Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Patrick Murck & Preston Byrne: Regulation Series by Siân Jones

Episode Date: July 17, 2014

This episode is part of our coverage of the Bitcoin 2014 Conference which took place in Amsterdam from May 15 to 17, 2014. These interviews were conducted by Siân Jones and focus on the area of regulation. Topics covered in this episode: Patrick Murck, General council of the Bitcoin Foundation Preston Byrne, Securitisation lawyer at Norton Rose Fulbright in London This episode is hosted by Siân Jones. Show notes and listening options: epicenter.tv/bitcoin2014-08

Hello and welcome to Epcenter Bitcoin, and Showitz talks about the technologies, projects, and startups driving decentralization and the global cryptocurrency revolution. My name is Sebastian Kuchu. And I'm Brian from Antoin. As you know, back in May, we were in Amsterdam for the Bitcoin 2014 conference. While we were there, Sean 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 financial institutions to stay away from me. 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 Merck. He's a general council of the Bitcoin Foundation and he talked about the stance of the Bitcoin Foundation towards regulation. The second interview is with Preston Byrne. 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 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 popular and important person, Patrick Merck, who is General Counsel of the Bitcoin Foundation,

the legal legal, the legal legal, when it comes to all things Bitcoin. And Patrick, you've been very heavily engaged in this last year with regulators and legislators. 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 has certainly been a busy year on the policy front. And we've been spending a lot of time both building our capabilities there, building up our messaging around that and also engaging at the same time.

So we've been doing both strategy and tactics all together. And I think it's paid off. And I think you can measure our success by kind of some of the lack of action, right? The lack of technology-specific rules or regulations or things like that. The thesis that we came to is that the best environment for Bitcoin's ultimate, success and we define success for Bitcoin keeping the protocol open participatory distributed decentralized the best prescription for that success is to not ask for new rules or new regulations we no one really knows how this will develop over

time so any sort of attempt at rulemaking or regulation that's specific to a technology would be premature so What we do think is fair and appropriate is to look at what the services are that are being offered and how they fit in current regulatory frameworks. Over time, we can then judge if there are incidences that we need to address as a community or through the governmental affairs, regulatory affairs groups to solve those problems proactively. But for now, it's more a matter of just mapping it out and seeing exactly where I think. fit, how they fit, and for the most part, seeing is there an opportunity to maybe not have as much regulation in the space? If we can look at some of the services and how they're being provided, potentially some

of the regulations that are being applied here may not, in fact, be necessary. The policy goals behind them may only fit traditional. of systems. So applying the current regulatory framework 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 one of the panelists back to the audience just yesterday from the European Banking Authority was why does it have to be anonymous, you know, as if, well, you solve that problem and I I start to relax was kind of message coming through there. Presumably those kind of responses come difficult for you guys on the policy front.

Well, 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. It's far from it. If anything, there's a big technical challenge. And consumer education challenge, I'm making sure that it's private enough for mass consumer adoption. So I don't consider Bitcoin particularly ready for mass consumer adoption yet for a couple of different reasons, but the primary reason is around this privacy element. It's simply not private enough right now as is constructed. Now there's a difference between anonymity and privacy, right?

And I think that we often conflate those terms in harmful ways. So there's actually a place for both of those things in our world. but we do have as a community both an opportunity and a challenge to respect everybody's privacy in a meaningful way and at the same time create a responsible system that doesn't require outside regulation or at least not heavy-handed outside regulation. So the concerns that were being expressed for, I think a gentleman was heading up a task force for a digital currency task force for FATOF, which is a... Actually, no, for the European Banking Authority.

European Banking Authority. Great. So the concerns there in that community are for every technology, for every payment system and payment method are around consumer protection and transparency. And when he says the anonymous piece is an issue for him or gives him heartburn, it's around this transparency. What's happening in the system? traditionally everything about a transaction is hidden from the world unless there's a regulatory responsibility to keep records and file things in the system that's been created here there's already radical transparency baked in perhaps there's an opportunity to rethink 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 FinC, with the Senate hearings, with FTC, all the various bodies at the federal level. Is that right in the U.S.? That's correct. What did you find their response, the general response? How did they receive this stuff that they were getting testimony on and so forth? It has definitely changed over time.

