Why blockchain and crypto regulations are ‘necessary evil’ for US and Europe
Regulatory finesse toward cryptocurrency and DeFi will spur investment while not stifling innovation, says Alex Tapscott of Blockchain Research Institute
As France experiments with central bank digital currencies (CBDCs) using proof-of-stake blockchain Tezos and the European Central Bank (ECB)'s Christine Lagarde mulls over the introduction of a digital euro, what impact will Europe's regulators play in blockchain's expansion into financial sectors?
"Regulations are a necessary evil to innovation in business," said Alex Tapscott, co-founder of Toronto-based Blockchain Research Institute, which is expanding into Europe through a partnership with Blockwall.
"Regulation is a tricky business because on one hand, if you are doing something new and it doesn't fit neatly into the existing regulations, it creates a regulatory vacuum, and in that scenario, business and investment are hampered because people aren't sure whether to allocate capital in a regulatory grey area," Tapscott said in an interview with Forkast.News. "The flip side is that you want to be careful not to overregulate or create new rules when you don't fully understand the technology or the industry that's emerging."
European regulations over digital industries such as the General Data Protection Regulation (GDPR), which aims to protect individuals' online privacy, may help the development of blockchain-related businesses in the region, Tapscott said. But Western authorities also may be putting their countries at a competitive disadvantage if they take too long to develop a coherent set of regulations. China, which has moved faster to develop a blockchain and cryptocurrency regulatory regime, is already testing out its own electronic currency.
See related article: How close is China’s digital currency DCEP to launching?
"I think that signs from the ECB most recently saying they're exploring [a digital euro] is very encouraging," Tapscott said. "I don't want to overstate the progress that's being made on this front; I would say that compared to China, Europe and the United States are far behind, but they delayed doing this at their own peril, because this is coming; it's an inevitability, so better to be prepared."
Watch the full interview with Tapscott and Forkast.News Editor-in-Chief Angie Lau as they explore how regulations could affect blockchain innovation in Europe as well as the development of decentralized finance (DeFi) and the challenges as well as opportunities it creates business.
The Blockchain Research Institute is organizing the Blockchain Revolution Global online event from Oct. 26-30.
- Blockchain's impact on money: "In the next 10 years, money as we know it is going to be reinvented."
- The business need for certainty and regulatory finesse: "Regulation is a tricky business because on one hand, if you are doing something new and it doesn't fit neatly into the existing regulations, it creates a regulatory vacuum, and in that scenario, business and investment are hampered because people aren't sure whether to allocate capital in a regulatory grey area."
- How regulations could affect DeFi: "From a regulatory perspective, I would say that they could very easily kill it, and with it, the access of DeFi, but also the key innovations. So I would say that's probably not the right strategy."
- The role that DeFi could play in existing financial markets: "There is, between centralized traditional finance, like central banks, commercial banks, Swift, Visa, MasterCard, these big monolithic institutions, and the world of DeFi, which is sort of like the Wild West, there's an area in the middle where I think there could be some synthesis, and that's around the area of central bank-backed digital currencies, around stablecoins, around automated market makers."
Angie Lau: What's the state of play of blockchain in Europe? What's holding back the digital Euro? Is the European Union ramping up its cryptocurrency regulation? How will governments and multinationals engage? Welcome to Word on the Block, the series that takes a deeper dive into blockchain and the emerging technologies that shape our world at the intersection of business, politics, and economy. It's what we cover right here on Forkast.News; I'm your Editor-in-Chief, Angie Lau.
Well, 2024 — that is the year, according to two E.U. reports, when we're going to be seeing a fuller and more comprehensive slate of crypto regulations expand across the European Union. And increasingly, we're hearing from finance ministers across the E.U. and they're calling on the European Commission to put in place "very strong and clear rules."
What does this all mean? Let's bring in a veteran of this space, Alex Tapscott, a co-founder of the Blockchain Research Institute and co-author of the best selling book "Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World." Indeed, that is exactly what has happened. Alex, welcome.
