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Ep. 27: Global Blockchain Trade Associations and 2024 Policy (Part 2)
124 Plays7 months ago
This is the second episode from our “trade associations” miniseries for 2024. We are joined by Sandra Ro (Global Blockchain Business Council), Ian Taylor (KPMG and Crypto UK), Alison Mangiero (Proof of Stake Alliance), and Jannah Patchay (Digital Pound Foundation) discussing key blockchain developments, policy updates, and interesting use cases.
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Transcript
Introduction to OWL Explains
00:00:06
Speaker
Hello and welcome to this OWL Explains Hootenanny, our podcast series where you can wise up on blockchain and web3 as we talk to the people seeking to build a better internet. OWL Explains is powered by Avalabs, a blockchain software company and participant in the avalanche ecosystem. My name is Silvia Sanchez, project manager of OWL Explains and with that I'll hand it over to today's amazing speakers.
Meet the Speakers: Trade Association Miniseries
00:00:34
Speaker
All right, everybody. This is the second episode from our Trade Association's miniseries for 2024. And today we are joined by Sandra Rose, CEO of the Global Blockchain Business Council, Ian Taylor, KPMG Head of Crypto and Digital Assets and Board Advisor at Crypto UK.
00:00:52
Speaker
Alison Mangiro, executive director at the Proof of Stake Alliance and Jana Pache, executive director, policy and strategy lead of the Digital Pound Foundation. So it's a very diverse lineup, brilliant people. So we're so excited to have you here on the Owl Explains podcast.
Blockchain in Financial Services with Sandra Rose
00:01:10
Speaker
And let's kick it off with Sandra. So Sandra, where do you see the most involvement on blockchain from the private sector? What kinds of companies are building with blockchain?
00:01:21
Speaker
Well, thanks, Sylvia. I'm glad to be here. I want to say that from an blockchain technology perspective, we're seeing developments across industry sectors, but not surprisingly, financial services being sort of the first industry out the gate to adopt blockchain altogether.
00:01:38
Speaker
now closing in on a decade, I would say that we're seeing the most maturation and products coming to market. It's not just products coming to market, but also infrastructure coming to market. And as we all know, it takes time when it's deep level infrastructure being built, but the number of consortia that are out there
00:01:59
Speaker
the number of collaborations that are occurring, just to name a few, RLN, Canton, the projects that are going on with MAS, Guardian, et cetera, I think are very good signs that groups are working together, institutions are in coopetition mode, and that we are beginning to see things scale.
00:02:20
Speaker
That's amazing. Thank you for
Staking Principles with Alison Mangiro
00:02:22
Speaker
that. I'd like to turn it over to Alison now. Could you please talk to us about the key principles launched by the Proof of Stake Alliance recently? I know we did some content about that last year that I will explain, but I'd like you to expand a bit more on that.
00:02:36
Speaker
Yeah, sure. So, also thanks for having me, I'm excited to be here. So, as the name suggests proof of stake alliance is laser focused on advocating for proof of stake ecosystems, and those involved in the staking space. So when we originally launched the trade association in 2019, one of the first things that we did
00:02:56
Speaker
was start to think through some principles that some of the staking as a service providers who are first coming online and starting to commercialize their services could agree to abide by in order to be regulated as the technical service providers that they are, but also to provide some guidelines to ensure that there was consumer protection in place while they were innovating. As you all know, the landscape for staking has radically changed.
00:03:23
Speaker
since we released those principles in 2020. And there's been a lot more focus on staking recently, so we thought it was important to update those principles for the 2023-2024 landscape.
00:03:37
Speaker
And so we got close to 20 of the top staking as a service providers and folks who are in this space to agree to support these principles. And what they basically say is that we need to focus on areas such as emphasizing security and participation, ensuring that these service providers are not using financial terminology or offering investment advice.
00:03:59
Speaker
down to more practical things like not engaging in fractional reserve staking and ensuring that there is, in fact, user opt-in when people choose to engage in these services. So we released those in November of 2023, but we very much think that this will be a living document and anticipate updating these principles as the staking environment continues to mature.
00:04:20
Speaker
Sounds good, great. And I think that's a very recurring theme across this industry as a whole. You can put out something, but then there's always another thing happening and you just need to be constantly fresh, keeping things updated. So we look forward to seeing how that continues to evolve. And now let's go to the UK.
