Want the next-generation internet? Start legislating for it

Transcript

Angie Lau: Rules and regulations. While some may consider them the antithesis of a decentralized, Web3 world, others say they’re the critical guardrails, the necessary brakes to ensure that the world of digital assets and currencies evolves in a safe and ultimately ideal manner. And over the next half hour, we’re going to be getting the insights from one of the biggest influential voices in this conversation about blockchain policy in the world’s biggest economy.

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast. I’m Editor-in-Chief Angie Lau.

Well, today we’re in conversation with Tomicah Tillemann, Chief Policy Officer at Haun Ventures and so much more. Tomicah, thanks for joining us.

Tomicah Tillemann: Pleasure to be with you, Angie.

Lau: For anyone who has read your CV — and then some — you served at the State Department and the Senate Foreign Relations Committee. You were a speechwriter, adviser to folks like Hillary Clinton, John Kerry, Barack Obama, Joe Biden, to name a few. You’re also co-founder and director of Blockchain Trust Accelerator at New America. This is one of the top think tanks in the United States, and you’re working with top firms right now, and on all of that — on top of being the chief policy officer at Haun Ventures — what is it about blockchain that connects these threads in your journey for you?

Tillemann: Well, I’ve dedicated most of my professional life to determining how we can ensure that institutions and open societies meet the needs of the citizens and communities that they’re supposed to serve. And in the course of my work at the State Department, when I was serving as a senior adviser to Secretary Clinton, I had a number of conversations with the then President of Estonia, a man named Toomas Ilves. And President Ilves was the visionary responsible for ensuring that Estonia had some of the world’s best digital systems and infrastructure. And I was asking him, at one point back in 2013, what it would take to port Estonia-style solutions to different countries around the world. And at that point he told me something that was very surprising. He said that if we were to build again today, we would build on blockchain technology.

And this was the first time that I’d really considered blockchain as anything other than criminal money. Back in the day, it was just not a topic that was really discussed much among polite company. And yet, as I looked deeper and deeper into the toolbox that it provided — what we now call the Web3 toolbox — I recognized that it created the infrastructure necessary for ensuring that institutions and systems run a lot better. And this is really — in my mind — a series of new solutions that we can deploy to deliver on the needs of communities worldwide.

Lau: That policy, infrastructure-wise, it’s so important. We talk about it all the time. But there really seems to be tension, still. In your view, why is that policy infrastructure so important and critical here?

Tillemann: If you want to achieve population scale with these technologies, if you want to serve hundreds and millions and billions of people, then you’re going to need some guardrails. And specifically, the community that is working on these technologies, that is knowledgeable about these technologies, has an opportunity right now to develop the best practices, the principles that should guide responsible engagement in this space.

We can do that on our own, but we can also work with policymakers and those in the civic sector and civil society to ensure that we have clear rules of the road that can enable innovation, can facilitate broad utilization of this new toolbox by people all over the planet, and can hopefully deliver some dramatic improvements on the legacy systems that we’re replacing.

We’ve got, frankly, one shot to get this right, and if we succeed, we’re going to build a better internet that’s going to serve the needs of a lot more people and a lot more places. If we fail, we’re going to end up with a very fragmented set of systems that may, in some cases, improve on what they replace, but won’t ever be able to deliver the type of systems-level change that I think many of us recognize the world is in need of right now.

Lau: That fragmented system really feels like the system that we exist in right now in the Web2 world. And, as we all migrate into Web3 — some faster than others — this is that discussion. You say, ‘one chance to get it right.’ What are the obstacles right now?

Tillemann: Well, the obstacles are pretty significant and multitudinous. If this were easy, it would have happened already. And I’d cite three big baskets of challenges that we need to be aware of.

The first is a real lack of education and familiarity with the technology among policymakers, and we shouldn’t blame policymakers for that. This stuff is pretty complicated. Those of us who work with these tools every day are the first to acknowledge that, but we need a broad effort to familiarize policymakers with these tools.

Challenge two is we need to, as a community, be able to come together around best practices, something that I mentioned a little while ago.

And the third piece of this is, ultimately, we need to deliver use cases that are going to appeal to broad swaths of society and solve problems for broad swaths of society. Some of that’s already happening, but there’s certainly a lot more work that needs to be done in that realm.

