Web3 in the EU: moving decentralisation from theory to action - Joachim Schwerin

Transcript

[Music] Thanks so much for the kind introduction and let's give people the chance a bit more to flee because uh the public sector creeps in then there's a certain flowing out of people but that's okay. I'm very happy to be here and speak at this conference. I'm a little bit touring the east conferences at the moment because we have a lot of stuff to discuss. So always interesting to see also what you focus upon when you introduce me basically on the PhD and the LSE which is nice. So abstracting from 24 years of public service which is I think good way to do. Um I'm in the European Commission

responsible for the real economy aspects of blockchain crypto tokenization. I've been in the space basically since the beginning but I've also contributed to the financial things. So Mika what we now do on the digital euro DT pilot etc. The main theme of today and then you can decide whether you listen to it or not is basically to tell you by way of example that we don't only talk but that we also build and do because sometimes there is the perception indeed that uh policy makers and regulators talk a lot of time and don't really take an active involvement or don't basically know what they do. So I try to get a little bit rid of that cliche and tell you when it

comes to what we see as web 3 as a sort of next generation internet that doesn't repeat hopefully the mistakes of web two with the big text of what we're actually working upon. So when you're working in the public sector any type of initiative always starts with a crisis. No one gets out of bed unless you have a crisis and then things have to go fast. Now for me there was a situation when I was working in 2007208 on the interface on industrial politic uh industrial policy and competition policy when the financial crisis erupted and we had to save all these banks because apparently or allegedly they were of systemic importance. Now we didn't save the banks because we like the banks but we have

the situation in Europe that 75% of our small and medium-sized enterprises and startups are financed through the banking sector which is different to other parts of the world. So the banks at that time were important not because they were the banks but because they were service providers for the real economy. And interestingly enough, and I say that as an economic historian, there is a period, a small one, six weeks in the autumn of 2008 where you have probably the worst moment of the centralized system, which is the collapse of Lehman Brothers and then the Bitcoin white paper as the start of the at least the official start of what we see in the decentralized space. This is no coincidence because the pressure in

the centralized system has been building up over a long time as has been the movement for the decentralized world and at this point of time it culminated. So that had a lot of repercussions and my next slides will be more visual so don't worry there's not too much text. What it basically meant is that this crisis exposed the huge systemic risks that we have in legacy systems. It's not everything that is outside the legacy system that is the problem. It is the legacy system itself that is the problem through the connection of risk factors in these systems and that also means that for years and years to come that the public sector was basically in a

reactive mode because as said we had to stabilize it and at the same time these new waves of innovation were emerging and policy had to be developed for that. Now, I think that this has shown the way forward because it's not only that starting with Bitcoin and then cryptocurrencies and everything that emerged on top of that, Ethereum, many other things created new visions of the way forward. But also, it came with a speed that we've never seen in human history. We've studied a lot of innovation and growth processes in the past, but we've never seen a technology that has moved as far and as fast as crypto has. Although for you guys, it

probably looks very slow because you are used to higher speed and change. But at least when you see it from the other side it's extremely fast. and also that then the governance for the centralized system has become dysfunctional because the governance of the traditional system is not built on that's great. So, wow. Thank you. That's the one. If we can have it. Thank you. I don't know if I killed that or if that was the system, but anyway. So, what you see here on the left, thank you. In the red color is the approach that regulators have taken in the past for legacy systems, whether that's banking,

securities, capital markets. You had mature markets, you had very few players, you had little competition and certainly not disruptive competition and that enabled regulation in long cycles. So you had a review every couple of years. You change a few things and that is it. What we see in the digital economy and in web 3 is the complete opposite from bottomup change. It's emerging markets. It's competition for the market. It is very disruptive. It is especially that the pace of innovation is much faster than the pace of regulation. And at the same time you have a technology that is global yet local or decentralized. So all of that is new. All of that requires for a new mindset for policy makers to operate.

