Direction: decentralization
Digital decentralization and institutional resilience: companies avoid domicile in jurisdictions with unclear rules, now blockchain lets them avoid any domicile
William Entriken
Blockchain Developer and Advisor to 0xcert
- This article was originally published as part of the 2018 edition of Bled Strategic Times, the official gazzette of the Bled Strategic Forum (BSF) international conference. You can access the full version of this and other BSF publications by visiting our official website.
In this global economy, companies have ever more choices of where to incorporate and how to classify their services. In a few high-profile cases, innovative companies have creatively ignored existing regulations and nearly replaced existing industries. Their excuse is that the rules are too bothersome to read. The public has welcomed these companies and is starting to question the value of government regulatory institutions. So these institutions must make their rules easier to understand for would-be entrepreneurs in order to retain public confidence and attract innovative companies.
Decentralized case studies
In the past decade, a few innovative and quasi-legal companies have shown everybody that laws and regulations for taxi service across the world can be safely ignored. These are millions of pages of rules that “ridesharing” company managers most likely did not bother to read. The consumers are not reading the rules either. This great experiment left a lasting message with consumers — government institutions are not always the best market custodians, even where they have long held control. Consumers quickly found that ride availability was up, drunk driving was down, and they had a powerful feedback mechanism for poor experiences.
Next is the hotel industry. New entrants are making real estate available for shortterm rent. At first they did not pay the 10% or higher occupancy taxes that government institutions typically demand. And they were not accountable to institutions’ demands for safety checks. Again, consumers found that institutions had provided little value in policing this market. Safety at “home-sharing” rentals are on par with hotels. And more rentals on the market is a great value to consumers.
This last example touches the most sacred of government institutions, fiat currency. Bitcoin started with the straightforward mission of replacing the Visa and MasterCard payment networks — by offering lower fees and accounts that cannot be seized by governments. Of course Bitcoin and related digital currencies with a mere market capitalization of 300 billion Euros have hardly achieved their original mission. (Visa cleared 7.5T EUR of transactions in the past year, UnionPay 13T EUR.) However the impact is clear — decentralized systems offer an alternative where previously trust in government was required.
The Bitcoin example is special. Governments know that companies strategically move their intellectual property to low-tax jurisdictions. And consumers know (thanks to General Data Protection Regulation) that their information has been moved around to cloud services in various jurisdictions. But Bitcoin has no jurisdiction. The company has no domicile. Actually, there is no company.
No-domicile organizations
A very brief way to describe how Bitcoin works is to say it is a document notary system. Based on the magic introduced in some 1980s computer science journals, this system works without any one organization maintaining it. The first notarized document basically says “I invented the Bitcoin system and I have one million Bitcoin.” All subsequent documents are basically a transfer from one person that has some Bitcoin to another person.
The new part of this system, which is both powerful and dangerous, is that people can transfer and store money in any jurisdiction. Only the assigned owner must consent to authorize a transaction. This is in strong contrast to traditional monetary systems where government or banks can block or reverse any transaction.
Bitcoin is only the first blockchain application to create billions of Euros out of thin air in this way. This month, a new gambling system collects wagers using a similar decentralized system. Nobody can prevent these wagers from going through and nobody can tax them. Oh, and P.S., all the transactions are anonymous. Other applications are coming to track ownership of physical property and identities of people, all without government help.
Resilient rules
Government institutions can act today to stop their best companies from leaving to other jurisdictions or even no jurisdiction.
Companies that will raise capital for decentralized organizations are frequently choosing Switzerland to incorporate. Why? Because they have read the laws in other countries regarding “security sales” and “utility token sales” and they didn’t understand them. It is easier to move a company to another country than it is to hire a lawyer to interpret laws in your country. That’s an opportunity, review your laws, make them more straightforward.
Next, learn the modern definition of accountability. If you eat a bad meal, there is probably an app already on your phone begging you to provide all the details so it can make an actionable and public report. If institutions cannot provide this level of service and convenience for reporting potholes, citing public health concerns, or reporting unfair workplace practices then somebody in the private sector will replace that institution.
Lastly, this one is hard. If the fees for government services are very high, then a competitor will find an opportunity to get around them. If government charges a 2% fee to record house title transfers but it does not need that much money to police house title transfers, or offset the economic externalities, then this is what economists call “rent seeking”. Some company will come along that promises to transfer houses without paying transfer tax by calling it “ownership sharing” rather than a “transfer”. Each time something like this happens, public confidence in government is weakened. So institutions should carefully evaluate what services they provide and at what cost.
Forturately, resilient government institutions have a large opportunity ahead. Institutions which implement a regulatory framework that people can actually read will quickly attract innovative companies and increase public confidence.