So you went from skepticism, sometimes deep skepticism. sometimes deep skepticism, to healthy skepticism, to now you're starting to see emerge people within the agencies and on the hill who grasp exactly what the benefit of this kind of system is. There are challenges, there are risks, and these can be mitigated, but you should always bear in mind as you start trying to mitigate those risks. there is a tremendous opportunity here for all of us 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 behind grabbing the headlines and of course it's the headlines that people listen to or see or here. Whereas in Europe, there isn't that same driver. 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 they don't have a lot of appetite for grabbing headlines in quite that same way. And so it's much more consultative here, whereas one gets the feeling.

looking at it from this side of the pond, anyway, that in America, there's a kind of shoot first and ask questions later approach, 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 your regulators and legislators. It's definitely a mixed bag. We've also seen shoot first, ask questions later, without a doubt. there are some states that have certainly taken it upon themselves to first promote their place in the process ahead of actually substantive work on that. And so you do have to deal with that a bit.

At the same time, yes, there are just so many different groups that have a finger in the pie here that they all have a different. and they all have very different ways of dealing with things. And they all want their say, of course. Is New York an example of one of those places? I would say that some don't want their say. Actually, some are simply sitting on the sidelines and don't want to get involved yet for a variety of reasons. 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 it has a ways to go before it's even worthwhile. And some would argue that commodities and futures and derivatives more broadly,

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 an important thing that we talk about a lot is the scope, right? 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 in the mix, but when you look at the broader world and it's both challenging in the sense that it's still a very small group, but it's good that it is a small group because we're able to come together a little bit easier.

And the opportunity is still huge. But it's still opportunity and it's still potential. We still need to tap into it. And that's going to be maybe not just multi-year, but multi-decade ahead of us. Well, we are where we are with the internet after 20 years in terms of commercial terms. So we should have that sort of a right.

Everybody, of course, once it's 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. But that's how early this really is.

And that's an interesting perspective. So from the foundations point of view, you see this with a much, a further horizon than quite a lot of the participants in Bitcoin businesses today who want to have clarity today and know exactly where they stand and be able to get on with their business. It's not going to happen quite like that. Yeah. So there's the, so clarity is important, but clarity could come at a cost that's not something that you should pay right now. So it's a tricky balance and I think people need to be very, very thoughtful about what they mean by clarity. If clarity comes at the price of compromising Bitcoin as an open participatory

decentralized, truly decentralized system, then you haven't really won anything by getting it in the first place. You talked earlier on about technology-specific laws, regulations, not being a good thing in broad terms. And yet in New York, there's a supervisory authority that is, I think, even named their idea for Bitcoin-specific regulation, calling it Bit licenses. So it clearly doesn't apply to Lakecoin, then. Well, yes, I'm not quite sure what people would think of Doge licenses, for example.

But 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 hard to know, you know, do I agree, disagree, or anything like that. I would say that, marketing aside, the idea of a tech-specific bit license is unfortunate. 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. So that's consumer protection and transparency again. So the transparency piece of it is handled at the federal level. All those companies have to be money service businesses registered with the U.S. Treasury's Finsen Department. And those companies have to file SARS. And Finsen, you know, that's a conversation that's been.

going on for a little while now about how to attack these problems in a thoughtful way. 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 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 you somehow don't miss either don't store it properly so that it's stolen or because you lose it. So 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 surety 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 positive development. And as I understand it, there are a lot of regulations in the existing framework that are simply impossible for Bitcoin to, or Bitcoin businesses, exchanges in some cases, to comply with simply because

some of those criteria just don't exist. It's not in the system. Those rules were created oftentimes in public-private partnership, you know, decades ago 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 system.

When you have a system with no intermediaries, perhaps the police should be the police of that system. Yes. Yeah, that's, I suppose, it's not really a bit license. It's an intermeditated, world license. That doesn't mark it as well, right?

