Regulation Series by Siân Jones - Patrick Murck & Preston Byrne

Transcript

[Music] hello and welcome to epicenter Bitcoin so talks about the Technologies projects and startups driving decentralization and the global cryptocurrency Revolution my name is Sebastian qu and I'm Brian fman cran as you know back in may we were in Amsterdam for the Bitcoin 2014 conference while we were there Shan Jones conducted a series of interviews with a number of people on the topic of cryptocurrency Regulation we think that given the recent European banking Authority opinion paper warning uh financial institutions to stay away from virtual currencies this is an extremely appropriate time to release those very valuable opinions by these people and dive more deeply in this

topic this is the second episode of our regulation interviews from Bitcoin 2014 in the first interview Sean talked to Patrick MK he's the general Council of the Bitcoin foundation and he talked about the stance of the Bitcoin Foundation towards regation the second interview is with Preston burn he's a Securities lawyer based in London and very interested in Bitcoin 2.0 and decentralized application and explores the legal implications of smart [Music] contracts so on my final day and I suppose the final lap of Bitcoin 2010 I've fortunately been able to grab hold

of very very popular and uh important person Patrick MK who is General Counsel of the Bitcoin Foundation uh the legal legal the legal legal uh when it comes to All Things Bitcoin and Patrick you've been very heavily engaged in this last year with regulators and um legislators uh and I was wondering if you could tell our listeners a little about what's been going on in that last year yeah so it it has certainly been a busy year on the policy front um and uh We've uh we've been spending a lot of time both building our capabilities there uh building up our messaging

around that and also engaging at the same time so we've been doing both strategy and tactics all together um and uh I think it's paid off uh uh and I think you can measure our success by kind of some of the lack of action right the um uh lack of uh technology specific rules or regulations or things like that um the thesis that we came to is that the best environment for bitcoin's ultimately success and uh and we define success for Bitcoin keeping the protocol open participatory distributed decentralized um the best prescription for that success is to not ask for new rules or new regulations um we no one really

knows how this will develop over time so any sort of attempt at rule making or regulation that's specific to a technology would be premature so uh what we have uh what we do think is fair and appropriate is take to look at what the services are that are being offered and how they fit in current regulatory Frameworks uh over time we can then judge if there are incidences that we need to uh address uh as a community or or through the uh governmental Affairs uh regulatory fairs uh groups to to to solve those problems proactively but for now it's more a matter of just mapping it out and seeing exactly where things fit uh how they fit

and and for the most part seeing is there an opportunity to maybe not have as much regulation uh in the space uh if we can look at some of the services and how they're being provided potentially some of the regulations were that were uh that are uh being applied here may not in fact uh be necessary the policy goals behind them uh may only fit uh traditional kind of system so uh applying the current regulatory framework uh and then forbearance on those items that don't seem to make sense in a trustless system decentralized system yes I remember the question posed by as one of the

panelists um back to the audience just yesterday uh from the uh European banking Authority was uh why does it have to be uh Anonymous you know as if well you solve that problem and I I start to relax was of sort of message coming through there presumably those kind of uh responses uh become difficult for you guys um on the policy front well it's it's one that actually will probably get more difficult over time than it is today because Bitcoin as it's used right now is not Anonymous um it's it's far from it um if anything there's a big technical challenge um and consumer education challenge I'm making sure that it's private enough for Mass uh consumer

adoption so I don't consider Bitcoin particularly ready for Mass consumer adoption yet uh for a couple of different reasons but the primary reason uh is is around this privacy element it's simply not private enough right now as as constructed um now there's a difference between anonymity and privacy right um and I think that we often conflate those terms and harmful ways um so there's actually a place for both of those things in our world um but we do have as a community both an opportunity and a challenge to respect everybody's privacy in a meaningful way um and at the same time create a responsible system um that doesn't require outside

regulation or at least not heavy-handed outside regulation so the concerns that would were being expressed for I think that gentleman was heading up a task force for digital currency task force for fat which is a actually no for the European banking Authority for the European banking Authority right um so the concerns uh there in that in that Community uh are for every technology for every payment system and payment method are around um consumer protection and transparency right and when he says the anonymous piece is is an issue for for him or gives him heartburn it's around this transparency what's what you know what's happening in the system um traditionally everything about a

