Welcome to The Future Rules. I’m Angie Lau, Editor-in-Chief and Founder of Forkast.News. And I’m Marta Belcher, Chair of the Filecoin Foundation. In this podcast, we going to dive into the future of technology and the ethical and legal issues it raises. Today we’re going to start by tackling DeFi.
So what is DeFi? Could it power the future of financial inclusion? And is there set to be a showdown with governments and regulators? There’s no one better to ask than Sheila Warren! That’s right. Sheila is the Head of Blockchain, Digital Assets, and Data Policy at the World Economic Forum (WEF). She’s been building solutions to real-world problems in the blockchain space, and she’s also a great friend and an advisor to the Filecoin Foundation for the decentralized web. So Sheila, let’s start by explaining what DeFi is… Thanks so much for having me and Angie and Marta. I am thrilled to be here and help you
all kick this off. What a fun time to talk about the future. So DeFi stands for Decentralized Finance. That’s the De and the Fi. And it’s really a general term for what I think is an evolving trend. So literally speaking, it’s a category of blockchain-based decentralized applications. So dapps we’re all familiar with for financial
services. And so those can include everything from lending to insurance, credit, like all these different kinds of financial applications and financial services. I think over time. we’ll see more erosion of traditional forms of intermediation, financial services. Financial services is a heavily intermediated industry at the moment and kind of present time. And so DeFi represents, I think, really an opportunity to think about how we apply disintermediation principles into that, not only heavily regulated, but heavily centralized system. And the hope,
I think, and the reason so many of us are very excited about this is that it’s going to give us an opportunity to realize more stakeholder engagement from a wider variety of actors who either have been traditionally cut out of these traditional legacy systems for all kinds of reasons, sometimes inadvertently, sometimes deliberately, sometimes even maliciously. But it’s going to, I think, create new opportunities via peer-to-peer engagement to think about where are these services not serving people and how can we get more people involved in bettering their lives. You bring up a great point. How do we serve people better? I mean, we know that there are more than 1.2 billion people in the world that are unbanked. This is a situation where technology really allows people to suddenly engage in a way where they have been disenfranchised.
On the other side of the coin is, who are we disenfranchising as a result of this technology that really branches out to the people? And I’m just thinking legacy systems and traditional finance, is there a face-off coming? You know, that’s certainly what gets most of the attention in the press is – are we going to completely erode the traditional legacy system in favor of this brand new, decentralized system? You know I don’t really see it that way because if you really look at the reality of it, yes, there is a significant portion of the world’s population who does not have access to financial services, on the other side there are a lot of people who are actually quite well served by financial services as they currently exist. And who aren’t necessarily seeing or feeling this acute need for a different system. Now, I think when you layer in, whether or not you have access to financial services. So those
of us on this pod today, you know, we if we wanted to go out and get a loan, we have a credit history, we’re able to kind of document in the ways that traditional systems require or the current legacy systems require, whatever it is we have to document, to prove that we are worthy of a loan or whatever it might be. Whatever it is, there’s a whole system that makes that relatively straightforward and even influencing your own, in the US at least, influencing your own credit score, there’s now more transparency in those systems. You can kind of figure out what might be making your number a little bit wonky and address it. That is not true in parts of the world. But it’s interesting to see where the uptake currently is in things like DeFi, because right now it’s really more around; how do we make money, how do we use this to kind of what’s called yield farming or how to create leverage? So how do we just find a way to make money and arbitrage as opposed to any real focus on financial inclusion. And I think we just have to be honest about that at the current time. That’s a great point. When it comes to really building wealth, I think for the first time
Blockchain and DeFi allow for people to put in a dollar, put in two dollars. And if it grows to four dollars, wow, that is really significant in certain parts of the world. And it’s really driving the adoption. It’s quite incredible to see.
