Yesterday I filed my submission “Digital Assets Down Under. Making Australia a Destination Jurisdiction for Digital Asset and Cryptocurrency Projects, Investment, and Skills” with the Australian Senate Select Committee on Australia as a Technology and Financial Centre. Here are what I think are the inherent challenges involved in any nation being a “destination jurisdiction”.
Challenge 1: Blockchains (ideally) Obsolete The Middlemen Laws Require
Through a combination of code, key pair encryption, and game theory blockchains minimise the need for trust reliably and cheaply enough for complete strangers to collaborate across time and space without the traditional institutional intermediaries.
However, our laws generally assume a hub-and-spoke world. Faced with cost of policing its individual citizens, governments regulate and deputise the hubs. Laws tend to assume a “throat to choke”, an entity who is, or can, be made responsible for the activities in question by virtue of their role in the transaction or relationship.
Very often, this entity must register with relevant authorities or hold necessary licences. Yet, blockchain systems are peer-to-peer. Their benefit arises (if at all) from the degree to which they do what they do without a hub to connect the spokes and without any party who could sensibly apply for or hold licences on behalf of the blockchain.
Challenge 2: Digital Assets are (New) Property
Digital assets arise almost naturally from blockchains. They are just entries in a database. But the distributed, permissionless nature of these blockchain systems lend sufficient certainty and independence to these data entries for them to be considered money and property. Mere data becomes verifiable, permanent, alienable, and transferable. On a database anyone can use, everyone can police, and nobody owns, the data becomes property.
Challenge 3: And They are Speculative Investments
Digital assets allow a wide range of rights and things to become tokenised, to be given a digital identity. Almost any right can turned into a tradeable asset. Inevitably, this leads to speculation, turning what might traditionally have been a commodity market into something that feels like it should be regulated as a security or managed investment.
Challenge 4: And They are Money!
Once tokenised and liquefied, everything also becomes money that can be transferred without regulated intermediaries. The pressure to regulate all digital assets as money will be significant. But regulating them like we regulate banks and money services businesses will probably destroy their ability to provide the promised social scaling benefits.
Challenge 5: But They Can Also be Really Useful
Smart contracts make the digital assets programmable, adding a new universe of possible ways in which relationships can be automated or governed by code rather than the discretionary actions of complete strangers.
Challenge 6: Money, Useful Assets, and Speculative Assets Don’t Usually Mix
So, in the same way light behaves as both a particle and a wave, digital assets are data that behave as money, useful assets, and speculative instruments. This is a problem because data, money, property, and investment instruments are regulated in different, almost incompatible, ways.
Challenge 7: Now Add Diversity
Blockchains and digital assets are not uniform as to design or technology (or desirability). PoW, PoS, and, UNLs are different technologies that achieve the same ends in different ways, potentially with different legal consequences.
Then there are digital assets which are native to their chain with no counterparty (like BTC, ETH and XRP), non-native assets with no counterparty (like many ERC20 Tokens), and counterparty assets that rely on a third party for their value or redemption, like USDT.
There will be a continuum of Digital Asset Projects from those that cannot perform their function and deliver their benefits without being “purely decentralised” to those that involve “decentralisation theatre” and would be better handled and regulated as traditional centralised databases.
Do Your Regulators Really Have the Courage and Will?
So, the challenge is to have laws that create a welcoming regulatory climate for the types of blockchain projects the country thinks are desirable. This will almost certainly mean adjusting laws to welcome purely decentralised projects that have no one who can sensibly apply for licences or registration despite the project involving a digital asset that is simultaneously money, a useful asset, and a speculative investment.
It will take care and courage to design regulations that are both technologically neutral (because the technology is so varied), does not foreclose the most beneficial projects (because they will be the most difficult to regulate, if at all), and yet keeps bad actors away (because there are plenty of those, too).
Do your regulators really have what it takes to be a destination jurisdiction?