Alex Tapscott: Thanks for having me.
Lau: Great to have you on. Ok, so the Blockchain Research Institute, co-founded by yourself and your dad, Don Tapscott, recently announced your partnership with Blockwall to launch Blockchain Research Institute Europe. So what need are you actually seeing amongst governments and multinationals in the E.U. right now?
Tapscott: Well, it's a wonderful question. Why don't I start with a little bit of background on the Blockchain Research Institute? So the Blockchain Research Institute, as you said, was founded by Don Tapscott and myself a couple of years ago following the release of our first book, "Blockchain Revolution." What we found at the time was that a lot of enterprises, governments, and other institutions understood that this technology was going to have a big impact on the way they did business, or their industry, but they didn't know exactly how, and they weren't sure where to start to learn more.
So we created the Blockchain Research Institute (BRI) to solve this problem, effectively to answer, what are the opportunities, challenges and new spaces for blockchain in the enterprise, blockchain in government, and blockchain in other institutions. In the past two years, the BRI has grown into the largest independent think tank in the world focused on these exact issues. And recently we made the decision to expand into Europe through a partnership with Blockwall.
Now the BRI has always been global in focus — we have members that are European, as well as Asian and African, Latin American, North American and so forth. But because we're based here in Toronto, Canada, our membership did skew more towards U.S. multinationals and other organizations in North America. So companies like IBM, Microsoft, Exxon, Delta Airlines, PepsiCo, Coca-Cola and so forth, sort of make up the nucleus of our membership base.
But Europe is the largest carbon market in the world. People forget that because so much time is spent on the United States and China. And Europe's economy is one that is in desperate need of reinvention. It's not that it isn't prosperous; it's that many of the industries and businesses that are fueling growth in Europe are old-school businesses, and there haven't been as many big technology champions to emerge from Europe as there have been from the U.S. or especially from Asia, and this needs to change.
Now, blockchain is a really interesting technology because it represents the second era of the internet. For 30 years we've had the internet of information, and now we have an internet of value, a way to move and store money and other assets peer-to-peer and to build trust and to build value without the need for centralized intermediaries or other third parties. And that means that the growth, the explosion of innovation that is occurring today, and I think will ultimately grow in the future, would eclipse what we saw in the first era of the internet.
So it's everybody's golden opportunity to seize this moment, and it's Europe's as much as anyone else's. So we knew Europe was going to be a focus. We know that there are a lot of big companies and governments that are thinking hard about this subject, and we wanted to be there to help support them and guide them through.
Lau: Well, we recently reported on Forkast.News, Société Générale, which was tapped by the French Central Bank to explore a central bank digital currency (CBDC), has identified Tezos as protocol to explore a CBDC. This is increasingly of interest for not only France, but China, and really around the world — Canada, the U.S. and truly around the world and across continents.
So in that specific example of CBDC exploration by France, how are you potentially seeing this interest expand in Europe? Is the E.U. ready for a digital euro? We heard recently from ECB Christine Lagarde regarding thoughts about a digital euro. What is the trendline that we're seeing in Europe and certainly in the conversations that you're having with your government members and your multinationals in Europe?
Tapscott: Well, I would say that within Europe, certain countries and their political leadership are more advanced on the subject than others. But you make a very good point, which is that Europe is unique in that all of these countries have a single central bank: European Central Bank (ECB). And Christine Lagarde, as you no doubt know, before was running the International Monetary Fund (IMF). And at the IMF, she actually commissioned an advisory group to advise the IMF on fintech, blockchain and cryptocurrencies.
I was one of the founding members of that advisory group, and this was in 2016 to early 2017. When we met with her, she was very thoughtful on the subject. And since then, during her tenure at the IMF and then later at ECB, both of those institutions have shown not only a willingness to explore this technology, but really an eagerness to understand what it would mean for the central bank in function. And I think that's very encouraging because I do believe that central bank digital currencies are the future of money, or at least one of the main pillars of the future of money.