transaction is hidden from the world unless there's a regulatory responsibility to keep records and and file U things uh in in the system that's been created here there's already radical transparency baked in uh perhaps There's an opportunity to rethink um uh some of these rules and forbear on some of these rules because you already have so much transparency into the transaction flow so you were right out there with the with finsen with the Senate hearings with FTC all the various bodies at the federal level is that right in in the US that's correct um what did you find

their response the general response how how did they receive this stuff that they were getting testimony on and so forth it has definitely changed over time um so you went from skepticism sometimes deep skepticism to to healthy skepticism to there now you're starting to see emerge people uh within the agencies and on the hill uh who who grasp exactly what the benefit of this kind of system is um there are challenges there are risks uh and those can be mitigated but you should always bear in mind as you start trying to mitigate those risks um there is a tremendous opportunity here for all of us uh and I don't think that's lost on

the regulatory community at all they just might have a different balance yes I think there's a contrast between how it works in the States from how it works in Europe in the states it's there's often political motivation if I understand it correctly uh behind grabbing the headlines and of course it's the headlines that that people listen to or see or hear um whereas in Europe there isn't that same driver um officials tend to be purely bureaucrats they're civil servants largely and the politicians don't directly influence that so you've only got the legislators

and and they don't have a lot of appetite for for grabbing headlines in quite that same way and so it's much more uh consultative here whereas one gets the feeling looking at it from this side of the pond anyway that in America um there's a kind of shoot first and ask questions later approach and and that's what gets a lot of the attention what I'm hearing from you is that actually you've got a lot of you've got a lot of positive feedback from uh from from from your regulators and legislators it's definitely mixed bag we've also seen Shu first asked questions later without a doubt uh there are some states that have certainly taken it upon themselves to to First promote um uh uh their um place in

the process had of actually substantive work on that um and so you you do have to deal with that a bit um at the same time yes there it it's it's there are just so many uh different groups that have a finger in the pie here um that they all have a different and they all have very different ways of dealing with and they want their say of course is is New York an example of one of those places I would say though that some don't want their say actually some are are simply sitting on the side and don't want to get involved yet for a variety of reasons um uh the Commodities future trading commission for example they've mentioned Bitcoin before and they've

mentioned these systems but they're not really that ready to have a say in it for them to have a say in it means they have to take responsibility for it okay and so some people don't want it to do that yet and they have very valid reasons for not wanting to do that yet it's a very immature Market it's a brand new market and uh it has a ways to go before it's it's it's it's um even worthwhile and some would argue that Commodities and Futures and derivatives more broadly uh partly responsible for the mess the financial mess that we've been in those last six years or so well it does point out that does point out um uh an important thing that we talk about a lot is the scope right um with Bitcoin

you're talking about something that is that right now is currently a very small phenomena still it feels large when you come to conferences like this and you're you're in the mix but when you look at the broader world and the and you know it's both you know uh challenging in the sense that it's still a very small group but you know it's good that it's a small group because we're able to come together a little bit easier uh and the opportunity is still huge but it's all it's it's it's it's still opportunity and it's still potential um we still need to tap into it and that's going to be you know maybe not just multi-year but multi- decades ahead of us well we we we are where we are with the internet after 20 years in terms of in commercial

terms um so we should have that sort of a right everybody of course wants it all to happen and be clear today and tomorrow but that's not going to happen and that's 20 years from when you had the first real commercial web browser it's possible that we don't yet have a real commercial web browser for Bitcoin so we're still in that pre-commercial internet phase right now I know that people are trying to be that and that's very good news um but that's that's how early this really is and and that's an interesting perspective so from the foundation's point of view um you you you see this with a much further Horizon than quite a lot of the participants in in in Bitcoin businesses today who who

who who want to have Clarity today and know exactly where they stand and and and be able to get on with their business is not going to happen quite like that yeah so there's the so so Clarity is important but Clarity could come at a cost that's not something that you should pay right now um so it's a tricky balance and I think people need to be very very thoughtful about what they mean by Clarity um if Clarity comes at the price of compromising Bitcoin as an open participatory decentralized truly decentralized system then you haven't really won anything um by getting it in the first place you

talked earlier on about um tech technology specific laws regulations um not being a good thing in Broad terms and yet in New York uh there's a supervisory Authority uh that is I think even named their their their their idea for Bitcoin specific regulation calling it bit licenses um so it clearly doesn't apply to Litecoin then well yes I'm not quite sure what people would think of Doge licenses for example but in uh in your opinion then this is not a good road to

