The United States is about to lose its economic superpower title
Co-Written with Mick Emmett
Despite its many advantages, protectionism and short-term thinking are doing real and lasting damage with blockchain and other financial innovations.
Until February 11, 1990, Mike Tyson was boxing’s undisputed, undefeated and seemingly unbeatable heavyweight champion. In a sport filled with some of the toughest people on the planet, Tyson was in a class by himself. Sometimes you could even see the fear in his opponents’ eyes when they got in the ring with him. If you watched boxing back then there was nothing more riveting than a Tyson match. To many boxing experts it was just a matter of time until he bested Rocky Marciano’s 49–0 record — the holy grail of boxing records.
Enter Buster Douglas. Douglas was a solid fighter, but, like pretty much every other opponent, he was given practically no chance of beating Tyson. In fact, the pre-fight odds were 42–1. Also not in Douglas’s favor were serious family problems: his mother passed away a few weeks prior to the fight and the mother of his son had a severe kidney ailment.
That night in Tokyo Buster Douglas achieved what is arguably the biggest upset in sports history: he knocked out Mike Tyson, and he did it convincingly. Only Mike Tyson and his team really know what happened, but it’s not exactly stretch to say that he didn’t seem to take Douglas as seriously as he should have. All that easy winning seemed to make him complacent and overconfident at the same time. And all those years of being the champ — and the huge paydays it generated — made it easy to live the good life, as in the super, unbelievable good life. Tyson’s team didn’t even bring ice packs or an anti-swelling plate; both standard for boxing matches. After all, who was going get in good shots on Mike Tyson?! Buster Douglas sure did, and the rest is history.
So what in the world does this huge upset have to do with the United States and blockchain? A lot.
Keep Your Eyes the Prize, or Pay the Consequences
The United States is a global talent marketplace. People from the US and those who come here from all over the world are surrounded by pretty much everything one would need to succeed (though access to these resources is a whole other topic): employers of all sizes and levels of innovation, universities, infrastructure, rule of law, and many other elements of a global leader. Technology and financial services are just two of the industries where the US leads globally. Say “Wall Street” or “Silicon Valley” to practically anyone, anywhere, and there’s a pretty good chance they know what you’re talking about. There’s also a good chance that the United States in July, 2017 is Mike Tyson in February, 1990.
Allow me to explain.
If The Starfish and the Spider Came Out Today It Would Definitely Include Blockchain
In their prescient book The Starfish and the Spider: The Unstoppable Power of Leaderless Organizations, Ori Brafman and Rod A. Beckstrom take an in-depth look at the concept of Decentralized vs. Centralized structures. With companies. With governments. With societies. With tech applications. With…many things, including living organisms. Hence the starfish (decentralized) and the spider (centralized organism).
Starfish don’t have heads or brains. Their major organs are replicated through every arm. Cut a starfish in half and you’ll soon have two starfish. Cut off an arm and it just grows back. Spiders, conversely, have 8 legs coming from a central body. If you chop off a spider’s head it dies. It could survive a leg or two cut off, but not the head.
It’s a fascinating read if you’ve got the time, even if it was published way back in 2006. You’d be hard-pressed not to notice the direct predecessors to blockchain applications that they delve into, like peer-to-peer (P2P) networks (remember Napster and Kazaa?!) and the open-source software movement. And those are great comparisons, among many covered in the book. But for our money…er, digital currency, the United States military vs. Geronimo and the Apaches is the most illuminating.
A Starfish in the Desert and Mountains
Unlike their one-time powerful neighbors to the south — the Aztecs and Incas — the Apache were not a “spider” society. There was no clear leader like Montezuma of the Aztecs or Atahuallpa of the Incas. Nor was there a rigid hierarchical structure or central locations where decisions were made. And there was no getting conquered by the Spanish (and later the Americans) once they figured out where the “head” was and summarily decapitated it.
The Apache were a starfish society. Instead of acknowledged leaders whom everyone was required to follow, the Apache had the Nant’an (like Geronimo), who were more like spiritual and cultural leaders. They led by example, not coercive power. Tribe members followed them because they wanted to. In this type of open system everyone was entitled to make their own decisions. And, since there were rules and norms (though they weren’t actually enforced), the society did not descend into anarchy like you might think just reading the description. Perhaps most importantly to not being easily conquered or controlled, the Apache were amorphous and fluid. It was impossible to know how many of them existed, where they were, and who influenced whom. Just like a starfish, you could conquer one group (or “circle” as the book calls them), but that would have no effect on damaging the others. If you’re thinking of al-Qaeda right now, you’re on the right path.
