The following are the outputs of the captioning taken during an IGF virtual intervention. Although it is largely accurate, in some cases it may be incomplete or inaccurate due to inaudible passages or transcription errors. It is posted as an aid, but should not be treated as an authoritative record.
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>> PIOTR RUTKOWSKI: Hello, everybody. I'm representing the organizers. We have the group of the different organizations which come to the same conclusion to have this debate today.
I personally advise the Polish government on blockchain policy, and I also try to organize a dialogue with business. So I'm also the -- participate in the creation of the European debate in the policy group of European Blockchain Partnership.
I would extend my warm welcome to our panelists and participants. Especially to those who have not been put off by today's difficulties of connecting online.
It is -- it seems blocking the possibilities of discussing internet freedoms by somebody shows that attitudes towards this freedom is really complex problem.
Our idea for this session is based on two assumptions. The one is that there is a clear need for regulatory challenges for blockchain. The second is the community of internet people should realize that the blockchain have changed, really changed. I would like to give the space for the moderating the discussion to Jacek. Welcome, Jacek.
>> MODERATOR: Thank you, Piotr. Welcome, everyone. It is a great pleasure to moderate this event. The Internet Governance Forum is an excellent conference and has important topics.
Yet I dare to say that the topic that we will be discussing at this panel is one of the most important ones and makes me very happy that we have this opportunity to devote some time at this key event to the topic blockchain and crypto.
The topic is How to Govern Decentralized Digital Public Goods: Blockchains Between Innovation and Regulation. I want to thank the organizers for proposing this topic as well as inviting excellent panel participants. They represent the variety of perspectives and also a variety of time zones. I will want them to introduce themselves. Please everyone say a few words about yourselves, and I will start.
So as I said, my name is Jacek Czarnecki. I'm currently spending this year at Harvard Law School, but I spent the last couple of years in the crypto space working primarily for a project known as MakerDAO which is redefining the future of digital money. And I had the opportunity to work with many fantastic projects in the blockchain and crypto space which really define the future of the internet.
And personally I'm convinced that this is the space that is going to define the future of the internet, and I hope to discuss this on this panel as well.
And I will have the participants also introduce yourselves. Steven, do you want to start?
>> STEVEN BECKER: Sure. Thank you very much, Jacek.
To begin, my name is Steven Becker. And to tell you where I'm from, I'm going to have to start with the similar journey to what Jacek has just been talking about.
I was previously the President and CEO of The Maker Foundation which developed and deployed MakerDAO as Jacek just touched upon. And MakerDAO really is a project that is all about generating credit. It's all about generating a stable coin, also a decentralized stable coin that really kicked off the whole concept of DeFi. Sometimes I feel like I'm being a bit arrogant when I say this, but I really believe that MakerDAO is the vanguard of DeFi.
Currently, my role is as CEO of a company called UDHC. And why it's so important to tell you about MakerDAO is because the UDHC is bringing DeFi to the mainstream. We're looking at the technology and the developments that basically bridges this traditional finance to the decentralized world so that we can create this new version of finance that not only is more inclusive and open but more effective and efficient. Thank you, Jacek.
>> MODERATOR: Thank you, Steven. Aya, do you want to go next?
>> AYAKO MIYAGUCHI: Sure, thank you. Hello, everyone. My name is Aya Miyaguchi.
I am Executive Director of the Ethereum Foundation. I won't talk about what Ethereum is to start, that would take too much time. The Ethereum Foundation, what we do is set forth everything in the ecosystem that EF, the Ethereum Foundation does for the Ethereum.
We support this open source project. Mainly for the platform layer which we believe is a common good. So when no one knows how to support this development research in a healthy way, so we do it -- that is the role that we are trying to do. And then also, you know, we encourage others to kind of join us together.
We have multiple projects including funding different projects that wouldn't be funded because it is a public work.
And including education, including coordination. Many things that doesn't happen because there is no one company who owns it. There is no one CEO who is managing the whole development concept. So that's simply what we do.
I have been also involved in some regulatory discussions in my previous work.
Yeah. And we recently as the EF, we try to kind of support advocacy efforts including kind of like you know, technology is getting more known, but the details are not really well known. And it is not like well-educated which again, again, kind of like a decentralized way of work. But we are trying to support the groups who are doing educational work, talking to the policy makers and regulators and because that is very important, I know the importance of that because of my experience, too.
So I guess that is my interaction. Thank you for having me.
>> MODERATOR: Perfect. Thanks so much, Aya. Primavera, do you want to introduce yourself?