go down so well no I mean but no one knows exactly what a bit license is all we've heard are just very rough ideas of it it has not been a fully baked cake right now so it's it's hard to know you know do I agree disagree or anything like that I would say that aside marketing aside the idea of a teex specific bit license is unfortunate um now having a conversation with New York that says let's talk about your money transmitter rules what are the policy goals here it's about protecting consumers and preventing illicit use of the system a lot of so that's consumer protection and transparency again right so the transparency piece of it is handled at the federal level uh all those companies have to be money service

businesses registered with the US treasury's finsen Department uh and those companies have to file SS and and finsen you know that's a that's a conversation that's been going on for a little while now about how to attack these problems uh in a in a thoughtful way um and at the state level while they also have an interest in seeing that that transparency happens the primary focus is generally on consumer protection so those ra that raises interesting questions when you're talking about a system where sometimes the highest degree of consumer risk isn't that a third party or an intermediary runs off with your money it's that you don't store it properly or um or you somehow uh uh uh uh don't uh

Miss either don't store properly so that it's stolen or because you lose it um so how do you how do you think about things then why regulate an exchange that never has custody over funds what's the regulatory justification what's the policy justification for that type of regulation for requiring somebody to have a shity bond when they don't have any customer funds at risk that doesn't make sense I agree that that doesn't make sense and we should have a conversation about how we can forbear on some of these rules right let's get the benefit of Bitcoin create those efficiencies let more businesses Bloom without endangering any consumers in any new way that's a that's a positive development and as I understand

it there are a lot of regulations in the existing framework um that are simply impossible for Bitcoin to or Bitcoin businesses exchanges in some cases to to comply with simply because some of those criteria just don't exist it's not in the system those those rules were created often times in public private partnership you know decades ago uh by you know entities and systems that had a specific way of doing things right these systems required intermediation and the intermediaries then became the police of the the system U when you have a system with no intermediaries perhaps the police should

be the police of that system yes yeah that's um I suppose it's not really a bit license it's an inter it's a it's a a disintermediate uh intermediated World license that doesn't Market as well right but but indeed you know again so again not having a license that says because you're this type of Technology let's have more neutral terms let's not fall into the same trap we fell into 30 Years Ago by having public private Partnerships Building Systems around a specific type of uh uh uh process or system or technology let's let's think about what the policy goals are to begin with if the policy goal is to protect consumers when a third party takes

custodial uh has custodial access to your funds let's just talk about custodial access to your funds yes I I think that makes a huge amount of huge amount of sense presumably that's going to take a lot longer still because too many too many fingers uh uh and pies to to play with that right and so to get there right instead of trying to anticipate what the world is going to look like and regulate the thing we're anticipating let's take a step back let's create create Clarity by saying you can come into the market you can start building these companies it's small now it's safe disclose to your consumers how high risk this is in

the first place so people getting into it really understand what they're getting into and let's see what the problems are that arise and if there are problems if there are market failures then let's address them through smart regulation so let's if we may um draw this to a close and just discuss things happening outside of the US I appreciate presumably it's it's it's simply lack of resources allows you to address uh too many places uh all at the same time um and you've got I suppose what is it 51 countries in the United States if you take the federal federal government to deal with as well um so

that that that that that's a fair number of U of jurisdictions now now there's the the rest of the world uh the next big block of course is is the European Union does the foundation have some some plans to address the same kind of issues but at the European level yeah so we've participated in FFF um uh which is beyond even the EU but we were in Brussels for that um and uh we uh we are you know taking the framework that we've been building some of the strategy um and exporting it right right um and allowing people locally to have who have a better sense of the tactics

that are appropriate to to implement them um because we do have limited resources and limited Reach the the process is to identify key jurisdictions around the world um I still would love feedback on what those jurisdictions should be we can clearly Identify some right so the EU right is one so some some Frankfurt you know is probably the right place um to have that conversation probably Brussels maybe Brussels it depends on who you know it does depend um well even London because the the European banking Authority is based that so sure potentially London although I don't I don't think that I don't know if the rest of the EU considers London part

of Europe but yeah I understand uh so uh but the world clears through London so that's that's one uh area that we've talked about you know Singapore Hong Kong Dubai these are all F TR additional Financial hubs you know and these are the places that the world clears through already um moving into Latin America which is a hugely important market for for Bitcoin identifying a jurisdiction there where it makes the most sense um uh without banging your head against the wall uh where the countries are that have uh fiscal policies that will never really accommodate Bitcoin um so th that's that's that's the conversation that's happening right now um and again I would love to have feedback on what those key

