“Interoperability” — Singapore Blockchain Week’s Buzzword
Singapore Blockchain Week’s first virtual conference just concluded yesterday (21 July 2020) and the word that seems to be on the tips of every panelist’s tongue is that of “interoperability”. Having had the privilege to speed run through the video conferences in the comfort of my PJs, I thought it would be good to see what the industry means by this as well as touch on other interesting points which came up in the discussions.
The one thing that the panelist agreed on is that the industry has matured significantly, especially as COVID became the unexpected catalyst to push the industry towards more production blockchains instead of proof-of-concepts (POCs). In an environment where people can’t meet face-to-face, the trust assumptions built into blockchain systems seems to be able to encourage better virtual collaboration. Discussions about the future of the technology has shifted from potential use cases to how existing use cases could integrate with each other. Essentially, how can individual systems interoperate by building smart contracts on their own systems which can then trigger contracts on an external system.
Critically, discussions around interoperability was not limited to just the blockchain layer but extends more generally to things such as: central bank digital currencies (CBDCs) and cryptocurrencies; decentralized finance (DeFi) and existing institutions; and even wallet interoperability for a better user experience. Underlying all these discussions was a shared understanding that there is not going to be a single dominant blockchain in the future due to the organic nature of this technology. As such, the chaotic potential of the blockchain industry has to be reined in by the creation of standards for interoperability. Standards which are not exclusively defined by private consortiums but rather in collaboration with government and open-source communities.
Being a Singaporean initiative, a lot of inspiration around inter organization collaboration was taken locally, especially that of Project Ubin which just recently concluded its 5th and final stage. Singapore’s decision to spearhead the technology rather than regulate out of fear of the technology was highly praised by many panelists. This public-private collaboration as well as the initiatives around connecting industry players and creating regulatory sandboxes underlie much of the private sectors willingness to invest more into the technology’s growth. Ultimately, Singapore has managed to redefine this public good (which is exactly what network effects are) as public infrastructure built on open-governance prioritizing equality.
Common Goal, Different Approaches
What was most interesting to see during the panel discussions was the different ways the panelists compartmentalize their views around their priorities in the blockchain industry. These provided an invaluable insight into the interdisciplinary nature of production grade blockchains and can be generally classified into two parts:
- Public sector: Innovation, systemic risk, consumer protection
- Private sector: Throughput, reliability, pricing certainty, governance
Of particular interest was the progressive framework based on different effects touched upon by Monetary Authority of Singapore’s (MAS) Chief FinTech Officer, Sopnendu Mohanty. Innovation effects generate network effects as the technology generates more interest and excitement. Network effects generate regulation effects as there becomes a need to protect less-technically abled individuals as well as minimize systemic risks. Regulation effects generate ecosystem effects as it reduces confusion and uncertainty around the future of the technology. Finally, ecosystem effects generates platform effects as it sets the standards and reduces the barriers to entry. In effect, ideas are superscaled and various players can easily connect, match, and agree on a trade. The above is my understanding of this framework but it definitely serves as good food for thought.
Identity Crisis: Centralized-Decentralized Structures?
For those who aren’t crypto-enthusiasts, much of the practical use cases for blockchain technology usually ends up further on the right side of the decentralized to centralized scale. Many of these cases are driven by companies which have a significant market share in the industry and usually results in a closed-looped system. For all practical purposes, this is a better starting point for enterprises as the focus is largely on the evidence trial of the process. Whether the enterprise approaches the technology from an efficiency ROI perspective or new market creation perspective, regulatory burden for global supply chains ensures that this will continue to be the case for the foreseeable future.
Moving into “Wild West” of unregulated cryptocurrencies, there is also a need for DeFi to properly define their business models. In the long run, smart contracts themselves cannot be a business model as contracts can be easily replicated. Instead, the industry will have to derive its value from its ecosystem and user experience(UX) in order to drive customer adoption and sustainably high service levels. Moreover, DeFi models will have to determine whether they are trying to fit into the current industry or play to the strengths of the technology itself. Enterprises will continue to look at DeFi for inspiration while relying on existing regulation to safeguard the monetary system.