After the Apache eventually defeated the Spanish, Geronimo and other Nant’an kept the US flustered for decades despite an overwhelming disadvantage in manpower, weapons and resources. Like other decentralized organizations, when attacked, the organization tends to become even more open and decentralized (aka, the first major principle of decentralization).
If only this book had been written in 2017, because the authors would have been all over blockchain considering the same centralized vs. decentralized dynamic is taking place right now with banks (and other financial institutions) and blockchain. Actually, hold that thought for a moment…
Blockchain Is Getting Its Closeup, Ready Or Not
Blockchain is many things — including the platform underpinning cryptocurrencies like bitcoin and ether — but it’s not connected to a sovereign currency nor is it standardized: it’s a decentralized starfish of a platform. And that’s what makes it so enticing to so many people, especially those who don’t want third parties involved: pesky centralized “spider” entities like governments, regulators, auditors — and prosecutors. But anything that’s moving ~$100 billion of wealth around the world (or, more accurately, digitial currency in the form of tokens) via bitcoin, ether and other cryptocurrencies is going to get attention from more than just banks, tech innovators and money launderers. Centralized, spider-y nation-states might be slower afoot, bumbling and habitually late to the game, but you better believe they will be looking to get a piece of the innovative, starfish-y blockchain action. One way they’re trying to control blockchain is through regulation.
Enter Sandbox
There are many regulatory approaches and activities happening now in the US and other countries, covered in our recent article about FinTech regulation. That article describes some of the US regulatory agencies that are making a real effort to work with a very different financial animal like blockchain. The situation is tricky in a place like the US where entrepreneurship is strong and a powerful force in the economy. You don’t want to overregulate blockchain and other FinTech innovations because then the entrepreneurs will just go somewhere else. Conversely, if you have weak or no regulation at all then you’ve got a Wild West situation which means no revenue and no benefits. Different countries and political entities are taking a range of approaches, though the jury is still out on what’s effective.
All that being said, the reality is that the US — despite its many financial, tech and innovation advantages — is losing ground to European and Asian countries. Fast.
The differences between blockchain-based currencies and traditional financial instruments require different approaches to regulation. It would be like Facebook trying to unilaterally regulate the Internet — the ENTIRE Internet. Not possible, even for Facebook. So what’s a country or region or continent to do? The European Union (EU) — among other entities and governments — has some interesting ideas.
The EU — specifically, the European Banking Federation (EBF), an organization representing 32 national banking associations — has arguably been leading the way in blockchain and other Fintech-related regulatory innovation. In a paper they issued last October, the EBF recommended many forward-thinking ideas that cover 2017 and beyond issues like cybersecurity, the ubiquity of cloud services, e-identification, and more. Perhaps the most interesting recommendation was a pan-European FinTech “sandbox.”
This type of sandbox would allow for experimentation with cross-border financial services. It’s sort of like how beta software works in the tech world: it allows users to test an application or service in a “live” environment and produce results that are then used to optimize it for wide release. The UK, Singapore, Hong Kong and the UAE are already using sandboxes which count many blockchain startups as participants, in fact. The EU is pretty far along to joining them. And the US is, well, all over the place..
Don’t Sleep On China
It may have been slow out of the gate, but China is now flooring it with regard to FinTech. Specific to blockchain, a recent Ernst & Young report titled The Rise of FinTech in China details just how fast they’ve taken to blockchain. According to the report, VC-backed investments in blockchain and bitcoin companies went from US $3 million in 2011 to an estimated $1 billion by the end of 2016. There’s growth…and then there’s that.
Beyond the VC numbers, there have been other aggressive developments on the blockchain front, including a Global Blockchain Summit held last year in Shanghai, a combined government/industry blockchain working group organized by China’s Ministry of Industry and Information Technology, and several other blockchain consortiums. It’s still early days, but the Chinese seem to sense the magnitude of this opportunity and are taking action to benefit as much as possible. So maybe it’s not surprising that Chinese bitcoin exchanges have accounted for 42% of all bitcoin transactions this year. Just one look at this chart will tell you all you need to know about bitcoin activity.
…Or Russia
And then there’s Russia. This is where we make the segue from regulation and innovation to potential wide-scale adoption.
At last month’s St. Petersburg Economic Forum it came to light that Russian President Vladimir Putin met with Vitalik Buterin, the founder of Ethereum. Russia’s interest in Ethereum specifically (and not the much more popular though less expansive bitcoin currency) is not at all surprising. A digital token like ether (Ethereum’s cryptocurrency) probably won’t replace the ruble anytime soon — at least not completely — but ether could get “official” government recognition and be used alongside it. The same goes for Ethereum in general. That would be a game changer. That’s like taking a software beta and immediately putting the product on the computers of hundreds of millions of users.