jurisdictions are because we do have to start narrowing the field a bit picking where you can have the most broad-based influence uh and then working from there so send your emails listeners to to Patrick MK at the Bitcoin Foundation uh he's waiting for your feedback I've set up my email filter now Patrick thank you very very much for sharing your thoughts with us this afternoon explaining um a lot actually that I didn't know so I'm sure our listeners didn't know it either thank you so much inde thank you very much for having [Music] me so this is Shan Jones I'm at Bitcoin 2014 in Amsterdam with about a thousand other people uh one of whom uh was just

nominated for the Bitcoin legal expert um lawyer uh based in London uh Preston burn do you want to tell us a little about yourself Sean um yeah basically I'm a securities lawyers so what I do in my day-to-day practice is I take pools of contractual debt and I set up legal structures which reassign those pools to investors uh who then hold that debt in form of notes or bonds so it's a very procedural type practice there are you know there are orders in which things go in and there are orders which things go out um and subject to some very complex if or rules and um that I think has made the smart contract space in particular but cryptocurrency in general um of significant interest to me from a legal

perspective because it sort of reminds me of my home turf and this is something you're very active in I know I follow you on the ethereum Skype channels and you you have an awful lot to say and a lot of insight um want to tell us a little bit about um smart contract I mean I suppose I I think the starting point is I've I've been interested in them for some time I uh I was familiar with Nick zabo's work before ethereum kicked off and became cool um but what makes it a really productive and rewarding Endeavor going into this is that most of the people who are writing smart contracts are these very brilliant it's not like Bitcoin where you have these it's moving very swiftly towards business practice and investment in

certain firms which are able to service Bitcoin and merch and acceptance of Bitcoin and Adoption of Bitcoin and frankly regulation of Bitcoin but regulatory law is in certain respects quite boring AML is one of the is one of the dullest areas of practice I can possibly imagine um and smart contract by contrast um firstly they blend in well with transactional law because that's what they're designed to do and they're quite exciting because they challenge the way that we look at legal relations the way that we look at interpersonal transactions of all kinds and that can be Financial transactions that can also be Communications um that could be the storage of data and so that's really what's attracted me into the field um as to what a smart contract is there're sort of two different views um and that's true in every area of

smart contract practice there's the engineers View and there's the legal View and not often times they don't link up um I the engineer's view is that the smart contract is an autonomous piece of code that lives on a blockchain that operates according to certain rules and will respond in certain ways to certain instructions every single time um in that sense Bitcoin itself is maybe considered a smart contract of a Kind a very basic one um rather like arpanet in comparison to the kind of smart contracts which are being proposed um but going forward we have individuals who planning very very complex arrangements from you know the very simple smart contract which is a collateralized or collateral or escro agreements um smart loans are fairly

straightforward to the more complex which are Communications and social networking so the potential for decentralized Network to really change the face of Bitcoin I'll be honest with you I don't hold any Bitcoin um I have no intention of ever holding any Bitcoin um and I think that the utility offered by smart contract platforms um when compared against all of the fuss that's being made against Bitcoin um I don't understand the relative uh lack of emphasis on Smart contracts perhaps that's because they don't exist um at least in a commercially workable form and something very new and something yeah they are very new but we've known about them for about 17 18 years they've existed in theory and for a industry which Prides itself I think of being

quite Progressive um the lack of emphasis on the smart contract space you know a lot of these guys are self-funded they're on their own doing it on their own but at the same time this is really where corporate interest is starting to come in this is where companies are beginning to look at the blockchain and understand that this is a viable way to make transactions more efficient um and from I think a political perspective I'm aware that a lot of bitcoiners uh are of the view that Bitcoin will democratize finance that may be but I think a lot of bitcoiners are also of the view that more people using Bitcoin will drive up its price um smart contracts are really they're quite agnostic in the sense that you you don't really have to pin yourself to any one protocol to get the utility and then capitalize that utility

at a later date and then use a decentralized network in order to operate them so in a sense they're they're very fair because you can set up this architecture and people will be charged very little to use it and they can transfer value by writing new contracts on top of it really in any way they wish so it's a platform that does not necessarily benefit the early adopters in the form of a rent um which Bitcoin admittedly does um but offers much of the same utility and in fact offers considerably more utility than Bitcoin um and I I'm surprised that a lot of people don't see that I've heard it said that um uh smart uh contracts well I've heard it said first of all that that that Bitcoin is the

