forms and uses of smart contracts, payment gateways, crowd funding, etc. While putting emphasis on compliance with regulations like KYC regulations making use of Ontology.
"Initially, the people that promoted the technology, they were kind of believers in a much more open system that is in clash with reality. [...] Anti-Money Laundering laws can be enforced on transactions on the blockchain."
Before someone is allowed to trade, they have to send a selfie holding the required documents to a registered identity provider for verification, if these documents are verified an approval token is added to the trading adress on the blockchain. Thus complying with regulations.
Privacy was also adressed. As a person that highly values privacy I think this is a very hard topic to discuss and enforce with Ethics in mind. Still, Fabio presented some reasonable arguments on how privacy on the exchange would work in combination with regulations.
"You could have a somewhat private blockchain, where you know who sent to who but you don't know the ammount, but in this case if someone like a judge of law for require for example someones rent, can you say how much it is? The person can say a range, or even the value itself."
This makes these transactions more tracable and compliant than cash. Which to be completely honest isn't to my liking, but it is to the liking of regulators, which in the end is what matters the most if we want to see wide adoption of Crypto currencies.
Da Hongfei |credit: valdor27 on Reddit/r/NEO
Next up is Da Hongfei, Co-founder of NEO.
As per usual, Da Hongfei's light-hearted charisma was well received by the audience.
The first half of his talk was dedicated to explaining blockchain, I assume most of the people reading this report will know enough about blockchain so I won't be covering that, if there's a demand for this I might make a seperate post.
What is interesting to note however is his focus on cheap trust and compliance with regulators. Putting lawmakers and regulators at ease concerning the disruptive, anarchistic nature of cryptocurrencies while still reaping the benefits of blockchain technology like borderless payments, voting and record keeping.
" One of the risks in financial markets is instability, we saw the price of these tokens, Bitcoin, Ether, maybe NEO, it fluctuates alot. Especially when there are new policies regarding crypto currencies, but if we have a compliant crypto currency, a compliant blockchain framework you will eliminate regulatory uncertainty."
This focus on compliance in my opinion is the biggest strength of NEO, allowing ragulations to be integrated into the code lowering the threshold one needs to overcome to invest in- and adopt Smart Economy Crypto Currencies.
"NEO is like the open network for Smart Economy, so censorship-resistance and anonimity is never a priority with us. And we have a desire of a dual token system, it's a governance token, is voting power over protocol evolution. And also you have GAS token, you can use it to pay for all the transactions on the Blockchain.
"NEO will use a project called Ontology as a module for digital identity to do KYC and AML. [...] The reason we're doing it seperately from NEO is because there are different policies, regulations over identity and those data linked to identity."
So Ontology is a network of different blockchains, with different rules, applicable to countries with different regulations like the GDPR in Europe.
Once again, the compliant property of NEO is highlighted.
Thus far Da Hongfei has been quite positive on blockchain and dApps, he does have some fair things to say about challenges and disadventages of blockchain.
"There are eight challenges, first one is limited scalability of blockchain. [...] Very limited privacy, with Bitcoin every transaction is public. [...] We have seen alot of security issues with those centralized applications, the most famous is hack of DAO, the DAO [...] hackers discoverd a security hole and stole an amount in the tens of millions of dollars worth of tokens. [...] There are storage constraints, every node needs to have a copy of the database, so storage is really expensive. [...] Some of the consensus mechanisms are not sustainable like Proof of Work (PoW), it's very expensive. [...] Then there are very few tooling and documentation of blockchains, developers really find it difficult to learn how to develop blockchain protocols. [...] And finally all the blockchains are relying on eliptic curve cryptographies and it is prone to quantum computing."
With this, Da Hongfei's talk was concluded.
These are all things to be weary about, luckily centralized applications are being replaced with decentralized solutions and quantum computing will (presumably) not be realised in the foreseeable future.
Da Hongfei's positive, yet skeptical view is refreshing in this age of hype surrounding blockchain and crypto currencies. Which I'm sure was well received by the European officials present.
Finally, we have Peter Kerstens, Advisor to the European Commission in Financial Technology, Digitization and Cybersecurity.
Kerstens' talk focuses on the financial applications of blockchain since that's his field of expertise.
"The financial sector is the largest IT sector in the world [...] and the financial sector doesn't necessarily get alot of bang for its buck on that investment. Seven hundred billion dollars a year going to IT, ICT. Unfortunately we see a number of legacy systems and structural weaknesses in the set-up, ineficiencies, that new technologies seek to overcome and I think blockchain is one of them.
"Banking used to be about money, but it is increasingly about technology and about data. But financial services' policy isn't necessarily about technology and data, it's still very much about the money part."