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 turn. 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 process or system or technology. Let's think about what the policy goals are to begin with.

If the policy goal is to protect consumers when a third party has custodial access to your funds, let's just talk about custodial access to your funds. Yes, I think that makes a huge amount of sense. Presumably that's going to take a lot longer still because that's too many fingers and pies to play with it. Right. And so to get there, 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 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 draw this to a close and just discuss things happening outside of

the US. appreciate, presumably, it's simply lack of resources that allows you to address too many places all at the same time. And you've got, I suppose, what is it, 51 countries in the United States if you take the federal government to deal with as well. So that's a fair number of jurisdictions. Now, there's the rest of the world. The next big block, of course, is the European Union. Does the foundation have some plans to address the same kind of issues but at the European level? Yeah, so we've participated in FATOF, which is beyond even the EU, but we were in Brussels for that. And we are, you know, taking the framework that we've been building some of the strategy and exporting it, right?

and allowing people locally to have, who have a better sense of the tactics that are appropriate to implement them. Because we do have limited resources and limited reach, the process is to identify key jurisdictions around the world. I still would love feedback on what those jurisdictions should be. We can clearly identify some, right? So the EU, right, is one. So Frankfurt, you know, is probably the right.

right place to have that conversation. Probably Brussels. Maybe Brussels. It depends on, you know, it does depend. Well, even London, because the European banking authority is based that. Sure. Potentially London, although I don't think that, I don't know if the rest of the EU considers London part of Europe, but yeah, I understand.

So, but the world clears through London. So that's one area that we've talked about. You know, Singapore, Hong Kong, Dubai. These are all traditional financial hubs. These are the places that the world clears through already. Moving into Latin America, which is a hugely important market for Bitcoin, identifying a jurisdiction there where it makes the most sense without banging your head against the wall,

where the countries have fiscal policies that will never really accommodate Bitcoin. So that's the conversation that's happening right now. And again, I 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 and then working from there. So send your emails, listeners, to Patrick Merck at the Bitcoin Foundation. He's waiting for your feedback right now. I've set up my email filter now.

Patrick, thank you very, very much for sharing your thoughts with us this afternoon. explaining a lot actually that I didn't know. So I'm sure our listeners didn't know it either. Thank you so much. Thank you very much for having. So this is Sean Jones. I'm at Bitcoin 2014 in Amsterdam, with about a thousand other people,

one of whom was just nominated for the Bitcoin legal expert lawyer, based in London, Preston Byrne. Do you want to tell us a little about yourself? Sean. Yeah, basically I'm a securities lawyer. 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 who then hold that debt in the form of notes or bonds.

So it's a very procedural type of practice. There are orders in which things go in and there are orders which things go out and subject to some very complex if or rules. And that, I think, has made the smart contract space in particular. cryptocurrency in general, 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 have an awful lot to say,

and a lot of insight. I want to tell us a little about smart contracts? Well, I mean, I suppose, I think the starting point is I've been interested in them for some time. I was familiar with Nick Zabo's work before Ethereum kicked off and became cool. 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 you're able to service Bitcoin and merchant 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. And smart contracts by contrast, 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.

That can be the storage of data. And so that's really what's attracted me into the field. As to what a smart contract is, there are sort of two different views. And that's true in every area of smart contract practice. There's the engineer's view and there's the legal view, and oftentimes they don't link up. 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. In that sense, Bitcoin itself is maybe considered a smart contract of a kind, a very basic one, rather like ARPANET, in comparison to the kind of smart contracts. which are being proposed.

But going forward, we have individuals who are planning very, very complex arrangements from the very simple smart contract, which is a collateralized, or escrow agreements. Smart loans are fairly straightforward to the more complex, which are communications and social networking. So the potential for a decentralized network to really change the face of Bitcoin, I'll be honest with you, I don't hold any Bitcoin. I have no intention of ever holding any Bitcoin. and I think that the utility offered by smart contract platforms, when compared against all of the fuss that's being made against Bitcoin, I don't understand the relative lack of emphasis on smart contracts.