first app and that smart smart sorry that ethereum is a platform and and smart contracts more generally um offer um virtually boundless possibilities of apps and limited by the imagination of the of of of those who want to innovate those apps I think we should make a distinction between the platform and the app um in the in the case of Bitcoin Bitcoin is the platform um it operates according to certain rules it responds to certain instructions in a certain and predictable way every single time with very rare exceptions where there's a fork um in the case of the types of apps which are being designed on ethereum ethereum is is in my view a blank slate upon which you can write contracts which

will be self-contained at a particular location on the blockchain um they are able to change state from time to time in respect of certain amounts of data which are registered or or deposited with that contract and it's my understanding that when you want to amend the contract certain fundamental terms you then novate it into a new location on the blockchain but it still feeds back into those other parts of the contract which are containing data or or cash management functions um in that sense I mean Bitcoin isn't really an app um Bitcoin is what we call a Dao which is a decentralized autonomous organization or decentralized autonomous Corporation DAC um in in other parlaments and a DAC is basically something which behaves as um a custodian uh of some description and what it does is it carries out certain

functions automatically Bitcoin is a very basic DAC um ethereum is also a DAC but is a DAC which allows the construction of additional dac's or daos on top of it and it's just strikes me that that kind of functionality provided that it and I do believe the ethereum team is excellent um having met them and there are other teams which are also excellent in the space Ripple um is with its payments protocols a very discreet industrial application um mastercoin is is making efforts in this direction as is next but really ethereum has been one of the most forward about it um I think that that kind of functionality is really unrivaled and it's going to introduce a whole range of uses for blockchains whether those

beyond the ethereum platform or not that that will will really frankly change the world the way the world does business um it's if Bitcoin you know people say Adam Levan said in Tim Swanson's book he said Bitcoin you know welcome to the future of money but he said that about ethereum and I think he was wrong um because it's not the future of money this is the future of everything um this is a decentralized Industrial Revolution and and it will change the way that we interact with each other once if it proliferates and I think that it has a better chance of doing that simply because it's so much more functional and that's a very bold statement record come interview you again and see if it lived up to the promise um people

hear the word contract and of course they think legal stuff they think lawyers obviously they think courts they think codes um can you explain a little bit for our listeners what the difference is between a smart contract in the sense that you've just been describing and and this um old body of of of of rules that we we live by and operate under absolutely I mean if we if we go back to Zabo to start um his vision was for a series of digital institutions which replicated the functions of bricks and water institutions um analog institutions he called it wet code the rules we live by

um and he proposed that you could use these contracts in order to how to describe it to replace these in tions because you could reduce the majority if not all human transactions to code um and there are ways there are transactions where you can do it but there are practical difficulties with it on the blockchain look get back to that in a second legal obligations exist because we deem them to exist um because the courts The Sovereign deems them to exist and so they are an old uh an old boss of mine we were talking about Equitable interests and he called them Critters because you say what's an equitable interest and you throw your hands up because there's no need to definition of it but it's a thing which if presented to a court will be protected by the court and the court

possesses the coercive power to render that thing or that act which should be done done so the difference between a smart contract and a legal contract at least in the current context is that the smart contract executes mechanics of the contract so if Alice and Bob want to enter into a loan Alice lends Bob 10 and Bob agrees to make periodic quarterly interest rep payments of 2 plus 1 for T equals 5 then what you have is the contract will execute those things automatically and if Bob has posted collateral for example the contract will not allow Alice to take his collateral unless there's an event of default and the contract will not allow Bob to retrieve his collateral until he's paid the loan off in full so in a sense if you have a very simple contract like

that you do in fact have an agreement um the enforceability of that agreement at law legally relates to the intention of Alice and Bob when they're entering into this smart contract the actual practicality is that Bob is unable to retrieve his collateral but that doesn't necessarily interfere with an interest which court might Force against Alice in for example a situation where Alice it took advantage of some exploit in the code in order to seize his collateral and get paid and full the loan the court would then give Bob certain rights against Dallas so the gulf between those two positions between the smart contract position and the legal contract position is really one of real world enforceability and you could in principle have contracts on the blockchain which were were no no