UK's Crypto Policy with Ian Taylor
00:04:38
Speaker
Ian, could you please share your thoughts on the blockchain policy scene across the UK and any particular issues that stand out? Yeah, thank you, Sylvia, and a pleasure to be here today on your podcast.
00:04:50
Speaker
So the UK, as most folks will know, has a positive policy position where we at Crypto UK were founded back in 2017 and pushed really hard for the UK government to understand the benefits of the technology and the opportunities that it can bring to the UK market and the UK citizens. So it was announced in 2022 that the UK was seeking to be a crypto innovation hub.
00:05:17
Speaker
And that's with number one, once we get that government position, then we can start figuring out how to regulate the sector, which as most people on this call know is not straightforward and it is fundamentally challenging. And I hope we can get into some of the nuances with regulating this new sector with bespoke regulation and also perhaps using some of the existing frameworks that we have.
00:05:41
Speaker
At the moment, what I can say is after we have this policy position, which is supportive of the industry from the UK government, we now have the hard work of getting the detail right with their regulatory framework. And I can tell you that at the moment we have three pieces of live regulation to protect against bad advertising, clear and misleading promotions in the UK, also against anti-money laundering or against money laundering, illicit finance, et cetera. This is standard across most of the globe.
00:06:10
Speaker
And coming forward this year, we expect to see stablecoins regulated, both fiat backed and systemic stablecoins. And we also have a next package of secondary legislation from the government, which they're calling phase two, which will drop at some point in the next probably 18 months to two years, which will look to regulate the activity, such as running a trading venue or custody and digital assets. And also some of the
00:06:38
Speaker
other aspects such as market integrity and even DeFi as it's talked about on there, which I'm sure we can get into a little deeper during the discussion. That's great. Thank you for that, Ian.
Future of Digital Currencies with Jana Pache
00:06:50
Speaker
And now this one is for Jana. How does the Digital Pound Foundation envision the future of digital currencies, particularly in the context of CBDCs? I know you were here with us last year talking about that, but I wanted to also open it up and hear your perspectives on what you have been seeing recently.
00:07:07
Speaker
Sure. Well, again, thanks so much for having me on the podcast, Sylvia. And it's always a pleasure to be involved in our explains projects. I think it's really important when we talk about digital currency to explain what's meant. And in the same way as we have both public and private forms of national fiat currency today, such as dollars or pounds or euros,
00:07:37
Speaker
In the future, we'll have public and private issuances of these new forms of digital money. On the public side, central bank digital currency, which is central bank issued. And on the privately issued side, we were seeing the emergence of tokenized commercial bank money. But also we see issuances from non-bank actors, and that's stablecoins. And these are new types of money emerging onto the scene.
00:08:06
Speaker
which is why there are additional regulatory considerations and it's just giving a little bit of background on what's going on in that space in the UK. And within those, there's also your wholesale and your retail side as well. And I think wholesale and retail have traditionally been thought of as almost two separate systems of payments and settlements. We prefer to think of them as the context of which money is used. So you have wholesale use cases
00:08:34
Speaker
amongst financial institutions and in the financial sector. And then you have retail use cases, which are more about payments and how people use them and businesses use them in day to day interaction. And I think, you know, it's important to note that the fundamental essence of money itself is not changing. What's changing is the form that it takes and what you can do with these new forms of digital money.
00:09:02
Speaker
So what are the real innovations that they provide? If you just create something in digital native format that doesn't do a lot more than money does today, which is mostly digitally exchanged anyway, then that's not really much of a value add. What you want is almost to tear up, and this is the opportunity with CBDC when people say, why do we need a CBDC? It's because, yes, okay, most of us are interacting and engaging
00:09:30
Speaker
in our payments and things like that on a day-to-day basis digitally. But these are systems that have evolved kind of incrementally and organically over time. And what CBDC and other new forms of digital money give us the opportunity to do is to kind of rip up the form that money takes and rip up our expectations of what it can do and say, what are the requirements that we have of money today and into the future as we move into a more digital financial system and digital economy?
