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Johannesburg - South Africa Financial Blockchain Consortium - August 2017

Johannesburg - South Africa Financial Blockchain Consortium - August 2017

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The impact of blindly following a regulatory framework created decades ago to deal with problems observed years before then. The amorphous term "regulation" disaggregated into a simple taxonomy to facilitate analysis and communication. The enormous gap between today's regulation and the challenges posed by open blockchain technology. The challenges and opportunities of self-sovereign identity. Financial KYC's spaghetti problem and how to solve it. The opportunity to leverage the design features and crypto economics attributes of open blockchains for self-regulation. The leading thought leaders in regulation for the blockchain age.

The impact of blindly following a regulatory framework created decades ago to deal with problems observed years before then. The amorphous term "regulation" disaggregated into a simple taxonomy to facilitate analysis and communication. The enormous gap between today's regulation and the challenges posed by open blockchain technology. The challenges and opportunities of self-sovereign identity. Financial KYC's spaghetti problem and how to solve it. The opportunity to leverage the design features and crypto economics attributes of open blockchains for self-regulation. The leading thought leaders in regulation for the blockchain age.

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Johannesburg - South Africa Financial Blockchain Consortium - August 2017

  1. 1. BLOCKCHAIN REVOLUTION IN REGULATION S A F B C , J o h a n n e s b u r g , A u g u s t 2 3 , 2 0 1 7 @JuanLlanos
  2. 2. “ UN EXPIRED G OV ERN MEN T - ISSUED PHOTO ID ”
  3. 3. REGULATION market failure prevention? catalyst for progress? instrument of power? © 2017 Juan Llanos
  4. 4. PRUDENTIAL LAW ENFORCEMENT POLICY • National Security • Crime Fighting • Consumer/Investor Protection • Safety & Soundness • Systemic Risk • Job growth & wealth creation • Development & sustainability • Taxation • Trade • Monetary POLICYMAKER ( S T I M U L A T I V E ) ( P R E V E N T A T I V E ) ( P U N I T I V E ) REGULATOR LAW ENFORCER policy supervision enforcement © 2017 Juan Llanos
  5. 5. RISK AREAS • operational • credit • money laundering • terrorist financing • information loss • counterparty • fraud • identity theft STAKEHOLDERS • federal agencies • state agencies • investors • consumers • employees • society GOALS • safety • soundness • security • privacy • crime prevention • health • integrity R e g u l a t i o n à Inevitable, yet valid Risks & Stakeholders C o m p l i a n c e à Onerous, yet valuable © 2017 Juan Llanos
  6. 6. R e g u l a t i o n à Inevitable, yet valid today…but not necessarily tomorrow C o m p l i a n c e à Onerous, yet valuable © 2017 Juan Llanos
  7. 7. t o d a y v s t o m o r r o w l a w e n f o r c e m e n t v s c i v i l l i b e r t i e s p r i v a t e v s p u b l i c c e n t r a l i z e d v s d e c e n t r a l i z e d a u t h o r i t y - d e p e n d e n t v s s e l f - s o v e r e i g n c o n s e r v a t i v e v s p r o g r e s s i v e l e t t e r v s s p i r i t n e a r v s f a r CONTRASTS © 2017 Juan Llanos
  8. 8. r eg/ t ec h mismat c h
  9. 9. PRODUCT-FOCUSED ACTIVITY-BASED INDUSTRY-SPECIFIC JURISDICTION-DEPENDENT INTERMEDIARY-ENFORCED
  10. 10. © 2017 Juan Llanos permissionless-/limitless-ness borderless-/jurisdictionless-ness (pseudo) anonymity peer-to-peer (in)flexibility radical transparency/translucence probabilistic finality DECENTRALIZED PARADIGM