Lau: There’s been a lot of interesting developments in the crypto space, there’s no doubt. The U.S. stablecoin bill — top of mind for a lot of people. You know better than most of us that it’s suffered some numerous delays and it’s been postponed until after the congressional break. What’s the impact here? Why is the stablecoin bill so important for crypto in this specific instance?

Tillemann: It’s important to acknowledge there is a lot of encouraging momentum in the right direction. Stablecoins are essential because in many ways they’re going to be best positioned to power this new iteration of the digital economy. They’re not subject to some of the fluctuations in value that we see in other forms of digital asset. And they’re going to be really critical to unlocking many of the use cases that will appeal to large numbers of individuals around the world. And so it is really critical — both due to their functional importance and due to their systemic implications — that we get stablecoins right. And that will require some legislation almost certainly in the United States and potentially other jurisdictions around the world.

Lau: Well, the leadership, no doubt, rests with the U.S. — often seen as the international gold standard of policy by default, and obviously by being the world’s largest economy and just having that gravitas. What do you think the Lummis-Gillibrand bill will mean for centralized finance platforms and users? And what about the implications on global crypto regulations? How do you see this playing out?

Tillemann: Well, we’ve seen a number of very important pieces of legislation, including the Lummis-Gillibrand bill, also one that was recently introduced by Senator (Debbie) Stabenow, who chairs the Senate Agriculture Committee, which may sound a little bit peripheral — I assure you it’s not.

The United States has 15 different agencies, depending on how you count, that have pieces of the regulatory puzzle when it comes to engaging around the financial sector and digital assets. That’s really, really complicated for builders and innovators in this space. And it also makes it challenging for those that just want to utilize these tools.

There’s a high degree of uncertainty among a lot of builders about what assets qualify as commodities and securities. This may sound like a pretty boring differentiation, and in some respects it is, but it has a big impact on how different forms of digital asset are regulated in the United States.

The Lummis-Gillibrand bill and some of the other important pieces of legislation that we’re seeing would start to clarify that a larger swath of assets should be regulated as commodities in the United States rather than securities. The key securities laws in the United States and the case law date to the 1930s and the 1940s. They haven’t evolved a whole lot since then, and so the idea that we’ll regulate some of the most important digital breakthroughs of the 21st century with rules that were originally designed for orange groves in Florida is a bit of a stretch. And I think it’s important that lawmakers are starting to acknowledge this and recognizing that we have fundamentally new tools and we’re going to need some new rules to govern those tools.

Lau: In your view, if there needs to be new thinking or a new evolution, does it come from precedents, which is very much traditionally the standard of law in the U.S., or does it need to be a standalone and something new? And what would that look like? Who would figure that one out?

Tillemann: It’s certainly true that there are digital assets that qualify or should qualify as securities. It’s certainly true that there are digital assets that are very likely commodities and should qualify as commodities, and would fit neatly into existing regulatory frameworks in each of those spaces. It’s also very likely in my mind that there’ll be digital assets that don’t fit neatly into one of those two frameworks. And in those cases, we should think hard about how we can design regulatory frameworks that are fit for purpose in the 21st century.

I’ll give you one example. Many of the regulatory frameworks that we have in the United States are designed to advance the goal of disclosure and ensuring that investors and those that are putting their money into these applications have equal access to information. And the way that that’s historically been done in securities regulation, for example, is by requiring very expensive quarterly filings by those that issue securities. And a lot of lawyers have made a whole lot of money off of those security filings. In a Web3 world, where virtually all of the information that would be contained in one of those quarterly filings, is available in real time via open, transparent blockchains.

And so let’s start thinking about how we can develop frameworks that take advantage of some of the inherent, built-in elements of these technologies and enable more people to gain access to good information and good systems to achieve the objectives that they’re looking to advance.

Lau: Really diving deep into policy from a U.S. perspective, and also your very influential role at New America, there’s just so much happening in the U.S. policy space, and you say that legislation and really coming in and having a sweeping set of comprehensive policy that offsets what currently is a very fragmented agency structure in the U.S. Does this happen at a state level? Does it happen at a federal level? I’m just thinking about California right now, inching closer to turning the bill dubbed ‘BitLicense‘ into law, which is going to make it necessary for crypto companies to be licensed in the state to operate, besides other requirements. It feels very fragmented if it’s happening at a state-by-state level. Does it need to be more comprehensive than that?