>> PRIMAVERA DE FILIPPI: Yeah, hi. I'm Primavera De Filippi at the CNRS in Paris and I'm associate at the Beckman Client Center at Harvard Law School. I have been in the crypto space since like many years now starting 2013.
I also have been involved in a variety of blockchain-based projects starting with BackFeed in 2015 and then I was involved in the early days of DAOstack which was a project to create platforms for decentralized organization and this we did collaboration.
And then I also founded COALA which is an international network of researchers, lawyers and engineers and entrepreneurs in the blockchain space which are interested in exploring how can we bridge the gap between the blockchain systems and more institutional legal systems.
And then finally I'm currently working on a European project which is aimed at looking at how we can use blockchain technologies not as a way of bypassing institutions but rather as a way for institutions, both public and private, to adopt this technology as a way to enhance transparency, accountability and confidence in order to eventually re-establish or make it easier to re-establish relationship of trust within those institutions because of the greater confidence with it.
>> MODERATOR: That's great. Thank you. Yuta?
>> YUTA TAKANASHI: My name is Yuta Takanashi. I'm from Japan Financial Services Agency, the Japanese integrated financial regulator.
I think it's great honor to be invited to this session with distinguished panelists. I currently serve as the director for international data strategy and policy managing teams engaging in work including crypto assets, stable coin and decentralized finance.
And myself I represent JFSA various working groups in the financial stability in this field. And I also participate in network in Beijing for commerce in the blockchain based financial system. Actually for a year that it is quite challenging to deal with DeFi because our contributory framework may not work well in that so we may need to consider new ways to achieve our regulatory goals. But it is very new system and new like kind of a new creatures for us.
So first we need to understand what is happening and how this technology works. And also how we can like manage the risks associated which will result and how we think innovation. So I believe that we are currently in the critical moment in designing future of finance and the future of the internet and we need to have the more holistic kind of dialogue to solve issues unique to decentralized finance in collaborative manner among creators, developers, businesses and Civil Society at large.
And I think it is lessons learned from the experience from the internet may help us so discussing this issue at this Internet Governance Forum has kind of special meaning in this sense in regards to discussing this very important and very timely topic. Thank you.
>> MODERATOR: Thank you very much, Yuta. And Lukas, please introduce yourself.
>> LUKAS REPA: Thank you very much. And also for me it's an honor to be here. It's a pleasure to be with such a distinguished panel. My name is Lukas Repa. I'm a civil servant at the European Commission working in the Directorate General Connect.
My responsibility is to see where blockchain technologies can be used in our economy to support it with all tools that we have, but also to work with our colleagues in the financial services sector on the regulation of crypto assets, decentralized finance and so forth, contributing the technology angle.
I think, as Yuta has already said, it is a challenge at some times to look at the DeFi phenomenon from a regulatory perspective because, indeed, we are no longer facing a known intermediary, but we are forcing smart contracts, algorithms that are completely self-executing, so this is a completely new phenomenon for regulators.
Nonetheless, despite the challenge we also point to the potential and I'm excited to discuss this today with this distinguished panel. Thank you for having us.
>> MODERATOR: Thank you so much, Lukas. I'm again, just want to underline that I'm very happy to have all of you on the panel not only because I met all of you at different stages over the past few years, but also I think that you are the best possible panel to discuss this important topic.
Let me start with a very short introduction to the topic in which I will just try over like two or three minutes answer the question why is that important. Because blockchain, this is something that is a recurring topic on many conferences and events over many years.
And for many, this is a topic that everyone has heard about it, but no one has seen it in practice. Everyone has some crypto currencies but blockchain for many remains a word which holds or involves certain promises, sometimes very bold and important promises but with no practical applications. This is the perception many have about this technology.
And it is important, very important to understand that this is not true anymore. Actually, there are thousands of projects, crypto space is entering the mainstream and involved in which this is actually happening such as DeFi or NFPs. And I think that what is probably most telling about where the space is going and also explains the phenomenon out beyond the distinction between blockchain and crypto currencies is this notion of Web 3.0 as a new stage in the development of the internet which can be allowed by the progress in the development of blockchains and crypto technologies.
So we had Web 1.0 which was about reading data, about being able to access information. We had Web 2.0, which was all about writing and sharing information. And we had social media as a key component of the space of the development of the internet.
And now what we talk about, and this is increasingly popular term in the crypto and blockchain space, is Web 3 which is about value. Not just data, but value and also ownership.
So from this perspective Web 3 has allowed first by crypto currencies, then the obligations of blockchain technologies including DeFi and NFTs, is this new stage in the development of internet.
