As with any important new technology, there comes a point in its development at which outside influence intensifies. Cryptocurrency and the underlying blockchain technology have been on governments’ radars for nearly a decade, thanks in part to legal fears around Bitcoin’s use on the dark web. Legislation around new technology often takes time though as policy-makers scramble to try and understand technology sufficiently to police it.
Fast forward to today, and governments are only slightly closer to knowing how to handle blockchain’s ascendance. This doesn’t mean that it has no place in the public sector though.
According to a report from Deloitte, analysts project that blockchain will save $15-20 billion annually in the financial services industry alone by 2022. The opportunities for governments to improve efficiency and cut costs will become apparent as use cases are created and research is completed.
“Analysts project that blockchain will save $15-20 billion annually in the financial services industry alone by 2022”
Last year, a report by IBM predicted that nine in ten governments would be investing in blockchain technologies by the end of 2018. It also predicts that the a large amount of the mass adoption - 48% - will come between 2018 and 2020.
Governments from Asia Pacific and Western Europe are leading the charge, making up a considerably larger share of the ‘trailblazers’ than any other region. North America, on the other hand, lags behind.
Scholars Will Lead the Way
One industry inextricably linked to blockchain’s development is academia. The community driving the technology forward is made up primarily of developers and academics - often with a great deal of crossover. At this critical embryonic stage in the technology’s development, academia will play a vital role in developing it not just technically but philosophically, deciding what the technology should mean for society whilst creating the framework for it to do so.
Gert-Jaap Glasbergen is a software developer at the MIT Digital Currency Initiative, where he spends most of his time working on the development of second layer solutions like the Lightning Network and discreet log contracts that operate on top of public blockchains. Gert-Jaap also works with Decos to help develop use cases that leverage blockchain technology for local and regional governments.
BDJ spoke to Gert-Jaap following his presentation at our off-chain master workshop in Berlin earlier this summer. His presentation was focused on his work with discreet log contracts, their scalability and their privacy. As a researcher working with universities on blockchain technology, we asked Gert-Jaap about the role academia should and will play in its development.
“I think the most important thing is that they're in touch with each other, so that academia will look at things that are viable for businesses to use. I think the role of academia is to research in areas that for-profit companies are just not ready to invest in.”
“Companies and academia should be in touch with each other and say 'look, this is a compelling use case, maybe we can do something with it.' I think communication is key”
“At the point where the research comes to a phase where you can explain it to a company and the company might say 'hey, this is something that we can use in our business model', then there is time for collaboration. Companies and academia should be in touch with each other and say 'look, this is a compelling use case, maybe we can do something with it.' I think communication is key.”
Regulation is Coming
Once these use cases have been developed, it’ll be time for governments to step in. Not only are governments adopting the technology to improve their processes, policy-makers have an important role in establishing the playing field for blockchain.
It would arguably be helpful for the industry if some form of consensus could be reached, although Russia, for example, has changed its stance on cryptocurrency a number of times, and in the US, different limbs of government have taken differing stances on the technology since its inception.
At this point, adoption is low and there are not an overwhelming number of use cases for governments to approach in terms of legislation. On the one hand, it will be necessary for policy-makers to get a handle on the technology as early as possible. On the other hand, regulations that are too stringent can hamper progress in the all-important early stages.
Gert-Jaap believes that government-led projects can be useful to blockchain’s wider development, but that regulation should remain light for now. “As I see it, there is a lot going on in governments trying to leverage blockchain technologies,” he says.
“I don't think that right now there is a real strict need for regulation in general, as long as we make sure that nobody is scammed out of a lot of money”
“Not all of the initiatives are as useful, so they're experimenting with it a little bit, which is good. If you look at government from a regulation perspective, I think their role is to set the boundaries in which research can freely evolve. As long as there is no real harm to the community at large - we shouldn't limit the freedom of research. I don't think that right now there is a real strict need for regulation in general, as long as we make sure that nobody is scammed out of a lot of money. That's where the focus is right now.”
Are State-Sponsored Cryptocurrencies Viable?
In order to keep up with the development of cryptocurrency, governments and central banks have been investing in or are looking into the possibility of state-issued digital currencies - 87% of them in 2017, according to the Cambridge Centre for Alternative Finance.
Sweden is something of a front-runner (unsurprisingly), with the e-krona already being planned as a digital equivalent of the country’s regular currency. An inquiry into the viability of the e-krona will conclude in 2019, and the world will be watching to see if one of its more progressive nations will be able to successfully embrace crypto.
Interestingly, Venezuela has shot ahead in terms of adoption, in large part due to necessity, with the Venezuelan Bolívar suffering from hyperinflation. Controversial President Nicolas Maduro mandated that the Petro cryptocurrency become the nation’s second official currency behind its traditional Bolívar, which came into effect as of 20th August. The currency has an equivalent value to that of the Bolívar, and in theory they will be easily interchangeable.
Gert-Jaap believes that both central banks and governments have something to gain by exploring the technology as a viable addition to existing currencies.
“Central banks that already have money in circulation… a cryptocurrency can be a very nice extension to the systems that they already have”
“There is a possibility where, if you have central banks that already have money in circulation, then a cryptocurrency can be a very nice extension to the systems that they already have,” he says. “Because cryptocurrencies have a lot of advantages over, for example, cash, where cash has similar disadvantages in terms of the fact that they can't trace it, etc.”
“So, I think it's good if there is some experimentation with state-owned or central bank-owned cryptocurrency because it would allow us to better integrate fiat currency with cryptocurrency. It is, now, always reliant on central exchanges and other systems that you can use to swap one type of asset for another.”
“So it would be nice if that's there and it would allow us to do the same cool things that we're now doing with Bitcoin, but with euros or dollars. That would be interesting.”
In a report released by the EU’s Policy Department for Economic, Scientific and Quality of Life Policies, the body laid out its stance on developing cryptocurrencies. The stance is suitably vague, indicative of a political world still deciding what to make of a new tech. The report does touch on an important topic, though, calling for cross-border harmony of cryptocurrency regulation to allow for collaborative development.
“[Policy] makers and regulators should not ignore virtual currencies, nor should they attempt to ban them,” the report says. “Virtual currencies should be treated by regulators as any other financial instrument, proportionally to their market importance, complexity, and associated risks. Given their global, trans-border character, it is recommended to harmonise such regulations across jurisdictions.”
Illustrations by Kseniya Forbender
To contact the editor responsible for this story:
Margarita Khartanovich at [email protected]
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