I think that in the next 10 years, money as we know it is going to be reinvented. And this happens occasionally in history — doesn't happen all the time. So we think that the status quo is what the world is and always has been. For example, people today are mostly familiar with money as a fiat, issued by a government, not backed by anything. That's only been the status quo for 50 years or so. Before that, there are various different kinds of methods for creating money. And I think this time we're on the brink of something different.
I think that central bank digital currencies, along with what I would call "civil society money," so things like bitcoin, and corporate money, such as Libra, issued by Facebook, are going to make up sort of the three main pillars. Within the central bank digital currency space, I think there are going to be three major players in this: there's going to be the Federal Reserve/the U.S. government, there's going to be the People's Bank of China/Chinese Communist Party, and there's going to be the European Union ECB.
Those are the three main pillars, because if you can create and issue digital currency that could be spent peer-to-peer between parties all around the world, that can settle transactions with merchants in real time, that can allow you to get access to banking services straight through the central bank without going through the commercial banks, that can allow you to earn interest with the central bank rather than with commercial banks — these are just some of the potential benefits of a central bank digital currency — people I think will increasingly gravitate towards the biggest and most ubiquitous currencies in the world.
And the U.S. dollar is the global reserve currency. But if China has anything to say about it, and they certainly do, they'd like to see the Chinese currency, the yuan, become much more widely used as well. So this puts Europe in an interesting position, sort of trapped in the center, so to speak, between these two superpowers. And they have the benefit of being able to push updates, so to speak, to their money, and have 20+ countries adopt it instantaneously, and for that to be widely used in the largest common market.
So I think that signs from the ECB most recently saying they're exploring the subject and others, I think is very encouraging. I don't want to overstate the progress that's being made on this front; I would say that compared to China, Europe and the United States are far behind, but they delayed doing this at their own peril, because this is coming. It's an inevitability, so better to be prepared.
Lau: Well, to your point, China has been working on this for the past six years. The People's Bank of China (PBoC) in the very early stages had exploratory research groups that were working on this, and right now it's in pilot phases across the country.
And then comparatively speaking, you have Europe that is actually using some very strict language, talking about licensing, talking about regulation, and then, of course, you have Jay Powell, who this year expressed, when confronted with the digital dollar and whether or not the Federal Reserve was thinking about it, said, "but first we must understand."
So that is to the level of degree of what everybody is talking about. But to your point, Alex, you're absolutely right that the global hegemonic role of the U.S. dollar could erode, certainly with CBDCs coming out of Europe and China.
Tapscott: I think you might be right about that. I think on the point of the U.S., there's a bit of a split, at least today, between the political leadership in the U.S. and the central banks. So Donald Trump and Steven Mnuchin are not big fans of cryptocurrencies. I think that's not hampering the Fed's efforts to become knowledgeable in this space. But certainly it would, I think, dissuade them from doing anything too bold and rash, at least while that's the government that's in power.
And then on the global hegemonic currency, which is what the U.S. dollar is, yeah, I think that China's been laying the groundwork for this for a while, maybe even before realizing that they wanted to pursue a digital currency, because their interests in Central Asia, Africa, Eastern Europe, Latin America, and so forth have been steadily growing: financial interests, business interests and government interests. And I think they see those corridors as areas where they can deploy this currency effectively.
Lau: Do you think that Europe needs more regulatory framework? This is what we're hearing from finance ministers across Europe, really calling for the European Commission to come together with a lot of very strict language and concerns about even stablecoins, and wanting the rules and regulations to be put in place before adoption would be legalized.
Tapscott: Well, regulation is a tricky business because on one hand, if you are doing something new and it doesn't fit neatly into the existing regulations, it creates a regulatory vacuum, and in that scenario, business and investment are hampered because people aren't sure whether to allocate capital in a regulatory grey area. So regulations are a necessary evil to innovation in business.
The flip side is that you want to be careful not to overregulate or create new rules when you don't fully understand the technology or the industry that's emerging. And there's plenty of examples of this throughout history.