And we need to take this into account because there's a lot of just criticism whether that is on the mika regulation on other things. But at the end of the day, we should not underestimate the massive not only mind change that people undergo in these systems, but also all these organizations, regulatory bodies, structures, etc. that have been built for a long time for the intermediaries. And suddenly the intermediaries are under fire as we have that in crypto. And this is a process that has a direct effect on everything that you are doing because the change in the public system is much slower than is the pace that we see in the tech space. Now when we look at this it can go either way and this is a slide that I

use for different purposes. Now I use it here basically to develop this narrative. This is a photo of actually one of the nicer areas in Switzerland where next to that in San Maritz we have a big crypto conference every year in January and this is the European waterershed. So what you have there is basically a little plate that has three holes and the drop of water is falling on that little plate and depending on which one of the three holes the water is falling into the drop of water will end up in the North Sea in the Mediterranean or in the Black Sea because basically that's how the rivers go and so you see a very very small deviation of only a few centimeters and you end up thousands of

kilometers apart. That is the situation that we have in reality in many tech fields because we have a baseline of technology. We have a baseline of events that affect all of us. But we can have outcomes that are completely different depending on how humans shape and have an influence on these things. So it's not only the hard facts that matter but it is especially the way how you can deal with the hard facts. How you can uh present your story for example to people you engage with whether you come with the same technology to a completely centralized or as far as possible decentralized outcome or as something in

between. Blockchain AI we all know that you can use that for very good purposes. we can use that for very bad purposes basically to control people if you don't leverage for the privacy enhancing tools etc and I come to that there is a little study that has been done and some of you will know that from the Warton school I now looked into the past 2008 where do we come from this is where people in the Warton school about two years ago thought where we might go to in 2035 and so what they did is building on what I just said they had two different uh variables whether we have a centralized system or decentralized system and whether these systems will be integrated or not. And if you look at

what they summarize here for the four different opportunities or solutions, it looks pretty much this topic. I mean, I tend sometimes to change a little bit the color, but I can tell you it doesn't get very much green. Uh we have what is probably for me the worst outcome if you have an integrated centralized world, which is basically totalitarianism. uh you can then have centralized systems that are distinct where basically everyone is doing what they want but still in an antagonistic way and you can have decentralized ways where let's say in best case probably we are meddling through but we are not really having systems that are fully optimal as we might to envisage that and my favorite one I can't really decide for myself

whether that's distinct decentralized or integrated decentralized I am more the distinct decentralized guy But uh depends on how you see that where you have a lot of I would say approaches that you take in communities. You can build protoates uh in web 3. We talk about that in the DAO panel tomorrow. But at the end of the day um the integration, the bridges, the infrastructure underlying that are a massive challenge for all of that. So I'm a pretty optimistic guy but I must say that building on this technology offers a lot of opportunities where things can go wrong.

So question is how can we influence not decide we can't do that but how can we influence that things get a little bit better and this is where I start now what we've been doing the last 10 12 years or so in the European Union by way of example of a couple of things to tell you first thing is we set the narrative we did a brainstorming exercise 2015 2016 where basically the whole public sector in Europe was looking in a sort of brains brainstorming of what will be the future innovation priorities in Europe and everyone could put on the table what they have. I proposed blockchain but I didn't propose blockchain for the financial sector. I mean crypto is nice but if you are in

the public sector if you have taxpayers money you need to do something that really brings utility to people and in my opinion what really brings utility to people is blockchain applications tokenization of real world assets energy tokenization housing Dows whatever you can discuss in this field here. So that in my opinion is very strongly the way forward and on that basis we said that we see in Europe blockchain as a key breakthrough technology in all policy fields at the same level as a few others AI supercomputing quantum whatever you name it we have a supportive we have a positive attitude to blockchain we tend to forget that because we speak so little about blockchain actually but the whole policy approach or what we take is

a proactive is a supportive one and you should not judge it only by mika or things like that. That is small corners that you have in the financial domain. To put beef on that, what are we doing? We have built an open-source public blockchain infrastructure in Europe. We call it the European blockchain services infrastructure epsi. It basically works with proof of authenticity. So that means that we have a system that onboards identities. Whatever document you have that has been issued by the public site, whether that's a passport, whether that is a banking card, whether that's a social security card or whatever, is a sign that you have been considered as someone who has an identity through the

public sector. And with that identity, you can engage in web 3 in the digital world. But we separate between the onboarding and the transactions because when you do the transactions, no one needs to know who you are. Imagine that in the most easy example and it wasn't on blockchain, but it's the same principle with those of you that know the COVID certificate that we had a couple of years ago. Basically, you have a code when you cross a border for the guy that's standing there at the border. It needs to show green or it needs to show red. No one needs to know your name. No one needs to know where you go to or come from. It is green or it is red. That is what these systems do. We have so far built more than 25 major projects based on that infrastructure.