  11. 11. © 2017 Juan Llanos
  12. 12. © 2017 Juan Llanos Quorum is an enterprise- focused version of Ethereum ideal for any application requiring high speed and high throughput processing of private transactions within a permissioned group of known participants.
  13. 13. permissioning + privacy + performance + configurable Consensus + settlement finality + © 2017 Juan Llanos
  14. 14. today…but not necessarily tomorrow © 2017 Juan Llanos
  15. 15. N O C E N T R A L A U T H O R I T Y O P E N + P R O G R A M M A B L E D I S T R I B U T E D C O N S E N S U S N O D O U B L E - S P E N D T R A N S F E R W I T H O U T I D E N T I T Y B L O C K C H A I N R E V O L U T I O N © 2017 Juan Llanos T R A N S PA R E N T L E D G E R
  16. 16. © 2017 Juan Llanos anonymity = anathema
  17. 17. • Anonymous identification • No value limits • Anonymous funding • No transaction records • Wide geographical use • No usage limits Cash features F AT F R e p o r t o n N e w P a y m e n t M e t h o d s ( 2 0 0 6 ) © 2017 Juan Llanos
  18. 18. F AT F R e p o r t o n N e w P a y m e n t M e t h o d s ( 2 0 1 3 )
  19. 19. F AT F R e p o r t o n V i r t u a l C u r r e n c i e s ( 2 0 1 4 )
  20. 20. © 2017 Juan Llanos
  21. 21. A M L / C F T TODAY - national security and crime deterrence are top public policy priorities - unintended consequence → strict identification standards facilitate fiscal surveillance but create financial exclusion of underprivileged - stick over carrot (heavy hand) TOMORROW - carrot over stick (lighter hand) - measure proportion and results - layered, zero-knowledge-based, identity systems could meet both law enforcement and civil liberties goals © 2017 Juan Llanos
  22. 22. I D E N T I T Y TODAY - Countries have the monopoly over a person’s identity (mostly, for fiscal and law enforcement reasons) - Not all countries have reliable identification systems - Government-issued IDs are not necessarily effective in deterring crime/unmistakably identifying humans TOMORROW - Alternative identity systems that transcend borders and facilitate identification of previously disenfranchised persons - Identity systems that balance both transparency and privacy and are controlled by the user (self-sovereign) © 2017 Juan Llanos
  23. 23. WHAT IF…? WHY NOT…? © 2017 Juan Llanos
  24. 24. Source: ID2020
  25. 25. Source: ID2020
  26. 26. © 2017 ConsenSys
  27. 27. KYC Challenges K Y C i s s l o w, r e p e t i t i v e , a n d e x p e n s i v e A M L i s p r e d o m i n a n t l y r e a c t i v e , o n l y i d e n t i f y i n g d a m a g e a f t e r t h e f a c t Client challenges ● Repeat onboarding ● Processing delay ● Lack of portability and control ● Varying verification levels Service Provider challenges ● Customer acquisition costs ● Compliance / due diligence risks ● Data cleansing and integrity ● Watch lists and monitoring Security & Privacy challenges ● Data privacy requirements ● Cyber-attacks and identity theft ● Personnel permissions ● Customer consent Slow ReactiveExpensiveRepetitive Error-prone © 2017 ConsenSys
  28. 28. ` © 2017 ConsenSys
  29. 29. • Regulator y/LE expectations promote the replication of identities (1-to-1 between regulated entity & regulator) • Regulators should allow for shared platforms (‘clearing houses’) (logically centralized but functionally decentralized solutions) © 2017 Juan Llanos
  30. 30. RETHINK REDEFINE REINVENT © 2017 Juan Llanos
  31. 31. (SELF-)REGULATION BY design feature crypto-economics © 2017 Juan Llanos
