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Blockchain and the Digitisation of Regulation

A Hacker in Business School

As the Java style capitalisation in 'CryptoSecurities' suggests, I was a proper nerd before I took a left turn into a top business school and later became a financial services consultant. What I didn’t anticipate is that a hacker’s mind would actually be an asset in an unlikely profession. Now Hackers are people who solve hard problems... and I don't mean solve them on paper. I mean people who make these solutions real, and can’t stop until they do. In that spirit of hacking, my eternal favourite was a certain gentleman named Ronald Reagan; until a Martian named Elon Musk hacked his way into history.

Indeed, the changing profile of the professional services workforce merely hints at a broader demographic trend, and the implications of this demographic change are profound. As baby boomers retire and millennials take on leadership roles in the industry, paper is making way for tablets, branches are making way for mobile apps and a much more diverse talent profile; not just in the traditional sense of gender and origin, but also in terms of the psychometric profile is changing our world fundamentally.

What's also starting to change, although much more slowly, is the thinking of regulators around the world. People generally fear what we don't understand and many regulators from the post world war generation still fear technology.

Regulators Still Run on Paper

As it turns out, this fear is not made any better by the meagre technology investment governments are willing to make in digitising the regulatory infrastructure. The colossal fines levied by regulators upon industry don't go on to fund the regulators themselves and the appropriations committees and similar bodies across the world tend to prefer funding populist rhetoric and pork-barrel projects in their constituencies, rather than a technology infrastructure upgrade for their regulatory bodies.

The result, of course, is a growing mountain of paperwork - volumes of documentation that reflects grand optimism for a future day when the said controls and processes will actually be realised. Unfortunately, Microsoft Office does not compile into reality and governance, controls or policies alone can’t transform either the culture or the infrastructure of a business.  Meanwhile, precious dollars that banks could invest in technology transformation, analytics, IT infrastructure remediation and digitisation continue to be diverted into mounting defence against fines, well beyond risk mitigation benefits for the economy as a whole.

The words, negative NPV come to mind.

Digitisation Disrupts the Republic

Few technologies in history have done more to draw matters to a head than Bitcoin. For the first time, it wasn't simply the industry getting disrupted. It was the very foundations of the state itself. As the European example has recently shown, the very notion of Sovereignty without control over currency is a fragile construct that can quickly fall apart in the face of the slightest challenge. Thus Bitcoin threatened not one government but the entire world order. If people switched to Bitcoin and the US Treasury were to lose control over the monetary policy, how long would it take before the Federal Reserve could no longer initiate effective fiscal measures? What would happen to all those central banks that run a dollar peg? How'd the sanctions regime work when you couldn't punish individuals or businesses for sending money to wiki-leaks or Iran? How would wars, endless oil exploration or pork barrel projects get funded? How would the mighty economy of Russia be brought to its knees when their tanks rolled into Ukraine?

This wasn't a question of rights and wrongs - this was a question of power and global order. Nurtured by digitisation, Democracy was now growing too big for the boots of the republic in a way that Plato would not have blessed indeed.

Adopting the Rebel…

Eventually the US congress recognised that repression of technology couldn't work. Way back in 1976, Diffie, Hellman, Rivest, Shamir and Adleman had beaten the NSA at its own game and lay their asymmetric key encryption scheme at the feet of the masses. That disruption laid the foundation of trust in the internet and powered the creation of a near trillion dollar e-commerce Industry.  However, technology didn’t merely threaten the established economic order, In recent years, unencumbered by paper or microfilm, Edward Snowden and Julien Assange had lay bare the secrets of powers that be, while Facebook and Twitter continued to ignite Arab syle 'Springs' around the world. With a billion people on Google and Facebook, Technology had finally become a force of nature, one that could not be tamed for long but also one whose energy could be harnessed to power rather than disrupt the authority of the state.  A time had come when heads of state would treat out the technology CEOs in ways they treated other heads of state.

The only way to quell the rebellion then was to befriend - to make this disruptive technology mainstream in the same way that the early homo-sapiens has learnt to use fire for cooking.

The Digitisation of Government

Assymetric key encryption challenged the foundations of security and eventually led to the disruption every industry except finance. Money and trust hardly go together and a much stronger level of trust was needed before exchange of value could be digitised. Blockchain made that possible. After years of scepticism about Bitcoin, it slowly became apparent that the underlying Blockchain technology was the key to this taming of the rebellious teen called Bitcoin. Once Bitcoin was in the news, curious thought leaders with tremendous engineering minds, like Paul Walker of Goldman Sachs saw the potential instantly.