Tillemann: Well, much of the regulation and the regulatory framework that exists in the U.S. is federal, and it’s important to acknowledge that you’re not going to get where you need to go in the absence of some good federal rules and legislation. New York’s BitLicense, which resembles the BitLicense framework that has just advanced in the California legislature, is one of those cautionary tales. I think we should recognize that in the aftermath of New York’s decision to adopt the BitLicense, many of the most prominent platforms in the United States — including platforms that work very, very hard to keep (to) the rules — had to wall off New York markets and New York consumers because it was too cumbersome and too complex to comply with the framework that had been put in place by the legislature in New York.

This is a bad outcome for everyone and certainly prevented New York — which is otherwise one of the world’s most consequential centers of financial activity — from shaping the evolution of this space in the way that its policymakers would have presumably wanted to.

A lot of that activity, ironically, then went to California, and California emerged as a real capital, a global capital of Web3. Governor (Gavin) Newsom has been pretty encouraging in his support for Web3. The executive order that he issued in May was a pretty positive executive order and created a lot of encouraging mile markers for both policymakers and technologists looking to expand utilization of Web3 tools in the private sector, but also critically in government itself, which is exciting. Hopefully other states in the U.S. will take a more consultative and thoughtful approach as they seek to make rules.

Lau: The acceleration of the blockchain industry, as we see it in late 2022 and going into 2023, really is to settle on the foundation of policy — in your words — policy architecture. The Terra Luna collapse earlier this year really seemed to have inspired a cascade of new regulations, and certainly not just in the U.S. but obviously around the world. Is there a connective tissue that you see here? What are the themes that have popped up since the Terra Luna collapse that we’re going to see really define the space with a little bit more clarity into 2023?

Tillemann: Well, I have to say, on the whole, I’m pretty encouraged by the response of policymakers, and part of the constructive tone that we’ve seen even in the aftermath of the Terra Luna collapse from many policymakers, at least in key capitals around the world.

Katie Haun and I put out a paper last fall specifically on stablecoins, outlining some of the risks that were present in the current system and saying that we needed good rules of the road in order to prevent bad outcomes and mitigate what at the time were some pretty unnecessary risks existing in the system. Fast-forward to where we are today and a lot of policymakers have looked around and recognized, ‘Yep, you were correct and we do need some good rules in this space.’

I think there’s also a bit of a silver lining in that the collapse of Terra Luna and the broader market volatility that we saw in the early part of this year subjected the entire Web3 ecosystem to a pretty extraordinary stress test. And what we found is that most of the well-designed platforms and projects have actually endured that stress test pretty well and are emerging still in a good position to create value for their stakeholders.

Policymakers, I think, are mindful of that. They see that this is not a technology that’s going away, but they also recognize that we need a greater degree of transparency and a coalescing around best practices in the ecosystem in order to give both government officials, but more critically, individuals who are utilizing and relying on these platforms, the confidence required to build these systems as a real cornerstone of the digital world that we want to create going forward.

Lau: Well, Katie Haun’s got quite the copilot in this seat when it comes to the policy space, which is increasingly so much more important to understand as you navigate the industry as we see right now. You’ve got U.S. stablecoin bills, you’ve got the fragmented agency space, you’ve got California and New York BitLicenses, then in the Philippines you’ve got the central bank halting crypto service provider applications for three years. At the same time, the UK is seeking guidance on regulating cryptocurrencies.

A lot of investors are really worried about it. First, do policymakers get it? Is this a kind of strict framework that squeezes the oxygen, that stifles the innovation? That’s no doubt something that probably keeps you all awake at night.

Tillemann: When I go in and sit down with leaders in the White House and other key agencies in the U.S. and around the world, what we’re finding increasingly is very sophisticated interlocutors who have spent time studying these technologies. They understand the potential upside and they’re eager to get it right. They’re also eager to create an alternative to the Web2 platforms that virtually everyone acknowledges are failing on many different fronts to meet the needs of citizens in the U.S. and many other parts of the world.