In a class of its own
Defining the products based on blockchain technologies (crypto, tokens, digital assets) was also a point up for debate as the existing financial definitions were inadequate. Rather, a unique and combined approach is required in order to ensure global consistency. Its use as infrastructure allows for more flexibility which is key in providing a testing bed environment. Financial inclusion is also contingent on this as such a definition enables transaction and money flow to be democratized.
With this being said, blockchain is still an unknown area for the large majority of regulators and hence it is the responsibility of those of us in the industry to educate and collaborate with them. The industry is relying on blockchain being a global network and it therefore has to be thought of in this way. Given that digital assets have no physical boundaries, jurisdiction regulation will be extremely difficult. The common starting point for all is that regulations require a standardized approach else risk too much friction for businesses to adopt with all the different tax regulations. This regulation will be key to consumer confidence which leads to education around the technology.
Central Bank Digital Currencies: Monetary Battle Ground
CBDCs were also a hot topic following upon the heels of China’s Digital Currency Electronic Payment(DCEP) national currency. Although the technology for this use case is still in its early stages, governments are aware that they cannot afford to lose out on this race. Much of this boils down to monetary control and hence decisions around CBDC interoperability will likely come down to politics rather than technology. There was even talk about Libra becoming a pseudo-government coin as the American government realized that it was so far behind the race.
Nonetheless, some of the questions arising from the discussions is still worth pondering about. If a country does issue its own CBDC, will it be issued by the private sector partner or the central bank? What is the central bank’s liability? Will we be able to start trading foreign currencies in the local market or even use the foreign currency as a bond? What will be its impacts on fractional reserves/banking? How will CBDCs be viewed by a financial industry which has historically thrived on transactional friction? Will CBDCs replace existing stablecoins? Should the CBDC be transaction or information focused?
The common theme throughout is that CBDCs will likely result in better financial access to the unbanked population as it significantly reduces transactional costs. CBDCs will also be a better way to distribute stimulus right into the hands of those that requires it most which will have significant impact on economics. As such, this continue to be an exciting development to watch.
User Experience: Learning From the Web
In order for crypto to become mainstream, the industry will have to create a user experience that is close enough to the current interfaces which they are used to. Even though the implementation details are hidden from the users perspective, the benefits of the technology should become apparent on its own. For example, majority of users don’t know the technical details of TCP/IP which governs the web but still reaps its benefits.
As a relatively experienced crypto user, I wholeheartedly agree with one of the panelist that my heart skips a beat whenever I have to make a transaction based on crypto addresses. The user experience still has a long way to go and a good starting point is in address readability. This is the biggest risk for users as one wrong address could result in losing a lifetime earnings. Something akin to a DNS for crypto addresses will go a long way in onboarding new crypto users.
The user experience will also improve significantly if there was an easy way to manage all individual wallets and exchange accounts via a single identity. This experience is much like SSO for websites where you can login with your Google, Facebook, or LinkedIn without having to create an account directly with them. Singapore has made their national identity system, Singpass, a key to unlocking the open banking revolution. There is even an exchange, ecxx.com, which enables logging in directly via Singpass.
Where are the institutional traders?
With the amount of volatility in the market, it would have been fair to assume that institutional traders would have entered the market long ago but the market is still largely driven by individuals. Although this can be credited to the fact that much of the market is still unregulated, crypto still does not have the necessary volume nor the infrastructure required for institutional trading. Custody and ownership of private keys are still big issues while there has been little development around information sharing requirements. The access to private investments also makes crypto a less attractive option.
What is understood is that exchanges should not be the ones regulating themselves as there is a clear conflict of interests given their need for volume. Prior to proper regulation becoming a reality, adoption by institutional investors will still largely come via paper derivatives.
The above was my summary of what I took away from the panel discussions and not a representation of the actual proceedings. I highly encourage you to check out the blockchainweek page if you’re interested in more details.
Thanks for staying till the end. Would love to hear your thought/comments so do drop a comment. I’m active on twitter @AwKaiShin if you would like to receive more digestible tidbits of crypto-related info or visit my personal website if you would like my services :)