And this is why it's so important to discuss this at the event such as the Internet Governance Forum.
Personally I'm convinced that decentralization as we know it from crypto currency such as bitcoin is coming. It is clear that this notion of decentralization is being embraced by many industries at the moment. Really spilling over. At the same time, this is invisible to many.
And this is different. Primarily different because crypto and blockchain and Web 3, these are catalogued by startups and the dependent projects, not that much by the public sector or big corporates. These are being developed in different ways as decentralization kind of makes it necessary to use alternative forms of development and incorporation such as decentralized autonomous organizations, DAOs.
So in a way we see the first stage of the development of the internet as completely independent alternative one which is rising just next to us, just next to the entire internet and technology space as we know this.
This is being represented by many technologies such as Ethereum which are, as what Aya already said in her introduction and what we see in the plenary title is very accurate, this is about building some decentralized public groups. Really decentralized networks which are basis for other projects more or less decentralized to develop and to change various economic or social institutions as we know them.
So this is something I was able to see while working as a lawyer in this space for many years that we see this independent space emerging, growing at the same time remaining, as I said, ultimate invisible to the current traditional work.
At this point we still have the chance to reconcile those two. This is what Primavera said in her introduction. We have an opportunity to work with society and make it ready for the revolution that is coming from Web 3, from the decentralization, the internet of value and ownership which does not require middleman intermediaries. This is why it is important, and I'm very happy to discuss these topics with speakers on this panel.
And let me go with the first question which I have to all of you. As I said about the crypto industry, Web 3 is on the rise and quickly goes into beyond financial applications and beyond crypto currencies and beyond decentralized finance into media, art, culture, as this is evidenced by phenomenon such as NFTs.
But it also goes into new infrastructures for distributed cyberspace, and this is especially clear in the Ethereum space where we see the various types of applications emerging and getting very significant traction such as distributed domain systems or layered to the rollups which allow for greater stability and even foster development of projects.
And many argue that it is not only necessary to remove legal obstacles for this new phenomenon of embracing decentralization, they say that we even need a completely new regulatory framework for Web 3. The claim is that phenomenon such as decentralized autonomous organizations, so ways of human cooperation natively on the internet with token-based governance systems, these require a completely new approach in terms of regulation.
I wanted to ask you how active should the States be in regulation Web 3? Is it about just establishing some broad frameworks and allowing the space to develop by itself? Or what is required is active engagement in technology, technology development and implementation including public funding for such initiatives?
And I want to start the answers to this question with Yuta who has some excellent experience in the public sector.
>> YUTA TAKANASHI: Thank you for the very interesting question.
So actually from my personal view is that if we don't like this phenomenon basically we cannot stop this because the decentralized finance, the decentralized system, it is permissionless and open to everyone and autonomous and so it is anonymous. So there is no way for regulators to completely stop this development.
And also I know that very clever and very like innovative people comes into this space and this will create something good for society and so we shouldn't stop this development.
But at the same time, I think decentralized system has unique like aspect that makes it difficult for regulators. For instance, stability or like consumer protection or preventing financial crimes, this kind of goal is still very relevant even in the decentralized system.
So we need to have opportunities pause because it is kind of the public good for the society without having (?) or without any like protection for consumers or financial crisis may destroy the society so still we need to achieve our goals.
But the programs have, so as Lukas and I have mentioned, this is very completely new kind of phenomenon we are facing. In the past it is relatively easy for us to get just regulating banks or insurance companies as intermediary and apply the regulation and impose the regulation on them.
It is relatively simple. But in the decentralized system it is more complicated and sometimes it is still difficult to find the target to regulate.
So we need to change our mindset, as Aya mentioned, on how we can regulate or at least achieve our goals in the Web 3 with decentralized finance is maybe looks very different from our current model.
Like I like Primavera's book "Blockchain and the Law", and I read that book three times. And I think the role is very interesting and concept and it may be necessary for us to think about how we can utilize architecture.
But at this moment currently it is quite like challenging to imagine how this will work with our current regulatory model where our country get different model.
So we need to like have extensive discussion with regulators, engineers and developers and academia and users and Civil Society and all kind of people in the system to find out the ultimate way to achieve the regulatory goals.
I don't -- I shouldn't say regulatory goals. That is the goal of the society. And have some common understanding of what should the future of finance look like and what the optimal regulatory control especially in the Web 3 financing. And then find out a way to achieve these goals.
