Analysis | Why you need to understand crypto
And how blockchain technology will change international relations
This article is part two of a miniseries on the relationship between technological innovation and diplomatic practice.
It is part of ISD’s series, “A better diplomacy,” which highlights innovators and their big ideas for how to make diplomacy more effective, resilient, and adaptive in the twenty-first century.
Policymakers, diplomats, and regulators can’t afford to ignore the seismic shift in the way we interact with each other.
Why diplomats and governments need to pay attention
You don’t check an email recipient’s physical address before you hit the send button. Whether they’re in Mogadishu or Mexico City or Miami, as long as they’re connected to the internet they’ll receive your message. Now imagine that same frictionless protocol applied to value — not just currency, but assets and information. Just as the internet upended government control over communication and information, blockchain technology will revolutionize ownership.
This means advocates of democracy and human rights will have new tools in their arsenal, such as Liquid Democracy, which wants to connect voters directly to elected officials. Tools like encrypted communication that don’t depend on a big tech company. Or the ability to add transparency to international aid.
And just like the earliest days of the internet, these new opportunities come with new threats. Bad actors can use blockchains to hide their crimes and launder their money. The space is rife with scammers tricking people through Ponzi schemes. And hackers routinely make off with millions in ill-gotten gains, such as state-sponsored North Korean groups have done. For diplomats, this means having to contend with a new and powerful set of non-state actors; groups who have new tools to organize, finance, and deploy in ways that run counter to national interests.
We’re standing at the cusp of a technological transformation — thousands of separate unnoticed innovations coming together to unlock massive new possibilities.
Understanding blockchains
Imagine our earliest ancestors keeping track of everything important on papyrus scrolls — who owed whom, births, deaths, wheat production, etc. The village needed to trust the central record keepers, and the records themselves had to be safeguarded.
Now imagine instead of just one big papyrus scroll at the chief’s house, the village had dozens of copies, and every day at noon everyone with a scroll met in the village center.
- To add anything to the scrolls, everyone with a copy needed to agree–you needed consensus. That way you couldn’t bribe any single individual to change records in your favor.
- This would be a trustless system — you had dozens of people with the same record, all incentivized by a small slice of the transactions, say a cup of wheat. Your relationship with any particular record keeper would be irrelevant.
- Finally, imagine that each new entry in the scroll had to reference the prior one. That way, even if you managed to bribe half of the villagers with a copy of the records to make changes in your favor, you wouldn’t be able to remove or change an earlier entry without obviously breaking the chain, so you lack the ability to erase all your debts. That is, the scroll becomes immutable.
When you think of decentralized ledger technology as a foundational concept rather than a shared spreadsheet, it’s easier to see its revolutionary potential.
Why we need public ledgers
When one has access to trusted institutions, it might seem inefficient and duplicative to insist on a public spreadsheet maintained by hundreds of separate computer networks, all holding copies of the same data, all computing the same information. We could simply entrust a bank, or a central government, or a tax authority, or a judicial system to keep an accurate record of important transactions. And if those records don’t need to be changed frequently, the system would work fine.
Problems arise when we factor in transaction costs and when we lack institutions to begin with.
- Costs: If one only needs a weekly salary cash deposit into a bank, and perhaps a few cash withdrawals, the slow, highly guarded system works. But it starts to break down when operating at scale — think of sending $1 from your account in Florida to a friend in Mogadishu. The complexity makes it impractical.
- Institutions: The other problem with sending money to your friend in Mogadishu is that they might not have a bank in the first place. Or they may not trust the bank. And there are of course countries where citizens can’t trust central authorities in any capacity.
Critics point to the immense energy required to maintain these databases. And the original proof-of-concept in distributed ledger technology, Bitcoin, does indeed require massive electricity. But newer platforms use a fraction of power and contribute to economic development, making them a net positive. Some blockchains are even carbon neutral.
The practical applications
Much of the narrative around blockchain centers on crypto currencies and their associated volatility, but a virtual asset is only one use for decentralized ledgers. A non-exhaustive list of the most exciting blockchain projects:
- Jia (run by a friend) is connecting real-life borrowers in emerging markets with capital from crypto.
- Footprint lets you prove your identity once and reuse it all over the internet.
- Waryu allows users to earn value in exchange for setting up wifi hotspots.
- Lens gives users control of their social media profiles, meaning it belongs to them, not the platform.
How web3 startups are different
The next generation of internet applications powered by distributed ledger, collectively called web3, are still in their infancy. Today’s debate echoes the past. Many missed the potential of networked computers running on an open protocol in 1995. And yet smartphones and connectivity have reached some of the most remote parts of the globe, upending businesses, toppling governments, threatening democracy, and bringing all human knowledge to our pockets. The next twenty years will see blockchain applications unimaginable today and will similarly transform our lives — especially the lives of the six billion people who live outside developed economies.
How is this anything more than a shared spreadsheet? Rather than think of blockchain as a financial tool, it helps to imagine it as a return to the systems our hunter-gatherer and small-village ancestors used. A time when reputation and group acceptance were a question of life or death. What could we do globally with reputation, collaboration, governance, and asset tracking, at scale? Could you reward prosocial behavior? Could you put value on positive externalities?
What the future looks like
What web3 means for diplomats: a whole new toolkit. Imagine connecting directly with audiences, without big tech intermediaries or censors, imagine distributing emergency aid in the form of cash straight to people’s phones, imagine working with developing economies to use smartphones to vote in elections and access government services (like Estonia does), and imagine secure government-to-government information sharing without costly and proprietary hardware. Removing intermediaries means public diplomacy could have greater reach and give practitioners a deeper sense of connection with their audiences.
It also means authoritarian governments will attempt to stop the spread of open blockchain architecture and insist on centralized and government controlled systems, giving them one more avenue to control their citizens. This will further fracture the globe into free and closed societies.
Tactical implications
As I noted in my previous post, the instant connection from the internet eroded autonomy at diplomatic outposts since officials now had to endlessly check-in with superiors. Whether blockchain technology will accelerate that trend is uncertain, though one thing is clear: governments will need a plan to address crypto’s internal use cases.
How today’s diplomats can leverage technology to further their missions is the subject of the final piece in this series.
Zed Tarar is an MBA candidate at London Business School, where he works with web3 startups. He has worked in five countries as a U.S. diplomat.
Disclaimer: While Zed Tarar is a career U.S. diplomat, the views expressed here are his own and do not necessarily reflect those of the Department of State or the U.S. government.