connection whatsoever to the real world and were entirely transacted over the blockchain that would not stop there from being a legal contract from coming into existence although those terms may or may not be set out um but it might frustrate enforcement somewhat in the event that one of the parties behave badly and the code was badly written so for more complex transactions it's going to be very important to build I use the term backdoor programmers hate it but you need to have an ability for a trusted third party to step into the transaction that said trusted third part is doing that you're still benefiting from about 95% of you know in terms of your economic position you benefit from automation much more than you lose from having a party in a third party capacity who's able to step in and arrest that contract presumably when when when when

lawyers or pre- lawyers first thought of um uh writing agreements down and and and and writing up contracts they thought this was a good way of doing it because we could um list everything that might happen and what the the different circumstances and how what effect those different circumstances have and and and and there's supposed to be Clarity in the written word of a contract and of course as we know in the real world that that isn't the case I disagree um I think the contracts are actually deliberately vague um but I'm being completely serious there are in some cases there there are rules for example in uh in in the United Kingdom if there's ambiguity in a contractual term it's construed against the person

who's seeking to enforce it in the United States if there's ambiguity in contractual term it's construed against the person who drafted it or introduced it into the agreement but in contracts you do not necessarily want a rigid and onmoving framework because that means that change circumstances um you cannot account for those um prime example is if you make reference to a uh transaction party needing all the necessary licenses approvals and consents to enter into an agreement and then that party then either ceases to have those license weth that's one thing or those the requirements change because facts in the ground so for example the particular area of business in which that party is operating becomes risky because there's a financial recession or because it's contributing to some other public ill

and um and the government will step in and say actually the terms on which you were transacting this before those are no longer relevant now you need to do this a paper contract it's conceivable that a paper contract can change because you can interpret it differently that's the vagueness is deliberate with a smart contract if you are unable to make the appropriate accommodations by virtue of cryptography um you may find yourself in situations you the parties May find themselves in a situation where neither of them are getting what they want and the contract itself may even be rendered unenforceable um in respect of a particular jurisdiction this is particularly true with consumer credit okay so have you got an example of of of that of where a contract can be

rendered unenforceable if you had let's say someone entered into a loan um it was a smart contract loan and and there were a court subsequently turns around and deems that the relationship between the I don't know trying to think actually back up let's say someone takes out an insurance policy um on a loan which ensures their payments um so they go to the bank and they say Bank um I'd like to take out a loan of 100 the bank goes fine you can take out a loan of 100 but in addition to the 100 we're going to make you borrow five with that five you're going to purchase a insurance policy from insurer and uh and you have to buy it from them and the person goes okay fine fine that's fine so they go into it it

transpires that the bank and the insurer have a relationship where there was a series of payments which were made by the insurer to the bank um in respect of the bank directing consumers to the insurer um when that happens customer has borrowed five over time equals whatever and made payments of principal and interest in relation to it under the current regime um the customer benefits from legislation which allows that customer to reclaim both the principle and interest that they paid plus penalty interest on top of it um and so and so that functionality if the court let's say that legislation didn't exist or new legislation came into existence which deemed that some aspect of the original lending Arrangement was unfair um a court would step in an attempt to unwind

it if you have a smart contract in respect of which that cannot be done um you have a big problem because you suddenly have an unenforceable contract and you're liable in respect of it and as the consumer you're not going to want that so it's introducing flexibility into contracts yes it's a matter of legal practicality but also if we think of it in that context it's also a matter of consumer demand consumers have rights um parties have rights the law implies those rights and if you're stepping into a new space where you have all of this functionality and all of this frictionless frictionless is not even a word I think you can guess it right and and you benefit from all of this automation um sure the banks will benefit the consumer May benefit in terms of reduced cost uh Freedom

benefits because it's all being conducted cryptographically and um and it it will suit the agenda of decentralization for those who believe that that is the true and proper course of action but you also have to create something that people want to use and if you have a contract which doesn't do that you're no one's going to use it at least in my view or um other lenders who aren't using smart contracts or other lenders who are will compete with you on terms and they will beat you because people will say hold on a second I have rights under this agreement which I don't have under this agreement and so even if the price is slightly the inclusion of those rights has value in itself and so I would rather go with the second contract the flexibility is built in and you know I'm buying accountability um in exchange for you

know the loss of of a trustless network I'm a trust netw and I suppose there's going to be a lot of um interesting work done on uh making smart contracts fit into the legal contract framework and into enforceable contracts that you can take to it it's I don't think it's that hard um I think you hear all of this stuff daos I was talking to an academic on this the other day and there was this debate what happens if you Doos get out of control and you know become Skynet and eat us and it's it's it's a silly debate because you know okay fine you have a doo which sits outside and can't be affected and and won't budge you know no matter how many drone strikes you shoot at it or or how much hash power you point at it it's you know it's