Like maybe combination of legal kind of goal and architecture or maybe the market. But still we agree in the very early stage in this discussion. And if we fail to have the dialogue among the stakeholders, it may be possible that because the regulators have only the regulation, so we need to utilize tools we have. Regulation to achieve our regulatory goals as much as possible. This will greatly affect the industry and the community of the decentralized finance and may have disruptive influence.
I don't have these results so we should have core understanding in the dialogue as much as possible to find out the new ways to achieve our regulatory goals or our social goals each.
>> MODERATOR: Thanks so much, Yuta. This is certainly challenging to be at the forefront from the public sector. And I think that everyone appreciates your view on this topic and the Japanese FSA in general.
And Aya, you mentioned the advocacy efforts of the Ethereum Foundation, especially recently. Please tell us, what is your message to the public sector and the regulators and what is your idea for approaching the emerging Web 3?
>> AYATO MIYAGUCHI: Thank you, yes. So I have been in the space for a while, maybe as long as Primavera has been, too. But I think, you know, looking at topics like today, I often feel always that the question starts with what problems Web 3 is making.
But I think it should start with what problems Web 3 is solving. Like there is a reason why Web 3 technology was developed. What were the problems that the world had before Web 3 was invented? Why did someone even think about this? And why do we care about decentralization?
Like without having that process or thinking, it is impossible to actually regulate the space and also the question of I think it is also dependent on what are the laws of regulation? And that is also -- sometimes it is confusing.
And then because, first of all, when you say public good, I don't see most of the thing in blockchain are not public goods. When you say public goods, that are something like not owned by a business, it is a public good.
So most of the stuff on like in box internet is not public good. That is the public good work we care so much because I'm sure we are almost like helping to solve problems in the world by creating this public good.
It could be built by government. It could be built by someone else. But someone needs to do this work. That is how we feel, or our people feel.
And then in -- so instead of like a focusing on the problems like anything can have problems when some project is trying to work. So it would be up to, of course, have to watch like something bad so that something bad doesn't happen. But that is true for anything. So I don't think this is something that is superficial about Web 3 things just because it is -- it maybe feel that all daunting because a lot of works are being done so can't just monitor one player. But it is not built for a bad intention. It is built that way to really solve a lot of the existing problems of the world.
So I think this has the future of solving a lot of challenges including new nation and those are very small so just because the EF doesn't really control things we didn't expect anything to become like big or popular. So we had no idea how NFC was going to bloom this year.
But it also can be an opportunity for regular people to find, you know, like, kind of this is an opportunity for anyone to learn or hear about this. Like, for example, when we say to give micro insurance to farmers in sub-Saharan Africa in a very new way which is like has been almost impossible because a lot of inefficiency and middleman and like a technical challenges or infrastructure challenges this project had before.
So like I want -- I want it for everyone not just for regulators or policy makers but I want everyone to understand this is giving an opportunity to do things differently and it is just one way, you know, it doesn't solve everything.
And then also technology doesn't replace laws. It is more like a complement. So human brain, which I still believe is way more sophisticated, have to work together with coding so that it complements each other. Because both have strengths and weaknesses which I can talk more about.
The human makes mistakes and can have bad intentions. Coding executes exactly as you code, which is great. But at the same time, it doesn't have human intelligence such as reading things between lines and then realize a bug before something happens.
So we still have to work together. And fear of code replacing everything, that is not happening for sure. But also that should not happen because like for a human, human work is very, very important. So that's kind of a confusing part when people talk about online -- sorry, on chain governance or off chain governance and all that.
It is -- I think that the part of regulation that needs to happen is what part is still very different idea stage, what part is in experiment stage. Which I think most of the stuff is still in an experiment stage.
That means I think -- I hope policy makers kind of like, you know, make effort to learn about what is happening very deeply which requires technical understanding and everything. And then after that we choose to make the decision where to actually watch or where to actually let -- like let things still develop.
And then a lot of things are still experiments and I think it's very hard when something is regulated too much at this stage because then that would kill all of the opportunities to solve the problems of the world together.
>> MODERATOR: Thanks so much. I think that this is a great perspective and I totally agree with you with respect to first not limiting the perspective to just specific products or industries which are emerging.
And this is very clear especially like Web 3 inherits the financial goods of the crypto currencies and now also DeFi. And this is probably not right to just apply the fair risk copious financial regulator perspective to all of the financial models which web 3.0 brings, that is for sure. And also putting this into the time perspective and understanding that this is long development extended over time and just taking a current snapshot of how things work is not going to contribute to a good regulatory framework. And I think that these are excellent remarks.