Perhaps that's because they don't exist, at least in a commercially workable form. And something very new. And so, yeah, they are very new. But we've known about them for about 17, 18 years that existed in theory. And for a industry, which prides itself, I think, of being quite progressive, the lack of emphasis on the smart contract space. 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. And from, I think, a political perspective, I'm aware that a lot of Bitcoiners are of the view that Bitcoin will democratize finance. That may be, but I think a lot of bit corners are also the view that more people using Bitcoin would drive up. its price. Smart contracts are really, they're quite agnostic in the sense that 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 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, which Bitcoin admittedly does, but offers much of the same utility, and in fact offers considerably more utility than Bitcoin. And I'm surprised that a lot of people don't see that. I've heard it said that smart contracts, but I've heard it said, first of all, that Bitcoin is the first app. Yes. And that smart,

sorry, that Ethereum as a platform and smart contracts more generally offer virtually boundless possibilities of apps only limited by the imagination of those who want to innovate those apps. I think we should make a distinction

between the platform and the app. In the case of Bitcoin, Bitcoin is the platform. It operates according to certain rules. It responds to certain instructions in a certain predictable, way every single time with very rare exceptions where there's a fork. In the case of the types of apps which are being designed on Ethereum, Ethereum 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. They are able to change state from time to time in respect to certain amounts of data which are registered or deposited with that contract. And it's my understanding that when you want to amend the contracts or in 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 cash management functions. In that sense, I mean, Bitcoin isn't really an app.

Bitcoin is what we call a DAO, which is a decentralized autonomous organization or decentralized autonomous corporation, DAC in other parlance. And the DAC is basically something which behaves as a custodium of some description. And what it does is it carries out certain functions automatically. Bitcoin is a very basic DAC. Ethereum is also a DAC, but it is a DAC which allows the construction of additional DACs or DAOs on top of it. And it just strikes me that that kind of functionality provided that. And I do believe the Ethereum team is excellent, having met them.

And there are other teams which are also excellent in the space. Ripple, with its payments protocols, a very discreet industrial application. MasterCoin is making efforts in this direction as is next. but really Ethereum has been one of the most forward about it. 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 be on the Ethereum platform or not, that will really, frankly, change the way the world does business.

Bitcoin, you know, people say, Adam Levin said in Tim Swanson's book, he said, Bitcoin, welcome to the future of money. But he said that about Ethereum, and I think he was wrong, because it's not the future of money. This is the future of everything. This is a decentralized industrial revolution. 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. I'll come back to you on that. We'll interview you again and see if it lived up to the promise. People hear the word contract. And of course, they think legal stuff. They think lawyers, obviously. They think courts. They think codes.

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 this old body of rules that we live by and operate under? Absolutely. I mean, if we go back to Zabo to start, his vision was for a series of digital institutions which replicated the functions of bricks and mortar institutions, analog institutions. He called it wet code, the rules we live by. And he posed that you could use these contracts

in order to describe it to replace these institutions because you could reduce the majority, if not all human transactions to code. And there are ways, there are transactions where you can do it, But there are practical difficulties on the blockchain. We'll get back to that in a second. Legal obligations exist because we deem them to exist, because the courts, the sovereign, deems them to exist.

And so they are 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 neat 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 for 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. 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 a court might force against Alice in, for example, a situation where Alice took advantage of some exploit in the code in order to seize his collateral and get paid in full of the loan. The court would then give Bob certain rights against Alice. So the gulf between those two positions, between smart contract position and the legal contract position, is really one of real world enforceability. And you could, in principle, have contracts on the blogger. blockchain, which bore 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. 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 back door. Programmers hate it. But you need to have an ability for a trusted third party to say.

step into the transaction. That said, trust that third party 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 lawyers or pre-lawyers first thought of writing agreements down and writing up contracts, they thought this was a good way of doing it because we could list everything that might happen and what the different circumstances and how what affect those different circumstances have. 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. I think that contracts are actually deliberately vague. I'm being completely serious. They are, in some cases, there are rules, for example, 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 a 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 unmoving framework because that means that change circumstances. You cannot account for those. A prime example is if you make reference to a 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 lessons involved. That's one thing where the requirements change because of facts on 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 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. The vagueness is deliberate. The smart contract, if you are unable to make the appropriate accommodations by virtue of the cryptography, you may find yourself in situations. The parties may find themselves in a situation where neither of them are getting what they want. And the contract itself may be rendered unenforceable in respect to a particular jurisdiction.