there can't be changed I think you're going to find that remember the blockchain there is a human element to a blockchain and that element is crucial to any blockchain's function and that element is consensus um and that consensus is and it's the same thing with any other distributed autonomous organization you have a user and that user capitalizes the Dao and it uses the Dao it cannot be designed simply from an engineering perspective it has to be designed in respect of legal considerations because people will not enter into illegal contracts and and practical Market considerations which are that you have to structure them so that they serve some useful purpose and they do so in a way which is valuable and increases the aggregate value of the transaction and um I think that's where it will go um but we need to really

start first seeing commercially viable platforms that can be deployed um they're almost there but and the people are writing there's a chap named Dennis mckinon out in Canada who's particularly well along and uh he has a very interesting modular contract he calls Doug which I recommend your listeners look up um and uh it's on my website Preston burn.com a brief post and I've got to write some more about it uh more about it going forward but yeah Dennis is a lovely guy nice guy smart guy and actually very amable to criticism and he is working on this contract which is quite flexible um and I think that that's approaching something which becomes commercially viable and once you see one that works and just like Bitcoin it'll have to work it'll have to work every time it'll have to work without

fail it'll have to be tested again and you know bitcoin's an open Beta um you know there's no there's no Alpha and testet and any of that stuff they just let it go and the same thing will happen with contct so what's your prediction on time scale before we're all familiar with well when we come to Smart contract 2016 2017 what I I said in January uh early February of this year I said that it is only a matter of time before governments businesses and financial institutions begin incorporating blockchains into their operations at the time I made that assertion um numerous decentralization Advocates said you are out of your mind um that will never happened um two weeks ago Fedor started using Ripple um last week A Bank in

Mexico started using Ripple um I'm talking with the bank at the moment um that is looking into decentralized ledgers either decentralized or um or ledgers which are proprietary in order to structure the transactions and and this is coming um I don't think we're going to see I don't think we'll see the kind of mass adoption of smart contract ledgers within the next 12 months within 36 I would be very surprised if most banks were not using 36 months so three years from today I'd be very surprised if most banks in the world were not using these kinds of ledgers in industrial applications in some way that's um it's a very clear prediction and it's a clear prediction it's

something we journalists love because of course we can absolutely and come back and and and it'll haunt you either because it was um you know it wasn't generous enough or because it was 2G do Dam if I do exactly I I want to turn to to one last thing we were both in a a panel debate or in the Audi panel debate earlier on today and uh the subject of which was was uh AML anti-money laundering some very uh probably one of the the most Lively uh panel sessions today and um very interesting you um you asked a question regarding um uh offchain transactions and how it might solve some very particular problems I

wondered if You' want to share that with um yeah um quite happy to so the the panelists I was looking at them chasing the tals and that's not a criticism it's just that's the way that the discussion is going and uh I'm merely being descriptive um and I think they were looking for a universal uniform solution to Identity in the blockchain and the fact is that will never happen um and again for the same reason that for the same reason that you're not going to have a smart contract which is fully automatic um you're not going to have cryptocurrency where everyone signs on because there is a human element the element of the user the element of consensus and the idea that you can take Bitcoin or any other cryptocurrency and then reduce it entirely to regulation um that's an idea it could be done maybe

you have some proprietary Bank cryptocurrency where a bank issues crypto tokens which are redeemable against the bank dollar for dooll and you know it benefits from transaction fees or mining fees or God knows what else so you know any major Commercial Bank you can name they create one they save you come to I don't know you get the idea um but with a decentralized one like Bitcoin I think that'll frankly never happen firstly because the blockchain is beyond under control and secondly because if there were a blockchain which The Regulators attempted to to render controllable um I think you'd see a fork in about 10 seconds left and and you know they so yeah who's going to jump on official coin and who isn't of course you don't need to do that you what you can do is

you can use an offchain solution and then businesses will be required to use it in comply with the regulations and then the blockchain will carry on doing what it does that won't make what people are doing on chain outside of the official uh framework legal um and it will make it all right if if someone decides they're going to enter the assassination Market with Bitcoin or something like that but what it is it's an acknowledgement of reality and who you can control and how you can control them the state is entitled to step in or not entitled the state is able to step in um about to get in serious trouble there with uh with my libertarian friends but the state is able to step in in very discret places points of articulation where there are entities which it controls um through legal

