As enterprises and governments get serious about adopting Blockchains and other DLT (Decentralized Ledger Technologies), policy makers are beginning to pay attention. What are they key areas they should be focusing on? What policies will drive the adoption of this technology? Why should the policy markers act? and How? - A few key takeaways from participating in a workshop on National Strategy for Blockchains...

Why should policy makers care?

Perhaps the simplest way to think about Blockchains is as a lubricant - it reduces friction in transactions. In B2B transactions (e.g. supply chains), G2C (Government to Citizen) transactions (e.g. public service delivery) and in G2B transactions (e.g. ease of doing business & regulatory compliance), Blockchains have the potential to reduce frictions.

Economists refer to this friction as transaction cost. A transaction cost is a cost in making any economic trade. In the last couple of decades, Internet and related technologies have reduced transaction costs: by creating electronic marketplaces, helping to realize cost reductions, increasing productivity, enabling e-procurement, integrating business processes and allowing for the creation of customized services. The next step in this path will be enabled by Blockchains & Distributed Ledger Technologies.

What can policy makers do to drive this? Here is my top-5 list:

1) Recognize Blockchain data as notarized & audited data

A Blockchain has value because it offers a secure and distributed mechanism for value exchange. As a ledger, Blockchain data records have the nice property of auditability (in geek-speak: immutability, tamper-evident, non-repudiation).

The first natural question then to ask is - Is the in-built auditability of Blockchain data recognized by a country's institutions? If an entity submits a digital record of Blockchain data to an institution (tax authority, court, customs), will this be acceptable? Shouldn't it be?

More generally think of all those scenarios where one is asked to submit a notarized , audited document - in a B2B/G2C/G2B setting. A policy which recognizes Blockchain data as inherently notarized / audited, can not only significantly reduce the friction in many such processes but also bring in transparency and reduce the potential of manipulation.

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In principle, if national regulations already recognized digitally signed documents, recognizing Blockchain data as notarized, audited is one additional step in the journey though several details need a clear policy stance e.g. Which blockchain data is recognized (public or permissioned blockchain)? In permissioned blockchains, who is the identity issuer? Do blockchain nodes need to be within national boundaries?

In my recent interactions, one key learning has been the stark difference in what Computer Scientists mean when they use the word "Smart Contract" and what Legal community understand when they hear the word "Smart Contract" - this is partly a problem of using an unfortunate name (perhaps a better name would be Self-Enforcing Contracts) and partly because the ecosystem is not ready to replace legal contracts.

Historically, the idea of Smart Contracts was proposed as a way to automate the transfer of value between entities when certain conditions are met. The conditions are specified as computer code and when evaluated will automatically transfer value. Smart Contracts are therefore best thought of as a programmable escrow. In a supply chain setting, for example, Service Level Agreements which carry bonuses or penalties can be automated with Smart Contracts - something we have been able to develop & deploy with our solution marketsN. The question that our clients ask is - are these contracts legally enforceable?  

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This then becomes the second question for policy makers -  What conditions must a Smart Contract satisfy so that the actions executed by it are legally enforceable? Should the Smart Contract itself have been audited by certified by qualified professionals? What happens in case of a dispute between the parties? How should Blockchain data be presented to human adjudicators to resolve such disputes?

3) Create a nuanced Crypto-Tokens policy

Besides the Blockchain-as-a-ledger and Smart-Contracts-on-Blockchain applications, Crypt0-currency is still a dirty word among policy formulators. To be sure, there are good reasons for policy makers to be wary - from the use of crypto-currencies to pay for contraband items to its use as an investment instrument for speculation.

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However, policy makers should not throw out the baby with the bath-water. A blanket ban on crypto-tokens (consciously calling this out separate from crypto-currencies) is counter productive. Any policy in this space requires a nuanced approach. A good place to start is the recent toolkit released by the WEF for policy makers on CBDC (Central Bank Digital Currencies)

4) Pragmatic Decentralization & Federated Blockchains

Decentralization is perhaps the word most frequently used word at any Blockchain conference. At the heart of the promise of Trust is Decentralization and yet the fundamental idea of decentralization is counter-intuitive to policy makers who are often used to thinking in terms of controls, regulations, enforcement, compliance - all artifacts of centralization of power.

The path forward seems to be pragmatism and acceptance that this is an evolutionary path which will require decentralization-purists and governments to find a mid-way path. The answer seems to lie in how Blockchains are governed / administered. This is a place where Blockchains can learn from political science.

I believe the recent trend towards Federated Blockchains is a promising one which recognizes that instead of one global blockchain, there will be many chains - each governed using a mechanism its stakeholders find suitable. Inter-connectivity among these chains will eventually create a federation of chains e.g. this is the approach we are adopting with marketsN. Our enterprise solution allows enterprises to setup private blockchains with their business partners (e.g. supply networks). At the same time, we allow such a private Blockchain network to be connected with the public Blockchain. This hybrid approach allows trusted transaction records on the private Blockchain to be shared, in a trusted way, with anyone in the world.

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For policy makers, the key policy question is setting standards to allow inter-operability across such chains. It might be prudent to recognize the cross-geography nature of such federations and collaborate with international standards bodies for this.

5) Nudge adoption in public sector

Finally, policy making, when accompanied with on-ground deployments is a powerful change agent. Policy makers can nudge civic bodies (at the city, regionald & national levels) to experiment with Blockchain base solutions - in a wide variety of ways. This decentralized approach multiple innovations to be experimented with before policies, standards and regulations are put in place. Such field deployments are critical not only to encourage innovation but also to derive contextualized learning upon which policies can be formulated.

Very often, the public sector lags the private sector in technology adoption. There is no reason why this should be so. Encouraging public sector to improve the life of citizens using technology (Blockchain, in this case) is a worthy cause and policy makers can do their part by nudging government departments and civic bodies to do so.

Summary

Blockchain is a technology for reducing friction in B2B, G2C and G2B transactions. It has the potential to increase efficiency, transparency & the ease of doing business. The following 5 areas deserve the attention of policy makers:

1) Recognize Blockchain data as notarized & audited data

2) Grant Legal Sanctity to Smart Contracts

3) Create a nuanced Crypto-Tokens policy

4) Support pragmatic decentralization & Federated Blockchains

5) Nudge adoption in public sector

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