Disintermediation Economics

Smart contract is a significant innovation for the performance of industrial, commercial and administrative tasks. The concept of smart contracts is well developed in the field of Computer Science but its uses in the market and the legal services are not as mature yet. Smart contracts bring challenges in both economic and legal terms. This chapter describes what a smart contract is and the possibilities of use. Then it explores the role of smart contracts in the economic theory focusing particularly on the topics of contract completeness and dynamic contracting. Functional inefficiencies and limitations in contract and algorithmic design are persistent in both the analogue and the smart contracts and prohibit contract completeness in both the versions. On the other hand, the static nature of smart contracts prohibits dynamic contracting between the economic agents. This can be remedied with deviations from purely decentralized designs with the inclusion into the smart contracts of physical intermediaries (curators) and programmable intermediaries (oracles). Finally, the property of self-executability can be improved with Ricardian contracts that can add discretion and flexibility.

This chapter explores what blockchain means for corporates today and how they approach digital transformation leveraging blockchain concepts and technology. After a brief outlook on the blockchain market for business, we present a picture of how enterprise blockchain and digital assets are becoming part of their business model (how they create and deliver value) and their operational models (how they capture their value). Next, we look into how companies can build successful consortia, design enterprise blockchain solutions and engage with the innovation ecosystem. Finally, this chapter considers how corporations and markets can create business and operating models that become blockchain-complete.

Distributed ledgers offer new horizons of opportunity for the monetization of data, and new models whereby individual consumers gain more control over and benefit from their personal data, versus the predominant model of today that awards the greatest economic gains to the oligopoly platform companies. Understanding distributed data economics requires reviewing the lineage of data aggregation, the characteristics of legacy data economics, the rise of a new generation of data ecologies, and finally exploration of the potential of distributed data economics in the context of technology architecture, governance, societal implications, and distributed data policy. Data ethics and a framework for the related area of ethical artificial intelligence (and how it interacts with data) have not only moral implications, but real-world business impacts, as governments strengthen their responses to private sector activities in data monetization. Furthermore, as distributed data economies move from theory into practice, government policy interventions can smooth this transition.

The digital age is here. It is incumbent upon governments and the international community to explore how to marshall its benefits for the SDGs. Blockchain offers potential benefits for poverty, hunger, health, gender inequality, clean water, affordable clean energy, climate and partnerships for the global commons. 2019 saw the stabilizing and maturing of the Blockchain industry, becoming more about what the technology enables. 2020 will be the year that blockchain goes enterprise—research and development projects will bear results. The areas where major blockchain progress is taking place are as diverse as the applications they are creating. The global nature of Blockchain’s development can help distribute opportunities for wealth creation and economic development more widely than before. It is important for governments to develop the right policies to harness the potential benefits of this technology while mitigating its risks and potential for misuse. To do so, it is essential for countries to cooperate in order to share best practices and ensure interoperability. This chapter summarizes the many applications of Blockchain in contributing to widespread social transformation and enabling traction against the SDGs, focussing on emerging economies. It also discusses barriers and enabling factors to achieve such a transformation.

Since its inception in 2008, cryptocurrencies are gaining adoption globally. Even though its utility may vary, the primary purpose of cryptocurrencies is to provide some form of payment (or medium of exchange) in the digital world. As more use cases arise from the industry, cryptocurrencies and blockchain are no longer a niche topic. Educational institutions are introducing it into their curriculum, and governments are talking about it in parliament. In particular, governments are keen to determine if the underlying technologies can form the fundamentals to issue a Central Bank issued Digital Currency (CBDC). Will these forms of currency become the “New Money”? This paper sets out to explore the utility of cryptocurrencies and CBDC, their implications on the economy and the government’s ability to use monetary policy. We examine and compare the approaches to CBDCs suggested by various governments.

With the advent of the Satoshi Nakamoto whitepaper first released on 31 October 2008, the call for an “internet-based, decentralized payment system”, has spurred nothing short of a wave of innovation in the future of money and, critically, the movement of value (Nakamoto, Satoshi (pseudonymous), Bitcoin: A Peer-to-Peer Electronic Cash System, October 31, 2008). Some will argue the future of money is a revolution. What is becoming increasingly clear of virtual assets and the attendant technologies such as blockchain and distributed ledger technologies (DLT) that power them, is that this may be more of an evolutionary step, rather than a revolutionary one. The progress and maturation of digital currencies should be welcomed by a wide range of stakeholders. Over a maiden decade, the world observed the wave of cryptocurrencies, greed-fueled or shoddy initial coin offerings (ICOs) and basic risk management failures, give way to credible opportunities to add optionality and competition in payments and banking through sound privately issued digital currencies. This chapter will argue that privately issued digital currencies or so-called stablecoins (guarding against the fact that not all stablecoins are created equal), can play an important role in improving financial services and modernizing the underlying infrastructure that conveys valueThis infrastructure is vulnerable due to single point of failure designs, promotes financial exclusion and is not interoperable at population scale. From enhancing consumer choice to spurring responsible financial services innovation and operating within the realm of regulatory and prudential oversight, rather than undermining or circumventing it, an industry is coming of age. After all, the vast amount of money in circulation in the global economy is privately issued via the two-tier banking system, credit card issuers and payment services firms, which are now turning to cryptocurrencies as a part of their own digital transformation efforts. This much holds true for the advent and likelihood of widespread public sector issuance of digital versions of fiat money in the form of central bank digital currencies (CBDCs). Arguably, the so-called CBDCs are already in circulation today and a breakthrough class of privately issued digital currencies represents their growing circulation. For these innovations to thrive, irrespective of how or by whom a trusted digital currency is minted, broadly available, open, secure and interoperable payment rails are an important void in the digital commons that must be filled.