It’s no secret that things can happen really fast if Putin is behind them — significantly faster than the US and European Union, that’s for sure — and it’s still early enough in the blockchain story for a country with a lot of engineering talent (where to even start…) to make some noise. A compelling storyline would certainly be how a decentralized platform built for secure transactions would mesh with a country notorious for corruption on a massive scale.
Russia could potentially do a “Go big, or go home” approach with Ethereum (or “Со щитом или на щите” as they might say in Russia), which would be fascinating to watch. It could happen, and bears watching closely.
Oh Yeah, Then There’s The Rest Of The World
A powerful country like Russia can have a relatively weak currency like the ruble but still be able to choose whether or not it integrates a cryptocurrency into its economy. The same cannot be said for every country. And this is how blockchain could really break out.
Think about it: a sovereign currency in Africa or South America (I’m looking at you, Venezuelan bolivar) could collapse and be worthless overnight. Finding mountains of gold reserves or billions in a stable currency like the dollar isn’t happening. But adopting a cryptocurrency is one of the few possibilities. Forced adoption might be more like it, but there would instantly be critical applications like transfer of payments. That’s a start. It’s also a whole other article that we need to get cracking on…
Banks Are Trying to Rig the Blockchain Game in their Favor. Because Banks.
Given the amount of wealth involved with blockchain-based currencies right now, the big banks are trying to sabotage public blockchains like bitcoin and ether. After all, they can’t control them. And that severely limits how much they can benefit. Having been the richly rewarded stewards of wealth (cash, transactions, gold, military) for so long, they have a lot to lose.
So, in the US anyway, the banking industry has been lobbying against public blockchains, sometimes disingenuously claiming they are a security risk because you can’t identify the transacting parties (not exactly true since a cryptographic key discloses info, but only to its holders). They unsurprisingly claim that banks are needed as a third party to oversee transactions — how spider-y! And while playing this angle of the game they are simultaneously playing the other side, working on “private” blockchains” which leverage the innovative parts of blockchain but without the decentralized, starfish nature of it. Just check out JPMorgan’s Quorum private blockchain and you’ll see what we mean.
OK, So Where Is This All Going?
Glad you asked. The answer is…it’s complicated. While there are a lot of players, moving parts and unknowns, the thinking here at Realm Labs is the US is poised for a Tyson-like knockout. Maybe not tomorrow. And maybe not next year. But it’s coming if we don’t embrace innovations like blockchain and get out of our own way.
Like pre-February, 1990 Mike Tyson, the US has more advantages than any other country to be the #1 world economy. But if it coasts on past success and follows self-interested, shortsighted advice without doing the work it takes to stay on top, then dogged competitors like China, Singapore and Russia on the nation-state side and millions of individuals and companies on the public blockchain side will climb over the US.
Door #3 Is Looking Pretty Good
The way we see it, there are three approaches the US can take to embrace innovation like blockchain and maintain its status at the top of the economic heap:
1) The pure libertarian approach. Basically, let it grow like a weed. Classic Ethereum is a good example. No rules or repercussions is great…until it isn’t. There are certainly situations and environments where this approach works well. But on a global scale? No.
2) The “listen to banks” approach. Banks are spiders. If the US government listens to them it will send droves of innovative companies and people (i.e., the starfish) elsewhere — out of the US and out of its control. Rip this starfish arm off over here, and 10 more will grow over there.
3) The “Hybrid” approach: in the book, Brafman and Beckstrom describe how companies like eBay, eClass229 and Intuit took the best elements from starfish and spider models and operated as hybrid organizations. In other words, a centralized company that decentralizes the customer experience.
Frankly, the only way the US will avoid losing its economic superpower title belt is to embrace the hybrid approach. By employing a “light touch” and telling banks that it’s going to be open-minded and responsible with FinTech innovation like blockchain, the US puts a fence around it while also providing room to roam (like the European “sandboxes” mentioned earlier). Then there’s no brain drain of developer talent, and no handing over the economic superpower title belt to countries who are embracing blockchain, and who have computing resources. And, most importantly, no repeat of Mike Tyson’s bad night in Tokyo.
DISCLOSURE: We wrote this article ourselves, and it expresses our own opinions. We are not receiving compensation for it. Views shared here are our own and cannot, under any circumstances, be interpreted as an official account of any companies we are associated with — currently or in the past.