A couple of funny ones: so in the 19th century, when cars were first introduced in London, they introduced this thing called the Red Flag Acts, which required an automobile to have two people operating it. One was the driver, and the other one was a red flag person, which is a man who would walk in front of the car waving a red flag to make sure that horses and pedestrians wouldn't startle. So if you think about the value of the vehicle, it's usually to get around freely and quickly, and having some guy walk in front of your car with flags sort of defeats the purpose.
More recently with the internet, there was at one point a bill that was put before Congress which would have required anybody who had a website to get a radio broadcast license, because they were broadcasting information over the airwaves, so to speak. Now, I think there were only a few hundred or maybe a few thousand of these licenses available, and of course, there are billions of websites. So you can imagine had that been put in place that would have potentially hampered the growth of the internet. So examples like this are legion throughout history.
There are so many times where regulators have gone wrong, and some places where they've gone right. The Telecommunications Act in the United States in the 1990s laid the groundwork for the modern internet: some really farsighted and well-executed policy. Which is all to say, what I would say about Europe is that Europeans like to regulate. The European Union itself is one gigantic regulatory experiment as well as a political and economic experiment; there's so many rules. But also more profoundly, Europe matters for regulations around the world.
One of the areas where Europe is a leader is in regulation. So everything from privacy rules to other rules, when put in place in Europe are usually adopted around the world, because companies can't maintain separate regulatory regimes, technology regimes, etc. for different markets, so they usually just default to whatever Europe does. So you see that with GDPR, for example, and that's very important because if the Europeans decide that they want to regulate first, it's possible that those rules get adopted across very different countries.
So I would say that the market today for much of the technology and innovation that's occurring is fairly small relative to the scale of Europe's biggest corporations or compared to the government in size. So let them innovate, let them make mistakes, you know, create the conditions for innovation to succeed. Don't allow it to be a Wild West. Apply existing rules that have been on the books for a while in a reasonable manner and work closely with industry to ensure that they understand those rules, but generally don't create new rules until the industry's had time to develop, to mature.
Lau: That's a great point. At the end of the day, what Europe truly is exporting is a regulatory framework for the rest of the world to adopt. This is truly what we're seeing at even the OECD in Paris is really influenced by the innovation that they're seeing in France in the technology space, and then across Europe, we see that in Zug with the new crypto-infused regulatory thinking and banking.
So if that's the case, how do you think Europe is really thinking about addressing new innovations, including DeFi? I mean, this is rising up like a dark horse or a unicorn or whatever four-legged animal you want to apply here. But certainly it's becoming dominant in this space. How do you think Europe could potentially respond to DeFi from a regulatory perspective?
Tapscott: Well, from a regulatory perspective, I would say that they could very easily kill it, and with it, the access of DeFi, but also the key innovations. So I would say that's probably not the right strategy. What I will say is that, well, just maybe to define DeFi, and this may be an incomplete definition, but I think DeFi has the ability to recreate financial services such as savings and loans, credit investments, and so forth without the need for a centralized, trusted institution, so to be able to coordinate between parties and to create value that way. And in so doing, give people the ability to access financial services when maybe they couldn't otherwise.
Today, it's mostly a market for rampant speculation on various new protocols and products that today are offering very enticing rewards for getting involved. So taking the first kernel of that definition, there's a lot of potential for DeFi in Europe, and that's because financial services as an industry is one of the largest industries in Europe — as it is around the world, but it's larger in Europe that it is in, say, the United States, which is more diversified and has a huge technology sector. And that's an industry that is poised for disruption and disintermediation.
We have the big banks and other financial institutions in Europe, hugely important to those economies: they employ lots of people, they offer key services to businesses and individuals, they're also unfortunately known for being badly managed from time to time and for enabling some not so great kinds of transactions with criminals and money launderers. So I think blockchain and DeFi could be implemented to some degree by existing institutions.