Not surprisingly, once Goldman Sachs, with some of their brightest minds in the world of money, had seen the light, it wasn't long before everyone else did. Of course, governments did too… and they saw that the way out of the digital disruption of government was the digitisation of government itself. So Mintcoin comes along, then Bitruble comes along and then Mr Haldane starts talking about 'was it Bitstirling'? How long before we get a BitBuck? Now you can't put her Majesty's picture on the Blockchain (actually you can) as you can on the pund note,but she can sure sign it with her private key...

At this point, I am tempted to make a bold statement that half of the OECD currencies will go digital in 10 years and in 2050, there will be fewer, more stable, less inflationary, more secure currencies than the currencies we have today.

 

In Blockchain We Trust, Well, Sort of

The foundation of power is trust. More importantly, the very foundation of value is trust. The US dollar has value, not because we trust God, but because we trust that the mighty US government will stand behind the dollar bill, and not throw the keys to the vault in the water and walk away. Many Banks have trust of consumers because the might Fed is there to bail them out when they make a royal mess of that trust. Historically, people have held that trust in gold, in other people, in governments, in the guns we house in our basement and arguably to a lesser extent... in God. As it turns out, Millennials, thanks to the years of peace, and general demilitarisation of the developed economies, have no experience of trusting a central authority. Yes they trust, but they don't trust authority. They trust proof.

Hacker Hack, Hackers Fix

Blockchain changes everything about the economics of trust. Not just currency, but anything that requires trust is now subject to decentralisation through proof. And proof requires data that's available to all, immutable and tamper proof. The technologies surrounding Bitcoin make it possible for the first time in history to have a dataset that powers a reasonably secure evidence of activity. As noted, this trust can be broken under severely restrictive conditions - either by the central authority managing the Blockchain, or by an infinitely funded adversary - typically again an adversarial government. But I don't know how a well designed Blockchain is riskier than a central counterparty or a bank or a government... and that's all down to the design of incentives.

Double spending, 51% attack... there are ways to break the trust in a Blockchain if there's enough will, money, intelligence and computing power. In recent years, the Chinese showed how collisions can be made to happen in MD5 and it’s a matter of time before RIPEMD and SHA 256 with their known vulnerabilities will get broken too. Maybe the NSA already has trapdoors into the secure hash functions and ECDSA. And yes, then there's the emergence of quantum computing which, thanks to Shor's algorithm, makes elliptic key cryptography easier to break.

We don't expect this violent tango of the mathematicians to stop anytime soon. Hackers will continue to hack and hackers will continue to fix. Hackers already work for the CIA, the NSA, the Mossad and Investment Banks… in recent years, a number of payments processors have tapped the talent from spambots in eastern Europe - and maybe it’s time for the regulators to tap some British and American hackers too. I just want the best hackers to be on my side well before bad things can happen, and regulators should as well.

The digitisation of regulation has begun...

Imagine an ecosystem of public utilities that provide secure public ledgers in the form of Blockchains that can be indexed, serialised and queried in real time. The chains can contain data about transactions, customer activity or just about anything else that's a set of events. Powered by compute farms, data centres ASICs and efficient algorithms that allow these Blockchains to scale well beyond Bitcoin ever will, these Blockchain utilities make trustworthy data accessible to regulators. In this brave new world, the regulator no longer needs armies of people to produce paperwork because living analytics driven by trusted data would have replaced lifeless paper.

However, what the regulators will need now, is a whole new class of technology infrastructure and a whole new skill set. They will need many more computers, programmers, data scientists, and well... hackers to match the technological and analytical sophistication of other ecosystem participants.

Would this be a better way to regulate? I don't know, but I know that what you can't measure, you can't manage – or regulate. And you can't measure anything without data, or without knowing which questions to ask. With the likes of Google & Tesla, a whole new breed of data driven managers has entered the workforce and irrevocably stamped its authority on both paperwork and gut-feel alike. Maybe it's time for us to manage the government, of which regulation is a critical function, differently; maybe its time to upgrade the technological sophistication of regulation, and install that 'hacker' thinking in the regulator itself.

Writing on the Wall

Blockchain is just one of the megatrends that’s about to force the issue of digitising the government. Will it take 5 years or 10? We don't know. What we do know is that there is a tremendous intergenerational change in the offing - not just in how we consume products and services, but also how we regulate and govern. Blockchain is the central protagonist in this phenomenal story.

 

 

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