Lukas, now I want to turn to you. And I think that you have a particularly interesting representative in representing the EU on this panel because the EU is actually a very interesting governance implementation, complex governance which embraces decentralization.
So I'm particularly interested in your thoughts about how the regulators and policy makers should approach the emerging Web 3 phenomenon.
>> LUKAS REPA: Thank you very much, Jacek. And I will try to build a little bit on what Yuta and Aya have already said. They already said a lot and I heard a good number of messages for regulators to pick on a little bit. I think perhaps let me break down my observations in two big clusters.
I think the first point would perhaps be do we need to think about the regulation of decentralized finance. Or do we already have a regulatory framework that is sufficient to capture this new phenomenon? And if it is necessary to legislate or regulate when is the best moment?
So when it comes to the first question, I think when we look at decentralized finance we have to think about the first based principles. Regulation is always there for a good reason. Regulation is there to protect certain public goods such as the protection of minors, the protections of the weaker in our society, consumer protection. Financial protection very often is geared towards giving people enough information to understand the risks they take in investing, protecting one against things.
And when we look at decentralized finance I think what we struggle with is that by accessing these completely decentralized systems that work only on the basis of algorithms, smart contracts and so forth, consumers that connect to the systems typically do not get the same type of information you could get in centralized finance where you have to go through an intermediary bank or broker, somebody else is providing the service.
So one of the first basic principles that we're asking ourselves is, is this emerging new financial world in the internet that everybody with a wallet can access a world where consumers can get sufficient information to make a learned decision on the risks they want to take or the opportunities they want to grasp?
Another big concept is in these first basis principles is, of course, geared towards the protection against money laundering, terrorism financing. Some of the interventions we have seen already in the emerging space of decentralized finance was pressure of regulators on decentralized finance to abide by anti money laundering laws. This is a challenge in a completely decentralized world.
But the question, indeed, is where are we in the stage of the evolution of this new emerging world? Are we already at the stage where we need to take a pen and start drawing a new law? Or is this where we should say do no harm is the best principle, let this new world first evolve and then let's see where to intervene.
I think that is a very difficult balancing exercise for regulators. Both the European Union and the United States of America have taken the time to regulate the internet. Some would argue we have taken too much time. I think as a general principle it's a good principle to say let's not overregulate an emerging industry in the beginning.
We are seeing that DeFi has exploded certainly. MakerDAO, 2017, $1 million of transactions. You were the frontrunners. But there wasn't so much money there. If you look at the market today, $110 billion in total value and this market is already showing a trend that we are facing a very rapid evolution.
So regulators will have to look carefully into this. But a lot of the parameters for this new web 3.0 are still so uncertain. We have seen that nonfungible tokens have seen a certain take-up. But where is -- how far does it go? Does it stop at artwork, or will we see any of this evolving further? Decentralized finance, what are really the efficiency gains compared to fully automated exchanges?
We already have today exchanges, intermediaries that are operating with fully automated order books so what is the efficiency gain of taking away this fully automated order book with the regulated intermediary compared to one that is completely decentralized? Is it really the big step change?
Where we would see really the big opportunities of decentralized finance in the first place are situations like examples that Aya mentioned. These are areas in our world where we do not have any intermediaries in the first place, where there are no matchmakers between those that want to provide finance and those that need finance, be it micro credits, be it micro insurance. And there the decentralized world can really bring enormous and undaunted benefits.
Where other parts of the world we already have very established efficient intermediaries that are subject to regulation, the efficiency defense of decentralization becomes a more complex one. So one would need to look into the concrete situation of the environment where the regulation is needed also to determine whether it is needed and what it should tackle.
>> MODERATOR: Thanks so much, Lukas. I think that this calibrated approach we should actually look at we want to regulate first before adopting a specific structure is an excellent one.
Now I want to turn to Steven who has an excellent experience in discussing these topics with policy makers and regulators around the world and international organizations.
What are your thoughts, Steven?
>> STEVEN BECKER: Thank you, Jacek. Yeah, this one is interesting.
So within the UDHC what we are looking to do is we are looking to create what I call compliance arc of decentralization.
If you think about the phrase clearly, it basically encapsulates a lot of what has already been spoken about. The one part is decentralization, the applicability, and also the way that it actually -- the way that a project starts from scratch and actually becomes decentralized. And then the important word in there was compliance.
When you think about compliance, it's all about saying well, what are the lanes that these projects, these ideas need to traverse in order to be able to not only develop but do it in such a way that makes sense for everybody?