00:09:59
Speaker
and look at the wider context of tokenization, digital trade and innovation and things like that. And what can we build to address those requirements with the technology that we have today? And then we start getting into the really interesting space of how we can add functionality to money, such as, you know, programmability, whether that's at the money level or a payments level,
00:10:22
Speaker
a slightly more nuanced argument, but we can really look at the form that money takes and how to make that more fit for purpose in the future. So we see there existing in the future, this ecosystem, this landscape of new forms of digital money. There might be some that we don't foresee now and also we don't, you know, we
00:10:43
Speaker
In so far as you look at these forms of digital money as a platform for innovation, there will be things that can be done with them in the future that we don't necessarily foresee now. But they'll also interact with other frontier technologies like AI and machine learning, internet of things, et cetera, to build more sophisticated use cases and functionality that are going to be embedded across the entire economy
00:11:08
Speaker
and in people's lives and behave very differently to money as we know it today. Great. Thank you for that, Jenna. I love what you said about really explaining what it's meant so that people can understand, okay, this is what's happening and also answering, okay, why do we need it? How can this address those requirements? This reminded me of something that one of our guests recently said in one of the podcasts when we were like approaching policymakers or also people in general that were a little bit like skeptical.
Government Use of Blockchain
00:11:36
Speaker
It's see what problem
00:11:38
Speaker
is happening and how can the technology address that and I think that once you use that approach people are much more open to that so I like how you explain that and now let's just switch gears a little bit we started off with the private sector but now I'd like us to talk about the public sector so this one is a group question in general so from what you have seen what are governments doing with blockchain technology what role do you see
00:12:04
Speaker
launching, playing and addressing global challenges like financial inclusion, like climate change. I know that there are so many things happening. So what have you noticed recently? I can kick off if that's OK. And so most of the innovation in any industry comes from the private sector. So the government always seeks to fall behind that. However, that being said, Janice has eloquently
00:12:30
Speaker
explained central bank digital currency space. And so that's one subset of using the technology, new forms of digital money, where the government will seek support from the private sector to use blockchain as a means to issue its state-backed currency. But other areas that we've seen in the UK, and I speak specifically for the UK, is no actual real development, but statements from our government back in 2022 that they were going to launch an NFT.
00:12:57
Speaker
that died a pretty quick death. So one could assume that was more of a comms PR stunt. And then recently, actually, in our budget was announced that the UK is going to look at ways to issue sovereign debt gilts on chain, which I think is a very good idea. And we've seen other states do this. Some of the cantons or regions of Switzerland have been testing with the National Bank of Switzerland, the assembly.
00:13:25
Speaker
and other private sector organizations. That's quite interesting. And what the value proposition is there is using the technology to launch a financial product. It could be any kind of fixed income product by a company, a bond, for example, that it reduces the amount of friction that exists within the value chain or the financial market infrastructure. There's also initiatives from the UK government and the European government to build out these sandboxes to help
00:13:52
Speaker
organizations both in native crypto space but traditional finance come together to combine some of these activities that exist because the technology can really reduce settlement times reduced back office bilateral reconciliation and so on and so forth. So that is what we're seeing at the early stages of development working with private sector which I find quite interesting.
00:14:13
Speaker
And just to build on what Ian said, you know, when it comes to tokenized bond issuance or the tokenized issuance of any financial instruments, it's not just the post-trade side that becomes more efficient. It's also the issuance process itself. So you can go from, you know, a 30-day to three-month cycle for issuing bonds and being able to do it and, you know,
00:14:36
Speaker
12 to 24 hours on an automated DLT based platform. There's also a key role to be played there by governments as well in the adoption, I think, of tokenized financial instruments. So in the private sector, for example,
00:14:55
Speaker
A single bank or a single issuer issuing a tokenized bond does not create a market, whereas banks, central banks and governments, particularly in the EU, where we have the whole kind of debt management office, DMO system set up, have the power to bring financial institutions into this world of tokenization at scale just by making debt issuances in that way. And that's something that we've seen happen
00:15:24
Speaker
in jurisdictions like Hong Kong as well, where they've issued, they've just issued their second government tokenized green bond, actually, the potential as well for sustainable, for digital finance to enable sustain, the embedding of sustainability in the financial system is huge. And that's been evidenced by some of those projects in Hong Kong and coming out of the
00:15:51
Speaker
BIS Innovation Hub in Hong Kong such as Project Genesis for example. There's a lot of the issues that arise from sustainable finance such as data that needs to be traceable and verifiable from source all the way through to the financial instrument that's funding that activity and things like that in near real time can actually be solved through digital bond issuances that are linked again to other frontier technologies like
00:16:19
Speaker
internet of things sensors using AI and machine learning to process these vast volumes of unstructured data and stuff like that. So there's really significant potential for blockchain and associated technologies to enable better delivery of some of the big kind of government policy challenges out there.