The biggest one is a system that is now operational and we tested it in a number of countries to detect fake products. So basically we have an identity mechanism when something is produced to ensure that this is the original product and it's not a fake. All of that including the code is on these web pages. So whoever takes an interest in that either look at the web page or reach out. But this is the biggest problem I would say that we do. We do and don't try to understand these slides. Only look at colors. We are late afternoon or so. So we are tired. Only colors please. We did a hackathon with a couple of hundred people where we tried to build prototypical industrial blockchain solutions. That's already six, seven years ago. And what you see in the different colors are nine different

parts of a traditional flow model in industrial ecosystems from the sourcing of inputs to the production, distribution energy supply whatever. And we built prototypes for each of that to show what you can do with blockchain. I mention only one example that is the drone delivery of medical supplies where the integrity of the supply, think of blood samples, think of organs for transplantation is guaranteed through the blockchain. This was science fiction six or seven years ago. Now we have a series of countries on the world where drones are flying to deliver medical supplies based on blockchain. These things are working. Third thing, we bring together the financial sector and the real economy where we bring the industry

players together to discuss how tokenization works in practice. One fundamental problem that we have and that affects also I think a number of you in the business models is that we always tend to think from the technical side from the supply side. We don't tend to think the demand side as well. Who needs our products for what? When you talk to industry, and this includes the biggest industrial companies in Europe, they want a workable solution. They don't care what your technical specifications are. They want to have something workable as a tokenized payment. They want to have a safe infrastructure. They want to see that it can be integrated. And this is where we need to get together from the financial and the non-financial side to work. So we have written a little report on this

for those that are interested to see what are the usual industry applications for example for payment structures and tokenization in general. Last example the sandbox we said it's not enough to conceptualize to build to do these things but we also have to cover the learning part. So now we have a European blockchain regulatory sandbox which is basically um consisting of 20 innovative use cases uh that we bring together every year. We have just started the third cohort and then we'll see how we build on that and extend that sandbox and I can tell you it is pretty innovative. So we have 50 plus national administrations, not individuals but

whole administrations that are participating together with these 20 companies in the sandbox. And the thing about the sandbox is actually that everyone is allowed to ask the most stupid question. A question that people would never ask you if you apply for a license with your national regulator because everyone has to appear smart. But you have to have a little playing field, a little sandbox. Eston is really sandbox for children where they get together to do the the very easy stuff and discuss it. The progress is immense. We had in the first and the second cohort a dao each. Now we have three dows in the third court and I can tell you that we're going into the most detailed things of legal rappers for dows of what can apply and consist uh be consistent with regulation or not and uh

there we will build on that. So 10 seconds to pause. I think I've run through pretty quickly uh through all these things and either you are now completely tired or confused or you have followed me. Congratulations. But um 10 seconds to breeze because at the end of the day I can use so many words to explain what all of this is. Tokenization, regulation, the policy, all these different fields. Now let's be honest. Is this difficult? And it is absolutely not difficult. I think blockchain, tokenization, crypto is child's play.

And I say that as an economist because I have learned in my professional life that you can try to explain things or you can build huge models that you calculate. But if you're not able to explain in 30 seconds what something is or what you do, you have failed. And this is what I see in a lot of pitches when companies come to me and I ask them what are you actually doing and then they send me 200 pages and white papers and thing and I ask you here you're sitting here next to me 30 seconds what are you doing and I guarantee you that 80% of the people in the first 25 seconds only come to R at O and oo because they can't explain what they're doing this is easy what is a token to only start there and I stop a token is a container a token is a

container that transport stuff in the digital world. And you can see from this physical container here all the features that a container has. It has a form. The form needs to be standardized so that the form fits to a lorry, a ship, a plane. It has to be open to any form of content. So it can be a financial asset in the in the container. It can be a physical product. It can be nothing. It can be nonsense. It can be some documentation on intellectual property or whatever. All of that you can put in a token. So I know that what you do is much more detailed and much more