This is particularly true with consumer credit. Okay. So have you got an example of that? of where a contract would be rendered unenforceable. If you had, let's say someone entered into a loan, it was a smart contract loan,

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 on a loan, which insures their payments. So they go to the bank, and they say, bank, I'd like to take out a loan of 100. And the bank goes fine, you can take out a loan of $100.

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 you have to buy it from them. And the person goes, okay, fine, fun, 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 you made by the insurer to the bank, in respect to the bank directing consumers to the insurer. When that happens, customer has borrowed five over time equals whatever and made payments of principle an interest in relation to it. Under the current regime, the customer benefits from legislation, which allows that customer to reclaim both the principal and interest that they paid, plus penalty interest on top of it. 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, a court would step in an attempt to unwind.

it. If you have a smart contract in respect of which that cannot be done, 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. 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 frictionlessness. Frictionlessness, is that even ord? I think you can guess it right. And you benefit from all of this automation. Sure,

the banks will benefit, the consumer may benefit in terms of reduced costs, freedom benefits, because it's all being conducted cryptographically, and 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 will 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 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 different, the inclusion of those rights has value in itself. And so I would rather go with the second contract that flexibility is built in. And I'm buying accountability in exchange for, you know, the loss of a trustless network. I'm a fully trustless network. I suppose there's going to be a lot of interesting work done on making smart contracts fit into the legal contract framework and into enforceable contracts that you can take to it. It's not too cool. I don't think it's that hard.

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 know, DIOs get out of control and, you know, become Skynet and eat us. And it's a silly debate because, you know, okay, fine, you have a DAO which sits outside and can't be affected and won't budge, you know, no matter how many drone strikes you shoot at it or how much hash power you point at it, it's, you know, it's there. It's a blockchain. It 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.

And that consensus is, and it's the same thing with any other distributed autonomous organizations. 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 practical and 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 I think that's where it will go, but we need to really start first seeing commercially

viable platforms that can be deployed. they're almost there. And the people are writing, there's a chap named Dennis McGinnon out in Canada who's particularly well along, and he's a very interesting modular contract. He calls Doug, which I recommend your listeners look up.

And it's on my website, Prestonburne.com, a brief post, and I've got to write some more about it, some more about it going forward. But, yeah, Dennis is a lovely guy, nice guy, smart guy, and actually very amenable to criticism. And he's working on this contract,

which is quite flexible. 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

Bitcoin's an open beta there was no there's no alpha on test net and any of that stuff they just let it go and the same thing will happen with smart contracts so what's your prediction on time scale before we're all familiar when we come to smart contract 2016 2017

I said in January, early February of this year, I said that it's only a matter of time before governments, businesses, and financial institutions begin incorporating blockchains into their operations. At the time I made that assertion, numerous decentralization advocates said you are out of your mind. That will never happen. Two weeks ago, Fidor started using Ripple. Last week, a bank in Mexico started using Ripple. I'm talking with the bank at the moment that is looking into decentralized ledgers either decentralized or ledgers which are proprietary in order to structure the transactions. And this is coming.

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 a very clear prediction. It's a clear prediction. And it's something we journalists love because, of course, we can revisit it.

Absolutely. And come back and it'll haunt you, either because it was, you know, it wasn't generous enough or because it was too, you know. I'm so damned if I do. Exactly. I want to turn to one last thing. Yeah. We were both in a panel debate or in the audience of panel debate earlier on today,

and the subject of which was AML, anti-money laundering. There's some very, probably one of the most lively panel sessions today, and very interesting. You asked a question regarding off-chain transactions and how it might solve some very particular problems. I wonder if you want to share that with the last night. I'm quite happy to. So the panelists, I was looking at them chasing their tails.