00:16:44
Speaker
I think one thing that we haven't talked about maybe in one area that where I see innovation here in the US is as pertains to digital identity. And I think there's been a lot of interesting pilot programs, especially with state DMV is like California, for instance.
00:16:59
Speaker
where they're using blockchain-based solutions to create their mobile driver's licenses and ensure that there's a digital identity credential that is then transferable and that will stay with you. And I think that's very exciting.
00:17:16
Speaker
And that there's also more that can be done obviously with licenses. And so I think at the state level, especially as pertains to digital identity, we're going to see a lot of innovation there. It's already starting, but I think we'll see that increase in the years to come.
00:17:31
Speaker
And if I can just add to what's already been mentioned, when I look at governments per se, I think there's a lot of exploration and conversations we've certainly had at GBC with different governments around the implementation of blockchain solutions for tracking and tracing, if I move beyond financial services. But the reality is that we haven't really seen full large scale implementations yet.
00:17:57
Speaker
And I think number one, it's about governments trying to find
00:18:01
Speaker
the right set of problems to solve. And frankly, I've noticed that some of the problems that they bring forth are really actually people problems and culture problems and not really around our process problems and not actually something that tech could solve. So I think we all need to be very realistic about, you know, what can blockchain actually do? But then more places are where blockchain can help solve for the embedded audit trail where Janet mentioned also implementing
00:18:29
Speaker
a payments layer into next generation infrastructure, automating through smart contracts, some of these processes. That's where it gets exciting. And I think we're going to see some highlights coming from some really interesting places. And I'm just going to say, I've been saying this for the last few weeks and months. I think people should look at Japan. It's a G7 country that hasn't had a lot of limelight around blockchain and crypto, but in recent
00:18:54
Speaker
year, months. I would say they've actually done a really couples that have really interesting things from a policy standpoint, but also from a government led standpoint. So there will be more coming out from I think Japan in particular, just to throw a name out there that doesn't normally get a lot of limelight.
00:19:11
Speaker
Thank you all so much. I liked how diverse each input was. And I think that there are so many different applications with that.
Decentralization vs Regulation Debate
00:19:19
Speaker
But as Sandra said, we need to also be realistic with how much can we actually do with technology, whether it's blockchain or something else, and making that distinction.
00:19:29
Speaker
And now I would like to talk about a concept that has been also getting a lot of traction on this space and its decentralization. Also with how it's sometimes defined and what it really is, because the concept of decentralization is fundamental to this type of technology. But from a regulatory standpoint, how can the policymakers strike a balance between supporting decentralization and maintaining sufficient oversight for a stable financial ecosystem? So what are your thoughts on that?
00:19:59
Speaker
I'll go first very quickly because then I'm sure everyone else has a lot more to say on the topic. But again, just as a bit of scene setting, I think it's really important always to be very clear about what we're talking about when we're talking about decentralization. Because at one level you have the decentralization of the technology and at another level you have the decentralization of the services.
00:20:20
Speaker
especially financial services and how they're provided and how they're governed. And those are two, you know, perhaps related in that one is often built on the other, but quite separate concepts to have. And so when we talk about the decentralization of technology, it's in some ways a lot easier, although we have to, you know, very clearly communicate it to regulators and explain it and things like that, because it doesn't necessarily come with the same regulatory issues
00:20:48
Speaker
and challenges as the decentralization of then the services provided on top of that and the activities that are undertaken and things like that. Yeah I'm happy to come in also on this decentralization topic. Now it's I mean it's almost an impossible question because there's a spectrum when it comes to look at how you regulate it and and Janet correctly said there's varying
00:21:12
Speaker
descriptions of what true decentralization is and many flavors of that. But in my experience, when it comes to looking at ways to provide guardrails that protect consumer harms, but also allow for innovation to exist, there's on one end of the spectrum, the far end of the scale, a radical approach to like a bottom up approach to regulating because where is the hook generally in the world of issuing
00:21:37
Speaker
a perimeter to protect against some of the harms, whether it be market integrity or systemic risks or consumer harms, depending on what you're trying to achieve. The hook is always on a central entity, a market participant that we know where they are, we know where they're based, they have an nexus in a particular jurisdiction. When we look at true centralization, Bitcoin is obviously the classic example that it's really hard to pin down.