Kerstens said as technology is starting to play a bigger role new policies need to be installed to keep up. Important to note is; regulators in Europe do not want to jump the gun, because by the time a draft on regulations is finished, the technology has already moved on since it might take months or years to talk this through.
"Policies should not regulate technology [...] financial services regulations mostly does not regulate technology. What it regulates is activities, financial activities which are subject to regulation."
The idea is to regulate the activities, not the technology. The question is are these activities based on blockchain financial services and if so should they be regulated?
"There has been alot of hype and attention lately on one specific application, crypto currency or crypto assets. On the one hand that attracts alot of attention towards blockchain development. [...] Most of this crypto currency trading you see takes place off blockchain, it takes place in exchanges. [...] And in our view the valuation of these tokens doesn't really contribute anything to the operation of the blockchain.
"It doesn't really matter if these tokens are worth €1, €0.5 or €10.000. The valuation of these tokens may say something about the valuation of the projects behind it. In a way the more highly valued they are, the less likely they are to be used on the blockchain for useful applications. At the moment the price decreases people are motivated to hold their tokens while not spending them and so there is a bit of a contradiction to this."
This is infact problematic for the Crypto Market, even though it is to be expected, for Crypto to become a true currency it needs to be spent. That said, even after 7 years Crypto Currencies are still in their early birds stages and places to spend these currencies are still fairly limited, and for that to change adoption is key. Luckily this conference is a step towards adoption and more projects trying to achieve this are popping up every day.
"We've seen the hype, we saw a price increase and it dropped, now it's picking up again, I have no idea where this can go. And in a way it's not really that important. But it does raise the question of wether these crypto assets, wether they are financial instruments or not.
"There is no simple anwser to that question, it's being studied by politicians, by European Suprvisor authorities, by regulators around the world and the anwser to date is, it depends. [...] It depends on wether or not they're financial instruments or securities.
"If they are securities that would have a number of consequences. Because the issuing of securities is highly regulated, the trading of securities is highly regulated. So a number of firms that issue them now, if they are issuing tokens which are securities then they're actually breaching the law, or the exchange of the trading of these tokens should actually take place on regulated trading venues.
"Ofcourse if they are financial instruments, if they are securities that also opens them up as allegabe assets for investment firms, for funds [...] so they may find more of an ingrowth into the established financial system."
All in all, regulations are still uncertain. Kerstens did say the following;
"For the time being the financial stability situation of crypto assets has been established as not really very significant. And this is due to two reasons, the overal size of the crypto asset market [...] is relatively not that big.
"The second reason why there is currently no, and I emphasise currently, no financial stability risks is because the transmission channels between the Crypto world and the traditional financial sector are limited. [...] But this is changing very quickly, we see established financial institutions gaining more and more interest in crypto assets and starting to transact with crypto assets."
This can definetely be seen as a step towards wider adoption and regulations.
"Any area where there is a great need for record keeping and where we have what we call long life cycle events, where contact between alot of accounting and record keeping, these activities in principle, are open to blockchain improvements
"As financial institutions develop these products and leverage up if you wish, the financial exposure, financial performance that sits in these assets also replenishes stability implications to become significantly more important.
"We do not want to regulate the technology but we want to see what this technology can do to make the financial sector more efficient."
In my opinion, this is a great stance on the matter, coming from the European Union.
But, even though this response is to be expected, these regulators and lawmakers still hold onto the idea of "a financial sector" as a regulatory body, using blockchain to improve the existing ways of managing money. The original philosophy of Satoshi Nakamoto is a self-regulatory, trustless, P2P, censorship-proof system that can replace the traditional financial sector. That said, it's positive the EU will hold off regulations untill the technology and their knowledge of blockchain has matured which means there is room for change.
"We also set up an expert group, within the context of our fintech action plan, to review wether our financial service regulation is fit for purpose if you look at the blockchain.
"One of the questions that emerges for example is that financial sector regulation [...] is about centralised infrastructures, centralised trading venues, central security depositries and so on, which are then regulated.
"Now we see this technology which follows a fundamentally different paradigm, decentralisation. How it fits into the regulatory structure we have raises important questions, including questions on wether changes might be necessary to enable this technology to really be implemented at a large scale financial sector to the benefit of its efficiency and the users."
This is all great news for blockchain technology and decentralisation. There is still alot of uncertainty surrounding regulations, but we now know the established financial sector regulations are being 'questioned'. Which bodes well for the future most crypto enthousiasts are hoping for.
Still , the anarchistic and disruptive nature of Crypto Currencies were put to the side, which was to be expected. But this need for compliance is a requirement NEO definetely meets.