And so there’s an imperative to develop something that’s going to be better, that will give individuals greater control over their information, that will provide higher levels of security, accountability and trust, and enable more people to access opportunity in the digital economy. Those are the goals that most policymakers are trying to advance. And — knock on wood — I think we’re relatively well positioned to help facilitate those ambitions in the months and years to come.

Lau: Ok … But I do want to understand the thinking at Haun Ventures in Web3. It’s a very prolific presence in this space. You’re making very big bets. Tell us about some of the bets, the thinking behind it, the thesis, as we move very decidedly into the Web3 world.

Tillemann: Well, a couple of quick themes that we’re spending a lot of time engaging on right now — the first is around privacy, and what I think we recognize is that if you survey the world right now, if you want to use digital technology, you really only have two choices. You have an authoritarian paradigm that is emanating largely from Beijing, in which your private information is aggregated and used to manipulate behavior for political purposes. And you have a big tech paradigm that is emanating largely from Silicon Valley and Seattle, in which your private information is aggregated and used to manipulate behavior for commercial purposes.

In the long run, neither one of those frameworks is compatible with a healthy, open society. And so we think there’s a space and really a need for a new generation of privacy-preserving technologies that will give individuals greater control over their information and allow them to participate in the digital economy on their own terms.

The second theme I would highlight that’s closely linked to this is the importance of privacy-preserving digital identity. We’re seeing a couple of intriguing examples around the world where different countries are pioneering new architectures around digital identity. We think elements of those experiments can be combined with Web3 technology to really come up with some qualitatively superior solutions that will be vastly better than the legacy Web2 platforms that most of us are stuck with right now, and hopefully enable new forms of economic participation and new forms of incentivization that will bring more people into the Web3 universe they aren’t currently able to enjoy. So those are a couple of the themes that we’re spending time on.

Lau: Katie Haun started the Web3-focused company in 2022, raised US$1.5 billion in March of 2022, right as Crypto Winter kind of settled in. And a lot of these projects are facing a lot of oxygen being sucked out of the room, as it were. Are you experiencing that same tension as the team looks into this space? What are the firms in the projects that remain steadfast and strong standing still versus the ones that have fallen away?

Tillemann: If you’re building right now, you’re building because you believe in what you’re building and you think it has a long-term future. That’s the type of project that we want to invest in. And we still see an incredible amount of talent and an extraordinary array of projects that are worthy of our support. So we’re fortunate to be in a position where we have a lot of dry powder available and are able to be very selective in how we’re deploying it in a market environment that we know from experience can give rise to really durable, long-term blockbuster solutions that are going to deliver a lot of utility for the entire ecosystem. And that’s what we’re trying to support.

Lau: Is it important for you to take a look as well in the context of policy?

Tillemann: Absolutely. It’s one of the key issues that we examine around every investment that we make. And I think we’ve seen enough to know that unless founders are thinking very consciously about policy dynamics, they’re probably not going to be able to realize their vision. The policy dimension of what’s happening in Web3 is so important, and it frankly is moving so quickly that founders don’t need to have all the answers, but they need to be asking the right questions. And to the extent they’re willing to ask those questions, we can usually help them get where they need to go.

Lau: So for any investor watching right now, for any start-up firm, any founder, Tomicah, in your view in 2023, what should they be watching out for? What should they be anticipating? What’s that one question they should be asking themselves in 2023?

Tillemann: Well, I would look hard at the intersection of privacy, digital identity and data, and how those pieces are going to come together to enable the next generation of the internet. That intersection is going to be incredibly consequential and also incredibly exciting. I think that’s where we’re going to be putting a lot of our energy and attention over the next little while. And certainly, my assumption is that others will find it beneficial to ask questions around the intersection of those issues as well.

Lau: Well, speaking of privacy, I’m glad you didn’t keep that private. You’ve been very transparent, and I really appreciate the candidness in which you’re sharing some of these ideas as you make some real serious bets in this space. Everyone is absolutely watching very closely where this policy infrastructure, where this architecture leads us. One thing is for sure, it’s the foundation of a future which all are going to be participating in. Tomicah, it was a pleasure, as always. Thank you so much for joining us.

Tillemann: Great to be with you, Angie. Thank you.

Lau: And thank you, everyone, for joining us on this latest episode of Word on the Block. I’m Angie Lau, Forkast Editor-in-Chief. Until the next time.