So the one thing I do want to say is most distributed systems in Web 3 -- well, you know, to my mind is effectively it lends itself to not being requiring a more sort of focused or active regulation. But what it does, it sort of generalizes the concept that's already in the Web 2 space about the publisher versus platform regulatory paradigm. Where Web 3 sort of goes more into, think of it more like a service provider versus platform paradigm instead.
So if you think of it in terms of examples, something that we know from Web 2, especially the paradigm platform, you look at someone like Twitter who is trying to establish itself as more of a conduit of information for its users to publish information that it itself is not liable for, right? But if you consider Twitter as a publisher, then that company would fall under a different regulatory framework.
So the parallel in Web 3 would be something like a decentralized exchange, for example, where you see it as a platform because it really is just a conduit for user contributed liquidity. The important part here, and I'm going to touch on this briefly, is the decentralized part. That has to be consistent, that has to be well defined. Almost like a test needs to be applied to it.
But in this example of this decentralized exchange where you have a look at a platform, you could have an example of a whitelisted security. You know, think of a digital Tesla or digital Apple using a liquidity pool in the decks. And then that liquidity pool by itself becomes a type of mini exchange which would really make it possible for the security token issuer to be seen as a financial services provider. What that does then is it immediately establishes a framework where it no longer looks like a platform and actually looks like a service provider.
And that means that the regulatory frameworks that are currently in place can be used.
So there is actually quite a lot of regulation in place that is really applicable and can be applied to not only the centralized organizations that integrate and profit with Web 3 in the back end, but there is this I call it a new dimension to think of in that the concept of decentralized applications on blockchains creates this added infrastructure on top of the internet that really supports everyone including really those that do not want to use an intermediary and have agency in their own actions.
But at the end of the day, the regulatory tools that we have in place still work. All we need to do is really change the perspective when implementing them. And then that really is the case, you know, from a Web 3 and sort of regulatory interaction point of view.
>> MODERATOR: Thank you Steven. And what I particularly like about this is highlighting that the Web 3 is not coming from nowhere. It is actually like a logical step of developmental to the previous phases of the internet. And it benefits from the value which was generated before. It's like built on top of the services that already exist, just providing an additional layer of value because it allows for technology to exist on the internet.
Primavera, so what do you think about how the States should regulate web 3?
>> PRIMAVERA DE FILIPPI: Yeah, I have a very specific view.
And this is kind of like this is from actually doing a spot of the project. And my view is that there is this possible -- of course, Web 3 is subject to existing regulatory framework. The problem is that it is now difficult to regulate because there is no intermediary that can be easily identified.
So I think it is possible to try and find who are the closest intermediaries, but there is also the problem that when the cost of compliance are too high, then it might also encourage the creation of unmarked decentralized systems. And we can see it with DeFi, et cetera, and we have seen these back in the days as with the internet and the development of peer-to-peer file-sharing networks that tried to escape increasing regulations.
And so the idea of decentralization can also be a way of actually trying to not have to comply with these very difficult regulations sometimes, especially when the system is constructed as a decentralized system.
At the same time, so there is this kind of like place between decentralization and then regulation that has to regulate the decentralization structure and then being deployed as an answer. At the same time, it is also possible to adopt a more collaborative approach to actually incentivize regulatory compliance. And this can be done via functional equivalence or regulatory equivalence meaning that especially with blockchain technology it is possible to create technological guarantees that can actually achieve similar policy of regulatory objectives as existing regulatory framework.
And especially as regulation, especially in finance but in general is designed as a way of minimizing or distributing risk. If the risk that the regulation is intended to tackle can actually be reduced by technology, in particular with regard to counter activities and so forth, then it is possible if one adopts those technological guarantees to perhaps benefit from a lower formalities or regulatory burden.
And so for me, one interesting way in which government can actually tackle the regulation of this technology is actually by providing spaces which are, for instance, regulatory sandboxes inviting the actors that are operating in the space to actually identify solutions to let them explore ways in which the rule of good can actually implement the rule of law. But, of course, this needs legal incentives.
And I think this is especially relevant as more and more of those Web 3 applications are actually eager to interact with more established existing institutional frameworks and legal systems.
And so the incentive is by actually adopting specific technological guarantees, by finding technological differences which can be together as being functionally equivalent to specific regulation then they benefit from a lower regulatory burden because the policy objective is already resolved via the technological solution.
And on that note, I would like to mention the work that we have been doing with COALA with regard the DAO model law, for instance. And the idea was exactly that it is easy to contact a government to say here is how DAO needs to be implemented.