The chapter presents an overview of the European Commission’s flagship legislative proposals for a new regulatory framework for crypto-activities in the European Union (EU) and a pilot regime to facilitate DLT experimentation by market infrastructures. To provide some context for the proposals, the chapter reflects on some of the issues industry, regulators and supervisors have encountered in seeking to reconcile innovative DLT applications with EU and national financial services law. The chapter goes on to outline the key elements of the legislative proposals, which are intended to mitigate risks effectively and facilitate the scaling-up of DLT and crypto-asset applications in the EU.

The response in Asia to the emergence of crypto-assets has varied enormously intra-regionally. Developments in the larger capital markets have ranged from actively permissive industry-regulator partnering that has led to more granular regulation (Japan), to cautious approaches openly permitting industry development while applying existing laws where possible (Hong Kong), to banning specific activities while also promoting blockchain technology (Mainland China). After a review of the Asian narrative in section 1, the current status of regulation in Asia is summarized in section 2. Sections 3 and 4 address the hurdles to ecosystem development and question whether regulatory incrementalism is sustainable. The final section 5 reviews suggestions for policy development.

The law and political economy of decentralized digital ecosystems is the policy, economic and legal framework surrounding the convergence of Blockchain/Distributed Ledger Technologies, the Internet of Things, decentralized Artificial Intelligence and other emerging technologies. The key unifiers are the enablement of multi-level governance, the decentralized management of data and the distributed nature of the technologies. They will challenge the existing more centralized economic and data management model of today’s Internet and will provide self determination to citizens in the management of their data and transactions. A challenge for the implementation of these technologies is linked to their very essence, their decentralized nature. Much existing legislation was adopted in a time when more centralized models dominated. The article analyses the legal challenges of applying such legislation to decentralized digital technologies, and reflects on the use of regulatory sandboxes as well as novel legislation in order to enable innovation in the economy and society based on the application of these technologies.

The current efforts to provide institutional and legal certainty around blockchain-based innovative solutions reflect the status of the technology as it appears in the market today, which emphasizes more the “disintermediation” properties of the DLTs and less the “decentralization” properties. With the improvement of the design architectures, the algorithmic efficiency of the smart contracts and the blending of DLTs with machine learning we expect “decentralized autonomous organizations” to become more efficient over time and reach more strategic industries. This will transform market structures, business and operational models and it is expected to have strong macroeconomic effects. This will pose significant challenges to the regulator. A principles-based approach is sine qua non for creating a sustainable competitive advantage in order for an economy to leverage the benefits of blockchain. European Union is a pioneer regulator in the space of distributed ledgers. It adopts a technologically neutral approach. We believe that this is an appropriate approach however technological neutrality should be coupled with business model neutrality. This is a requirement for making sure that the regulator will not be directed by short-term considerations and constraints. The European Parliament’s Blockchain Resolution is a text that reflected the views of how to approach, from a regulatory point of view, a technology which is still evolving. This text is the basis for the regulatory initiatives of the EU in blockchain-related topics and became a reference point for many other jurisdictions around the world. This chapter presents the views of the Rapporteur of the Blockchain Resolution and indicates the significance of creating demand for a new technology from a Political Economy point of view.

This paper discusses blockchain from a public sector perspective in Europe where interest in its adoption is accelerating. Having this goal in mind, the European Commission is currently deploying a common European Blockchain Services Infrastructure in close collaboration with the Member States, in addition to specific funding provided by EU Programmes. Despite being a recent technology—its origins date back to 2008—blockchain builds on classical trust enabling technologies to offer novel functionalities that open new possibilities for creating value for society. In the public sector, this happens via improved processes (internal focus) and services provided (external focus). In short, blockchain-based solutions have the potential to increase significantly the rate of automation and modernization within the public sector in compliance to Europe’s specific legal constraints, in particular when it comes to ensuring the authenticity of information in digital format.

Many smart contract applications—or more precisely blockchain-based digital ledger technologies (DLTs) proliferate. And yet, without accounting for the identity dimension and the different authentication regimes, there is little chance that these technologies will gain widespread use, and their disruptive innovation potential will not be realized. A growing number of digital interactions in which we engage online require more trust and more security; choosing the right identity technologies and data policy safeguards is an important policy choice. Digital wallets are part of our proposed solution: based on disposable identities tied to events and timelines. We explain why identity technologies matter. We describe the communication network architectures and functionalities. We show how EU Treaty legislation safeguards the important elements of this identity framework. We give examples of self-sovereign identity, and other solutions adopted by EU Member States. We conclude that successful deployment requires an EU legislative and regulatory framework fit for the digital society. The digital identity problem starts from the perspective of serving half a billion individual citizens, and inclusion requires public policy that strongly supports it.