Now, I'm not suggesting that liquidity mining is something that Deutsche Bank is going to start doing, I think that's sort of ridiculous. But there is, between centralized traditional finance, like central banks, commercial banks, Swift, Visa, MasterCard, these big monolithic institutions, and the world of DeFi, which is sort of like the Wild West, there's an area in the middle where I think there could be some synthesis, and that's around the area of central bank-backed digital currencies, around stablecoins, around automated market makers.
So being able to use decentralized exchanges as a way to help coordinate stock markets and other capital markets I think is really interesting, and some of these other areas. So it's the alchemy in the middle between the old world and the new world where I think the leverage would grow, and I think that right now, leaders in most of those firms are not really even aware of DeFi, honestly, and they should be. They should be because people generally tend to overestimate the impact of technology in the short term and underestimate it in the long term.
And this is one of those areas where it's not unlikely that in a year or two or maybe a bit longer, that the technology that enables decentralized marketplaces could be applied to traditional markets as well. So, again, it's best to be informed on what's going on in this space, and that's something that we hope to do with the Blockchain Research Institute. I would say that financial services institutions specifically are a big focus of ours, because they're large, and this is going to help them quite a lot to understand this space.
Lau: And how has Covid-19 affected people's perspectives on digital transformation, on blockchain and cryptocurrency, and really how the structures of legacy systems are effectively turned upside down with Covid? How have you adapted, how has your membership adapted as well?
Tapscott: Well, what I'd say about Covid is, like other crises in human history, it has accelerated the pace of history in some key ways, like laws that would have taken years to pass, they passed in a matter of weeks or months. Big trends like the migration to online commerce have skipped ahead by 10 years. We went from 10% to 20% and maybe even more. You see existing industries, legacy industries like the energy industry getting upended because of shifting tides of demand in energy usage, while new companies like Tesla and others rocket to higher and higher highs.
This accelerated pace of transformation has had an impact on everybody, I think, in our business as well. Now, the good news to the BRI is that long before Covid-19, we began transitioning to a digital-first model. Today, most of the things that we offer, to members and to the general public, are available online. So a couple of examples: number one, we have a partnership with INSEAD, the number one business school in Europe, who we've worked very closely with to develop an online suite of education courses and tools. It's called Blockchain for Business and it's on the Coursera platform.
We were regularly seeing a couple of hundred people signing up for this before the pandemic and we were getting a lot of great feedback and traction, but once people went into lockdown, the number of new signups skyrocketed to over a thousand new people who are taking this course. Even today, just a couple of days ago, I saw that we were at about 750, so I think a lot of people are at home and they're using this as an opportunity to educate themselves to become knowledgeable about an area maybe they didn't have time to when they were commuting two hours to and from work. That's been really gratifying, to see the feedback.
And then the other area is that we've been hosting a lot of webinars, roundtable discussions, and events. In the summer, we hosted our Enterprise Blockchain Awards in an all-virtual setting, in partnership with a technology company in Toronto called ARHT Media, which is a pioneer in holograms and virtual stages. So if you check out the Enterprise Blockchain Awards 2020 on YouTube, you can see it looks like the Emmys except for on a virtual stage, which is pretty cool.
Our next big event is Blockchain Revolution Global, which is our flagship, and it's going to be an all-online event taking place October 26th to 30th. I would strongly encourage people to check that out — registration is free. We're trying to reach as many people as we can, and we look forward to having those people join us. And there's more I can discuss, but those are the two big ones.
Lau: Well I hope to see you there, but until then, do stay safe. It is a brave new world. But we covered it all, I feel like, in depth, as usual. But, Alex, it was a pleasure to speak with you. Thanks for your deep insights on what's happening in Europe and the latest, and to share a perspective on the kind of thinking that's happening across Europe, because to be frank, you know, it is that kind of regulatory framework that is shaping where we are in the world that we are seeing nations around the world struggling with and cooperating with at the same time. So education absolutely is key. And thanks for that. Thanks for joining us today.
Tapscott: My pleasure. Thanks for having me.
Lau: And thank you, everyone, for joining us on this latest episode of Word on the Block. I'm Angie Lau, Editor-in-Chief of Forkast.News. Until the next time.