However, it is possible for a government to say if DAOs implement this particular set of criteria then we will recognize perhaps in some kind of limited, some legal personality or some kind of limited legal liability because the specific fields that are enshrining to the code of those smart contracts are actually achieving the same objective that existing code are intended to achieve.
And we are already seeing, for instance, like in Belgium which is now working on the implementation of DAOs worker bills, right, in order to help people that are working for DAOs to somehow be able to declare what they are doing.
And so the idea here is really like instead of trying to find ways to regulate the existing decentralized system, it is more like the carrot approach, which is we can provide specific incentives, legal incentives to fulfill specific requirements which we as regulators consider to be functionally equivalent to existing formalities, existing regulatory obligation but better achieved via technological means.
And then it is up for the blockchain developers and entrepreneurs to decide what actually I want to benefit from this lesser regulatory burden and therefore I will implement my systems in a way that actually comply with those requirements.
>> MODERATOR: Thanks so much, Primavera. That brings us directly to the second question which I think you have already answered in some way.
I wanted to ask about the governance of decentralized systems and the great challenges that it poses. Because like the early approach in Web 3 and in the crypto space was to apply the principle which you mentioned code law which is basically about not referring to the external legal system for anything and just relying on the code of specific structure for resolving problems that are emerging.
And the question was should the law adapt to architectures emerging from the distributed systems and go beyond the code as law approach and actually try to adopt the law, the actual law which would govern the structures. And I understand your carrot rather than stick approach, that makes a lot of sense to apply to the structure to kind of encourage them to come to the established legal system. Especially that all of those decentralized organizations in order to function in the real world and to interact with the real world they will probably need to play along the rules which means some form of interactions with legal systems.
So my question to everyone, if you could spend a maximum two minutes each for answering the question if code as law is enough. And if not, how the law can actually regulate decentralized structures.
To you, Primavera, just one follow-up question because you large answered this already. Do you think that the carrot is enough? So the stick is not needed at all to effectively govern these structures?
>> PRIMAVERA DE FILIPPI: Maybe I stopped? Yeah, I think this stick is always there in the sense that the existing regulatory frameworks are always there.
And if we can't identify specific intermediaries and there are of course specific intermediaries that can be held liable that, of course, needs to follow the regulations, then of course they would be subject to the stick.
For me, however, especially as we move towards increasing decentralized system that carrot would become the most effective tool. Because if we use the stick, the reaction might actually be destructive in the sense that the reaction might be the creation of even further decentralized and even systems that are harder to regulate.
Whereas if we actually adopt the carrot approach, then the ecosystem itself will try to come closer. And, of course, as there is more and more adoption there is an actual real desire by many blockchain based applications and DAOs and so forth to have a capacity to interact directly with the legal system. And this is a very strong incentive here, so this is very strong carrot. And of course the only way they can interact with those systems in a legally compliant way is that the legal system recognize them. And in order to recognize them, they might need to comply with specific regulation, but those regulation can be translated into specific technological guarantees.
And if the design is such as to comply with those guarantees, then they can benefit from this legal recognition and then they can interact with the legal system and then it is kind of a win-win for everyone.
>> MODERATOR: That totally makes sense to me. So now let me switch to the public sector.
And Yuta, your work partially at least has been focused on these topics as part of other initiatives. What are your thoughts about this?
>> YUTA TAKANASHI: Yeah, so to my understanding if the code is actually law, then we need to think about how we can create code.
Because usually the law reflects kind of politics and reflecting defined values and like solving the politics among different stakeholders and then create law. The real world was we need to solve the politics and we need to like reflect different values into the law.
And then if the code is law in the decentralized system, we need to invite like different people have different like values or like stakes into the process of the coding kind of thing. So designing the code itself.
So I -- at this moment in the decentralized system or Web 3 or decentralized finance, only the developers create code, and the code reflects their values. But it is still unclear whether this code reflects very different stakes or very different values in the similar way as the current legal system. Then we need to have some kind of the middle level where like regulation, the middle layer like low or like at least governance kind of thing to like actually like make the process of code developing more like a similar way as we are doing in the legal system or national system. So if the code becomes law in the decentralized system we need to have better label like the mechanism to define the values in the system.
At this moment this kind of mechanism is not in place so this will make some problems in the system. So like we understand that financial inclusion is very important, but, of course, we need to exclude someone from financial system like the terrorists or like criminals. But how we can decide who is the criminals and who is the terrorist in the decentralized system is very unclear.
So this kind of like different views, some people say the government shouldn't decide who is a criminal and who is a terrorist. But at least we need to think about how we can decide and how we can like distinguish between people who should access the financial system and who shouldn't access the financial system. This is kind of politics balancing between like privacy or traceability like different values, but no right and wrong.