00:22:02
Speaker
because there's multiple folks that provide the security for the public network to operate. And so that one approach is a bottom up radicalized way to regulate. And one thing that we've seen the UK government do in its consultation that closed last year in 2023, which is being looked at now in individual pieces of that will be consulted on a secondary legislation.
00:22:32
Speaker
timetable is what the government's calling phase two, which looks at one, to Jana's point, defining activities such as establishing or operating a protocol. Would they fit into a regulated activity under what we call the regulated activities order in the UK? And who are the persons carrying out these activities? Would the regulators steal where to apply the same rules to these persons? Perhaps not. And then we also talked about
00:23:02
Speaker
when we've discussed this with the public sector here in the UK is some parts of the value chain may be impractical to regulate. So for example, an underlying protocol, if they are truly open and decentralized and become so over time, Ethereum is a good example. There was a core group of folks developing the protocol at the start, in Berlin, for example, several years ago, but now this
00:23:28
Speaker
you know, layer one smart contract platform is fully decentralized and is operated by many, many folks providing the security by running nodes and producing the blocks, verifying the blocks, for example. And so there's lots of things to discuss and play out, but at the end of the spectrum, we want to make sure that there are some of these rules in place. So risks are communicated on websites, for example, users know what
00:23:56
Speaker
It may happen when they connect their wallet to a platform. If it's, say, a lending protocol, you might lose all your assets, these sort of risk warnings, what are the code audits being done on there? Are they made public? Are there conflicts of interest with the folks that are running the platform versus how many tokens they hold? So these are all the things I know Alison works on at the Proof of Stake Alliance specifically.
00:24:18
Speaker
on her area of the trade association. But these are topics that we will start to pick up in discussion, not just in the UK and Europe, but I'm sure in other jurisdictions over the next couple of years. Yeah, I think just to jump in on that, I think Ian's point is well taken. And one of the things that we're trying to think through, and we saw this, for example, here in the US with the market structure bill that was marked up last summer, FIT21, where it was kind of a threshold for decentralization that was introduced. And so the question is like,
00:24:48
Speaker
When does a network become decentralized? When does it move from that point? There are some folks who had worked on this originally to the point where it is fully open. I think from our perspective, what we want to make sure is that folks who are involved at the base layer and these base layer actors are treated as such.
00:25:06
Speaker
And I think that's going to be incredibly important going forward to maintain the integrity of these networks and the credible neutrality of these networks. And so continuing to hammer home that point I think is incredibly important for us. But I do think decentralization, while incredibly important and obviously
00:25:23
Speaker
One of the things that makes this technology unique is often thrown around as a buzzword and so people can just say hey We're decentralized for x y and z reasons, you know regulator in x jurisdiction leave us alone And I think the reality is much more complicated than that and so yes, the regulators and lawmakers need to be aware of the fact that
00:25:44
Speaker
This is a truly different kind of technology and should be regulated as such. But I think for a lot of founders in the space, we need to start thinking through what decentralization actually means and why it's important. Then we can have more productive conversations. Completely agree with that. And if I may point out work that's being done right now, and we will be coming out asking actually the entire community around the world to opine if it applies to them.
00:26:12
Speaker
is we sit on the CFTC, Global Markets Advisory Committee, Digital Asset Markets Subcommittee. It's a mouthful. And we're co-chair of the Infrastructure Workstream. And I will have to say the body of work that's now going to come into
00:26:28
Speaker
play is to get layer one and layer two feedback, also ancillary services to the base layers to really opine on what parameters. And we have a number of attributes and requirements that are
00:26:43
Speaker
Hopefully going to be put out in the form of a survey and what we would like to do is get that feedback so we could actually Start articulating to regulators and these are a set of recommendations that will ultimately go up to the CFTC GMAC Which is just really distilling down the myriad of different blockchains that are out there and I am including by the way here how
00:27:03
Speaker
public and private chains and anything in between. We've got lots of different chains working on different financial service related potentially regulated financial services products and services and therefore I think we need to really close the gap.