  32. 32. DISTRIBUTED LEDGER SMART CONTRACTS CRYPTO TOKENS © 2017 Juan Llanos
  33. 33. L AW M A K I N G R U L E M A K I N G B U S I N E S S C R E AT I O N VA L U E C R E AT I O N M A R K E T C R E AT I O N B L O C K C H A I N D E M O C R A T I Z E S © 2017 Juan Llanos
  34. 34. PRUDENTIAL REGULATION PRE-BLOCKCHAIN PRUDENTIAL REGULATION POST-BLOCKCHAIN a) Paper-based rulemaking b) Ex-post-facto monitoring and auditing c) Analog enforcement d) No feedback on impact or proportion e) Over-regulation f) Us vs Them a) Digital rulemaking b) Real-time monitoring and auditing c) Algorithmic enforcement d) Feedback on impact or proportion e) Optimized regulation f) Private-public collaboration
  35. 35. FINANCIAL CRIMEFIGHTING PRE-BLOCKCHAIN FINANCIAL CRIMEFIGHTING POST-BLOCKCHAIN a) Intra-company analysis only (silos) b) De jure (analog) Information sharing c) thick (upfront) KYC d) anonymity = anathema e) deputized financial institutions (lopsided allocation of liability) f) subjectivity a) inter-company analysis (network) b) (digital) information sharing by default c) thin KYC (just the proofs) d) pseudonymity/privacy = standard e) distributed allocation of liability f) objectivity (minimized subjectivity)
  36. 36. V I N A Y G U P T A Te c h n i c a l c a p i t a l i s m ( ” Te c h C a p ” ) à v a s t d e c i s i o n s m a d e b y s o f t w a r e . I n 1 5 y e a r s , s o f t w a r e c o u l d h a v e c o d i f i e d t h e e n t i r e U C C a n d h u m a n s ( l a w y e r s ) o n l y m a n a g e t h e e x c e p t i o n s . P r e c o g n i t i v e c o m p l i a n c e à c h e c k s t h a t e v e r y a c t i o n i s l e g a l b e f o r e e x e c u t i n g i t ; p r e d i c t s o u t c o m e s a n d p r e v e n t s m a j o r i t y o f t r a n s a c t i o n s f r o m e n d i n g i n c o u r t . ” “automate away the cost of running civilization” mechanize rules & compliance remove the need to remember the law provide freelance governance-as-a-ser vice produce smar t statutes / digital law create software definitions of law © 2017 Juan Llanos
  37. 37. N I C K S Z A B O S o c i a l s c a l a b i l i t y : h u m a n b r a i n s à f l a t o v e r h i s t o r y. N o t c o m p u t e r s : t h e y k e e p g r o w i n g . We ’ r e b e i n g a s u r p l u s o f r e s o u r c e s , b u t w e ’ r e s t i l l d o i n g t h i n g s w i t h h u m a n b r a i n s . C a n w e t a k e a d v a n t a g e o f t h i s g r e a t s u r p l u s ? ! A r e t h e r e w a y s t o m a k e t h e m a c h i n e l e s s e f f i c i e n t , b u t a l l o w i t t o p r o v i d e a c a p a b i l i t y t h a t s o l v e s a b i g h u m a n p r o b l e m ( e f f e c t i v e l y u p g r a d i n g t h e h u m a n b r a i n ) ? à Tr a d i n g c o m p u t a t i o n a l s c a l a b i l i t y f o r s o c i a l s c a l a b i l i t y. “lower our vulnerability to the whims of strangers” " w e t c o d e , " i n t e r p r e t e d b y t h e b r a i n v s . " d r y c o d e , " i n t e r p r e t e d b y c o m p u t e r s ” ’ S m a r t c o n t r a c t s ’ a r e a b o u t v e r i f y i n g a p e r f o r m a n c e , a n d t h e n a u t o m a t i n g i t . T h e n t h e r e ’s t h e c o n d i t i o n s i n t h e m i d d l e . ” © 2017 Juan Llanos
  38. 38. SPIRIT OVER LETTER o u tco me s a nd p o l icy g o a l s firs t SUBSTANCE OVER FORM stre ng the n p ro d u ct a nd o rg a niz a tio n fro m within ENGINEERS OVER LAWYERS to cre a te a l g o rithmic o ve rs ig ht s y ste ms
  39. 39. © 2017 Juan Llanos @JuanLlanos

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