But it -- we need to resolve these kind of conflict in the political system. If the code is law, this governance system should have some kind of mechanism to resolve these different values. So that is my position.
>> MODERATOR: Thanks so much. Staying conscious of time, I encourage very short responses to the question.
Aya, please go ahead and tell us if you have ever proposed some coding lessons to regulators.
>> AYATO MIYAGUCHI: Sure, yeah, I will keep it short.
As I said before, I don't think coding is replacing laws. It depends, right, because it's just a poll.
If lawyers or policy makers, whoever, decides to use coding for the purpose of regulating that you can do that. For example, Ethereum is a programmable blockchain, like you can program in any -- each application has each different governance system. It's like you can build it in any way. It is just a poll, right, how you want to make the governance is really up to the people. And they can really help the regulators to regulate, or this can help. But existing legal system have problems, we need to admit that.
And that is why there are new ways of governance or new ways like people call it smart contracts, but it is not really a contract, it is like coding is executing things. So that can totally supplement existing legal systems that are not working.
For example, like the COVID like restrictions and the whole like global working together is such a mess. And because the global coordination is really hard. So we need new technologies to help with that kind of coordination.
And like actual public work is perfect for cross-border coordination, too.
So it is just a supplemental tool for any system, not just legal system. It can help the legal system, too.
>> MODERATOR: Thanks so much. What do you think, Steven?
>> STEVEN BECKER: Being conscious of time, I want to keep this incredibly short.
I think this is just a change in perspective. It is simple. When you think about it, a lot of the systems are designed to work by themselves and about how folks choose to engage with these systems.
So consequently, the simplicity is this: If you decide to engage with one of these systems sitting on a permissions blockchain directly via a command line interface what you are doing is you're electing to engage directly with the code.
In that extent, code is law. Why? Because you have taken upon yourself to engage and you have taken sovereignty, your agency, you said I want to engage with this code and what comes with it comes with it.
I have opted out in this instance. I haven't opted out of being a citizen. I haven't opted out of anti money laundering counter terrorist or proliferation financing. I have opted out investing in consumer protection. That's what I've opted out on.
But if I decide to go and engage with one of these systems through a regulated front and/or front end controlled by a central party, then I have opted in, I have asked for my consumer protection, I've asked for my investor protection, and have basically acknowledged that I have the counter party to recourse to.
And that basically allows for the application of current regulation as we have it. I make it sound simple, but there is obviously a spectrum in between. And one of those aspects that really define the system is how decentralized this thing is that you are operating with and to what extent you are engaging at a level of code. Hopefully that was short enough.
>> MODERATOR:
>> MODERATOR: Perfect. Thank you. That is something that I think is one of the most important messages for regulators to understand the various layers and degrees of centralization or decentralization applicable to each of them.
Lukas, finally a question to you because I think the EU Commission's work on smart contracts and recognizing the novel ways of governance is particularly relevant.
What do you think?
>> LUKAS REPA: Well, generally speaking, I think we have seen the technologies very often operate at the beginning in a legal vacuum. This is not the first time.
Although the phenomenon of the centralized finance is, of course, novel. And over time the question is what did that -- is it technology that's the law or is it rather the law that has to adapt to the technology.
I think the answer is that very often it is a two-way direction. So if actors in completely decentralized systems want to have the perfect benefits, certain benefits that exist today for centralized actors such as limited liability in partnerships, then they will have to point a regulatory access point to speak to regulate in some form.
If they don't want to operate in this framework, they will have certain disadvantages that will work in a different way.
When we as European policy makers look at this phenomenon, we have every interest to seize the opportunities to support the developments here with an enabling legal framework. An enabling legal framework, for instance, by creating a legal certainty for legal transactions in decentralized systems.
For NFDs representing physical assets, how do we transfer ownership with NFDs in the real world and so forth. There is a lot to be done for policy makers, but there is also a lot of thinking that should go on in the fully decentralized world because there are legitimate interests and my colleague Yuta has referred to we have the democracy, we have the rule of law, we have codes. If they completely bypass the new financial system society will find a way to react to that. So it is I think in the best interests of the industry to take a step forward and also for the policy makers to have an open ear and to listen to those that bring forward the innovation.
>> MODERATOR: Thanks so much, Lukas. I think this is an excellent summary and words to finish our panel.
Thanks so much to all of the speakers on the panel and also to the organizers for having us. Wishing you a fruitful day of other discussions on the future and governance of internet. Thank you.