That's not a criticism. It's just that's the way that the discussion was going. And I'm merely being descriptive. And I think they were looking for a universal, uniform solution to identity in the blockchain. And the fact is that will never happen. And again, for the same reason that you're not going to have a smart contract, which is fully automatic, you're not going to have a cryptocurrency where everyone signs on because there is a human element, the element of the user, the element of consent.

And the idea that you can take Bitcoin or any other cryptocurrency and then reduce it entirely to regulation, 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 dollar, and it benefits from transaction fees or mining fees or God knows what else. So any major commercial bank you can name, they create one. They say if you come to, I don't know.

You get the idea. With a decentralized one like Bitcoin, I think that'll frankly never happen, firstly, because the blockchain is beyond control. And secondly, because if there were a blockchain which the regulators attempted to render controllable, I think you'd see a fork in about 10 seconds flat. And so, again, who's going to jump on an official coin and who isn't? Of course, you don't need to do that. What you can do is you can use an off-chain solution, and then businesses will be required to use it and comply with the regulations. it and 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 framework legal, and it won't make it all right 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. about to get in serious trouble there with my libertarian friends. But the state is able to step in in very discreet places, points of articulation where

there are entities which it controls through legal control and the cost to them of not submitting to that legal control is prohibitively high. Any business, any legal entity, any trust, any private individual who chooses to identify themselves. So I think if the discussion goes the way that that particular panel, seem to endorse, which is a view I frankly don't agree with, but, 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 or several trusted silos, which compete with each other on terms and price. And then you'll also see the blockchain carrying on very difficult to control, as the chat from Ripple said, you know, you've got green, red, and gray. you can't go red to green and you can't go red to gray, which can you go green to gray and that's the distinction. I think you'll see people could still do peer-to-peer transactions, buying Bitcoin from someone down the street.

Would the government realistically be able to control that? Probably not. Would they be able to limit? 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 taxes, but that's a discussion for another time. But it is a private industry 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 in order to engage with Bitcoin business, which is something which would not be advisable or desired by the banks, 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 silo systems work? Are there examples of those in existence or being planned? Swift? I think it's a sort of trusted mutual silo between the banks themselves. So you'd have to be very careful with a Bitcoin silo for obvious reasons because of

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. comes out of this depending on how cryptocurrency takes off, which governs its use in mainstream transactions. And for all we know, there may be cryptocurrencies which are developed within silos. And that is heresy, but the possibility is there.

There's a chap named Greg Simon from CryptoWorks that works with an E. 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 about how you can monetize a silent blockchain. And there are many ways you can do it. People are coming up with them every day. And I think we're going to see a lot more of that, certainly in the next 12 months in terms of proposals and the beginnings of these projects. And within two to three years, we're going to see, I think, very widespread implementation

at first in financial applications and from there it will expand. I guess this is where the banks are very involved at the moment, certainly in some countries, in developing blockchain-based projects. I don't think they're developing them. I think they're looking at them as almost the curiosity, but remembering that a bank is a very large corporate organization. They wouldn't take a very long time to deploy this

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. And then all of its competitors will very swiftly pile in and look for similar implementations. The benefits could be a couple of banks in London just sacked 15,000 and 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 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 because 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 predict that with a reasonable degree of certainty,

of course there's counterparty risk, things like that, but that's the idea that you can have a very tightly organized system which performs all of its functions itself, even very complex transactions like secure organizations are in theory reducible to a crypto ledger. 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. 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 Byrne. Always a pleasure. For entertaining our listeners. Just do listen to Epicenter Bitcoin on SoundCloud and iTunes and wherever else you find good podcasts.

Thank you very much. Pleasure. So we hope you enjoyed this episode about regulation. We'd like to thank Sean Jones for her excellent work in capturing these very valuable opinions. If you enjoy this episode, please consider tipping us at epicenterbidcoin.com slash tips. You can also subscribe to a weekly newsletter

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