Regulation and blockchain

By the middle of 2010-s informatization generated giant corporations which take part in every aspect of our lives.

Today the leading internet platforms follow us everywhere we go: we spend our spare time in social networks, use Uber for transportation, and most of the office tasks are easy to do using mobile platforms. And, whether we like it or not, the data about who we talk to, what we discuss and where we go is accurately stored. This data potentially provides the opportunity for perfect surveillance.

The authorities around the world understand that IT-corporations are able not only to do business but also to control large groups of people, manipulate their behavior and preferences in different life situations. This was the reason why the states around the globe started to control and regulate the internet.

The largest American corporations from FANG abbreviation provide the government of the US with all the data about users they have. Russia adopted several laws devoted to make internet transparent for the regulator (these include ban of particular sites, anonymizers and VPN, storage of all the data by the internet providers and mobile operators). China is the leader here, it actually created a surveillance system to watch all the citizens and organizations in the internet (behavior in the net can influence not only the credit rating of the person but also can be the reason one is allowed or forbidden to hold office, get free medical care and other public service). India follows China’s approach with its Aadhaar system.

Are people ok with such total control of all the aspects of their lives? Probably not. At least we can see that the attempt to directly control payments and currencies in 2009 gave birth to Bitcoin. It was followed with the solutions allowing not only to control payments but also transfer information, communicate in social networks etc. IPFS became an internet-provider and Bitcoin became a payment system.

Why do we see such great interest directed to decentralized systems and self-organized systems?

Human society has been going along the way of centralization and globalization for a very long time. First there were primitive tribes, then, after sedentary and agriculture became wide-spread, first states appeared. A more complicated social structure demanded institutes to provide the functions of defense from aggressive neighbors and control of the common rules enforcement by all the members of society. Time passed, number of institutes increased and the institutes themselves became more complicated. Today we are surrounded by state institutions, corporations, public organizations. All of them regulate our life, create order and formulate a general vector of social evolution.

However, during the last 100–150 years the structure of society and industry became even more complicated. Today we see a dramatic increase in small forms of business. There appear lots of startups, departments and big organizational structures inside corporations divide into small innovative groups. All of this looks line an innovative chaos causing the progress. The process of communication and interactions with other people is fragmented. Local communities are formed everywhere, no matter if it is a community of python programmers or embroider fans.

The society gradually makes a transition to self-regulated social interaction. But the generation Z wants even more, it wants to control the live completely and not to allow for external control by platforms, digital services or even the state.

How can the society regulate itself and ensure the rules enforcement? The solution of this problem is in creation of self-executed rules and financial instruments on blockchain inside the community. This is implemented with special tokens which define the rules how the community members interact with each other and with the outer world. The value of the token and the income of community members depends on how valuable and interesting the community is for the outer world. This can be either the basis of a single business structure (and we can already see examples of that among the teams making ICOs today) or any professional community. The community is then an organization with fully decentralized and automated control unit; this organization provides service to the outer world and obtains an incoming flow of value in some form which is the basis of the token’s value and is redistributed among the society members.

Naturally, such transformation cannot happen overnight. Most likely, several generations will have to change before one can see the paradigm shift. But the trend is clear, and technology helps this transformation.

The first example of such a community is the crypto community itself. Initially there was a group of people united by similar world outlook. They defined financial interaction rules for themselves, and started to live by those rules. This brought to the situation we can see today: their belief in the new interaction protocol lead to astronomic cryptocurrecnies exchange rates growth. Despite many community members became quite rich, the crypto enthusiasts are very alert about the cryptocurrencies hype. They often advise people not to invest money and think of the new projects as of beta-versions rather than finished product. In their world outlook the money gathered during an ICO is the payment the community is charged for the solution of an existing problem. This differs a lot an ICO from an IPO. For the enthusiasts the value of cryptocurrencies and tokens is the community formed around them.

Beside the crypto community one can find a number of examples of similar blockchain networks:

· A social network for students where remittance and payments inside campus are available (Campuscoin)

· Social networks with decentralized content creation and quality estimation, decentralized ads profits distribution (Steem, Golos, BAT)

· Dapps for art content (CreativeCoin, Voise, Musiccoin)

· Dapp for freelancers (CoinLancer, Git Money, Storm, BitJob)

· Dapp for state control (Democracy Earth, Flux)

· P2P loan marketplaces and project financing (BitBond, Bit Lend, Ripio, BlackMoon, Salt Lending)

Blockchain development will lead to localization of our interaction with the world. We shall return to the era of barter when one asset can be automatically changed for another one with tokenization. This is a basic model of society, and we have seen several times during crisis how our developed trade system is simplified to the stage of barter.

What is the use of such fragmentation? On one hand, the system itself will be much more sustainable. Today’s systems are so big and so complicated that the regulator being outside of the system is unable to see all the risks. A recent example is the CDS crisis of 2007–2008 in the US. Detection of such risks on early stage requires deep understanding of every single business model. This is impossible for the regulator today. On the other hand, this becomes possible when all the participants of the system make transactions in blockchain. Blockchain is the most transparent system today. This way the regulator can detect any problem on the early stage and not allow it become a disaster. Financial regulators all around the world seek such transparency. But transparent transactions are a fundamental change which demands a paradigm shift. It may be easier to create a new financial system from scratch than to change the existing one in the new paradigm.

If we take a look at the recent changes in Russian legislation during the last five years, we can see emergence of lots of SROs (self-regulated organizations) which make up the rules inside their industry by themselves. Therefore the state eliminates a huge problem as very often only strong professionals are able to understand how the industry really works and to create realistic and efficient rules for both the companies in the field and the state. Development of blockchain technology will make the SRO approach ubiquitous.

Is development of the abovementioned mechanisms a threat to the state itself? Definitely not. The only change is the regulatory method used to monitor and control the activity of people and organizations. The new model of financial system makes it more transparent and convenient for monitoring and violations prevention. Besides, direct relationships among the participants of the system and ubiquitous p2p services make network effects in the society stronger, it becomes more sustainable while the role of intermediaries decreases. This way the state itself becomes stronger, it is no longer exposed to the dangerous risks of system inefficiency and human errors.