control and they will the cost to them of not being uh of not submitting to that legal control is prohibitively high any business any legal entity any trust any private individual who chooses to uh who chooses to identify themselves so I think if if the discussion goes the way that that particular panel seemed to endorse um which is a view I frankly don't agree with but um you know the Regulators are The Regulators then I think what we'll wind up seeing is a trusted Silo which mediates most legally required transactions um or several trusted silos which compete with each other on terms and price um and then you'll also see the blockchain carrying on very difficult to control um is uh the chat

from Ripple said you know you've got green red and gray and you know you can't go red TO gray and uh you you can't go red TO gray which can you go green to Gray and you know that's the distinction I think you'll you'll see people could still do perer toer transactions buying Bitcoin from someone down the street would the government realistically be able to control that probably not um would they be able to limit or maybe you don't even need the regulation maybe a bank could say this is our Silo you can use Bitcoin with us but in order to cross the threshold and get into the banking system you need to submit to the following disclosure requirements that's entirely fair for the banking sector because the banking sector is not a public good although we seem to pay for

it with our with our with our taxes with that's a discussion for another time but um it is a private industry and um and we do not necessarily have a right to use it so particularly if they are going to be exposing themselves to sanction and liability uh in order to engage with Bitcoin business which is something which would not be advisable or desired by the Banks um I think it's entirely appropriate for them to create that Silo and say you can do it but you have to do it on our terms and at a practical level how might those silos systems work are there examples of of those in existence or being planned Swift I think a sort of it's a sort of trusted Mutual Silo between the banks themselves um so you'd have to be very careful with a Bitcoin Silo for obvious

reasons because of um the inability to get back something once it's been spent but it would be by mutual agreement there may even be you know there may even be a treaty that comes out of this depending on how cryptocurrency takes off which governs its use um in mainstream transactions and for all we know there may be cryptocurrencies which are developed within syum um and that's that is heresy but the possibility is there there a a chap named uh Greg uh what's his name Greg Simon from crypto works that's works with an e um he has devised the system proprietary blockchain system which I think is industrially extremely promising but at the same time if you talk to someone in Bitcoin about it they would say well

this is absurd of course it can't hold value it's not decentralized but I think he has the idea that how you can monetize a silent blockchain um and there are many ways you can do it people are coming up with them every day and um I think we're going to see a lot more of that certainly in the next 12 months in terms of proposals and um and the beginnings of these projects um and within two to three years we're going to see I think very widespread implementation um at first in financial applications and from there it will expand because I guess this is where the banks um are very involved at the moment certainly in some countries in developing a blockchainbased project uh I don't think they're developing them I think they're looking at them as as

almost a curiosity but remembering that a bank is is a very large corporate organization um I don't they wouldn't take a very long time to deploy this if they if one of their competitors that's really what's going to happen a large bank is going to figure out how to use a blockchain um and then all of its competitors will very swiftly Pile in and look for similar uh similar implementations the benefits could be um a couple of banks in London just sacked 15,000 20,000 people each respectively because their overheads are too high they said we need to save money well okay imagine you get rid of your server architecture um and you fire all of your it employees and you reduce your expenses in your middle and back offices and your audit function is automated and

every minute you have an up-to-date picture about everything that's going on and everything that will go on um because the all of your transactions have been uploaded onto the blockchain so not only do you know what's happening you know what's going to happen and you can you can predict that with a reasonable degree of certainty um of course there's counterparty risk things like that but that's the that's the idea that you can have a very tightly organized system um which performs all of its functions itself even very complex transactions like securitizations are in theory reducible uh to a crypto Ledger um and yeah it's only again I said it in February it's only a matter of time and I will say it again it is only a matter of time um and and I think it will surprise us how

swiftly it actually happens I don't think I could ask for a better end quote to finish off this interview and thank you very much Preston burn for uh for entertaining our uh our listeners do uh do listen to epicenter Bitcoin uh on Soundcloud and iTunes and wherever else you find good thank you very much pleasure so we hope you enjoyed this episode about regulation we'd like to thank Des Sean Jones for her excellent work in capturing these very valuable opinions if you enjoy this episode please consider tipping us at epicenter bitcoin.com tips you can also subscribe to our Weekly Newsletter at fenter bitcoin.com newsletter and of course you

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