00:27:21
Speaker
on what our responsibilities and controls and requirements in order to operate in a regulated environment. And that responsibility part I think is probably the most problematic because
00:27:34
Speaker
to say that you're not responsible just because you're decentralized, it's just not going to cut it from a regulatory perspective. Very important distinction, yes. And as we come close to the end of our episode, what would your message be to the policymakers in a
Advice for Blockchain Policymakers
00:27:49
Speaker
nutshell? If you could just like wrap it up very briefly, what would the takeaways be? Again, happy to go first.
00:27:57
Speaker
You know, quite often when policymakers are looking at new regulatory frameworks, it's from a very reactive perspective. They're reacting to something that has happened. And what we're seeing here is a very nascent sector emerging. We don't know what it's going to look like in five or even ten years time or whatever. We don't know what capabilities and market structures and things like that it's going to give rise to.
00:28:27
Speaker
And some of them could be amazing and innovative and some of them could be absolutely terrible, you know, from the point of view of some stakeholders in the ecosystem. But I think it's really important for policymakers and regulators to have, you know, clear guiding principles when they're starting to regulate this space. So, you know, how do you
00:28:50
Speaker
balance innovation and the need for consumer protection and market integrity and things like that. But also, how do you develop a regulatory framework and regulatory system that is not built on preconceptions and presuppositions of what the market structure is going to look like, but enables one to develop that's most suitable for, or in some cases might be better than what exists today in the future?
00:29:19
Speaker
So I think it's that forward-looking aspect that often regulators in particular struggle with. And it's something that we try to work very hard with them on to talk about what future models might look like, rather than just focusing on reacting to things that happened today or things that happened five years ago.
00:29:40
Speaker
I'll go next. I have just a couple of very simple messages for regulators and policymakers. Number one, crypto and digital asset products, as well as tools, are actually going to create opportunities for many around the world. And therefore, it's not going away. I think it's proven in the last decade. It's not going away. So it's here to stay. I think proper guardrails, as Jenna mentioned, is going to be key.
00:30:08
Speaker
to keep bad actors out, but that innovation continues. And then secondly, the education and the public-private sector collaboration, which a lot of regulators have leaned into, is absolutely critical. They don't hold all the knowledge and private sector also needs to learn from policymakers and public sector, so we need to collaborate together. I'll just echo quickly the thoughts from my fellow panelists. Yeah, public-private partnerships essential.
00:30:35
Speaker
in an innovative, complicated and dynamic environment that we operate in. And what I always say, the same message is to folks both in government policy makers and regulators is please do engage, please do understand because there's a lot more benefits for this technology than perhaps meets the eye and gets reported in some of the mainstream press. And I think just to echo things would take them in a slightly different direction. I think we're seeing a lot of the conversation
00:31:03
Speaker
here is around illicit finance. And I think getting the facts straight around illicit finance, getting some good messaging and reporting on that about what blockchain is actually enabled as pertains to tracking and about the
00:31:17
Speaker
what people are actually using this technology for, I think is going to be immensely helpful. So I think crypto obviously has always had a problem. I think from a PR perspective, we as an industry, some of us have not done ourselves many favors. And so I think the key thing for this upcoming year is to play a little bit more offense while still trying to tackle some of the misconceptions that are out there. I think especially on the illicit finance front.
00:31:47
Speaker
Absolutely. Well, thank you all for those amazing insights. Also, thanks for these concluding statements. I think that all of them have big truths to them. Thank you once again for being on the Owl Explains podcast, and we'll wrap
Podcast Wrap-up and Resources
00:32:02
Speaker
it up with this. Thank you once again.
00:32:08
Speaker
We hope you enjoyed our Hootenanny. Thank you for listening. For more Hootful and hype-free resources, visit www.owlexplanes.com. There, you will find articles, quizzes, practical explainers, suggested reading materials, and lots more. Also, follow us on Twitter and LinkedIn to continue wising up on blockchain and Web3. That's all for now on Owl Explains. Until next time!