advanced than this childish display here. But if you go to a regulator or policy maker, at the end of the day, what we're talking about here is to take the most simple functionality that you have in real life, which is just stuff that transports thing from here to there, and we digitized that and we put it in this domain here. And this is where I think that the narrative should be built like and this is an exemplification. So when you thought everything can be easy, yes, but we can again make it a little bit more complicated, but not much. This is for example a slide that we use when we talk to central banks or when we talk to commercial banks or other players to explain what the difference is between traditional money and crypto or

tokenized money. And you see here a spectrum I'm obviously not going to the details where we have traditional forms of money. And if you for a moment forget the crypto part to the right hand side for every traditional form of money we have a tokenized version and then we have the crypto stuff in particular and the point is that there is no competition for one solution but all of this coexists I get very often the question when I am somewhere CBDC's versus stable coins who will win now that's a stupid question because at the End of the day there are use cases for other things. You can have

good designs for CBDC's. You can have bad designs which probably retail CBDC is a bad design. You can have meaningful applications when they're wholesale CBDC's on blockchain. You can have good stable coins. You have more cryptostable coins. You have PayPal going to the stable coin part. You have you all know that much better than I do at the end of the day. So simplify things, visualize things. DT is not a revolution that makes anything new. DT is a functionality that you can put on top of every existing solution that you have in the traditional domain and then I come basically to the two last aspects and then I conclude. At the end of the day this is about language. So in the past you got a long

training and thank you very much for the introduction again with me being an economist and where I've been etc. That's totally fine and I think nothing better in the world than an economist who doesn't calculate but okay you can be a lawyer you can be an IT guy you can be whatever at the end of the day code is all of that at the same time if you have a string of zeros and ones it has an economic meaning it has a legal meaning it has of course a technical meaning but basically it has an anthropological meaning because what it does is it creates a value space for those people that agree on some rules.

So those that are basing themselves on this code here which then enables them to put value in a digital system and safely transfer it. That is what it is about. It's as simple as that. But it is extremely difficult to understand if you approach it from your traditional line that you ask for example there's a DAO but I don't look out the window I don't see the DAO or if there's other things of basically where is this stuff. We need to start with the logic of programming. We need to start with the logic of code to then get the functionality of what we're doing here. Now, I could stop here because I think I've hopefully tried to show you that we are not only watching the space.

We are not only regulating, we are building, we actually building 100% open source. We are agnostic to the specific type of blockchain we want to support. But the world is not as nice as this looks like. And this is the situation that we're actually facing today because we have all of this out but we have more and more people everywhere that are now sort of distracting from blockchain or seeing crypto from a different perspective where basically many many people that want to control what is going on see this as a wonderful technology to have full transparency on all your transactions. Which is why we

see a massive uh effort to get I would say rid to the biggest extent possible of any privacy enhancing technology that is there. Privacy coins, mixers, obiscation technologies, all of that from a certain perspective a bad thing because it can hide transactions from the supervision of those people that feel entitled to do that. Now I personally take the opposite uh view. I think that privacy and data protection are absolute essentials as actually identified in our GDPR as bureaucratic as it might seem. But the bottom line is that data belong to you. They belong to the community that you choose voluntarily and you decide if these data

can be used or not. That is the starting point for everything that we also do in the digital domain. And no one has the right to watch that which is basically why it is so important to work and we do that with different types of CK proofs with other sorts of technologies that you can use to protect the privacy and this is a little initiative that I support. It's not a European Commission initiative. It's a thing that I do in my private life. I do it together with the defense team of tornado cash. We call it the digital freedom declaration. It is basically the start of a societal discussion why we need privacy and why we want privacy enhancing technologies to be basically present everywhere in order to prevent exactly this situation. So if you have a moment

if you take an interest in this stuff check this out. We will leverage this in many different uh quarters but I think especially in your space and I know that also the Ethereum Foundation is very much supporting the cause that is helpful to have but we need to fight every day for the most fundamental human rights that we have in the digital space. It's not only about technology. It's not only about code indeed, but it is also of preserving what we are as human beings with our fundamental rights to have the right to remain to the largest possible extent anonymous and self-determined in what we do. I thank you for your interest and um we have only half a minute so I've been told before that there will probably not be too many questions. I don't know if there's one question now otherwise you

know where to find me. I'll also be here tomorrow morning and I wish you a good rest of the afternoon. [Music]