It really is. And so I think we also just have to acknowledge, though, that right now some of these services are quite complicated. So the same way that if you want to go be a day trader, you have a learning curve to get involved and to do that effectively without just losing everything you put in. Similarly, there is a learning curve to use decentralized
financial services via a DeFi interface. So it isn’t the case that, like anyone right now can go and just I mean, well, in some cases you can do that, it isn’t necessarily well-advised to do so. But I do think that that’s kind of how these things start. You start with maybe a little higher level, sophisticated financial product, and then over time, you test the security, the system, the safety of the system. And the goal, at least, I hope, is that we will open up. And so, to your point, will be able to do something meaningful with one dollar, which in many parts of the world, to your point, is if you flip that and get two dollars, that’s significant, it’s huge. It’s really, really huge for a lot
of people. And that, I think, builds on some of the models we’ve seen around the world around things like microcredit or micro-lending, which are models that at this point are pretty tried and true. So you can imagine how bringing the global scale to that, making that relatively frictionless could be extremely empowering.
Marta, I mean, you’re probably too modest to share this, but, you recently testified in front of the Senate Banking Committee, trying to explain cryptocurrency to policymakers and the importance of that. This is where policymakers really have a pivotal and prominent role to play. They do you know, and I would add that I think what we’re seeing with Congress in particular is a real reticence around technologies that are intended to be a new financial system. And so I think Congress is worried – OK, it’s great if you put in two dollars and it becomes four dollars, but what if you put in two dollars and it becomes zero dollars? I think that it’s hard because one of the issues is they see these things and it overshadows use cases of the technology. And during the hearing that you mentioned, Angie, there was a lot of talk specifically about use cases in the financial sector, and there was a little bit of acknowledgment that cryptocurrency can be used for things that are beyond financial services, but not very much of it. And I know that Sheila has talked about how you know this is really a critical time for DeFi because of the rapid growth in the volatility of the market and about the attention of governments and regulators in the space. And I would definitely
love to hear from Sheila about what that increased attention may ultimately lead to for the industry in her view. Yeah, well, first of all, congratulations on the testimony, because I thought it was fantastic and I couldn’t have thought of a better person to offer that up to that committee. It’s probably worth, just for the record, noting that I am not related to Senator Warren. She was, however, get this, my professor at Harvard Law School. I got her my very first day of Harvard Law.
Oh my gosh! I will say on the record that I am surprised by the stance that she’s taking and how strong it seems to be, at least what she’s saying publicly about some of these things, because while she certainly has a history and even back to when she was my professor an unspoken number of years ago, but long enough ago before she was a senator, obviously, I think she was always very concerned about consumer protection. And this gets to kind of the point I want to land, which is I personally feel we really have to rethink how we define consumers within the crypto ecosystem, because really consumers are more like users. Right. So the World Economic Forum talks a lot about stakeholder capitalism and this idea that our current model of extractive shareholder capitalism is designed, it’s deliberately designed to extract value to shareholders often whom are conglomerates or whatever it is, at the expense of workers and other stakeholders in the ecosystem. Whereas a model of stakeholder capitalism would far more equitably allocate both risk and reward, rather than reserving reward to shareholders and pushing all the risk onto, let’s just say, employees as an example. Right. And in crypto governance tokens are a model where you actually have stakeholder capitalism, if you want to call it that, in action in a way, because a lot of the tokens with which you engage in, DeFi activities are governance tokens and governance tokens give you some say in how the DeFi protocol makes changes or how Treasury dispenses earnings or whatever it is, really how they actually use Treasury. So that’s a really powerful concept that we’re at the beginnings of exploring. But
when you think about consumers, OK, well, if I hold a governance token for a DeFi protocol, am I a consumer, or am I a shareholder? I’m not really sure. What am I? Nobody wants to see the average person, the stereotypical grandparent or whatever, putting their retirement into this and then having it vanish. But, it doesn’t really work that way, if done, depending on the kind of setup of a government, it doesn’t really work that way because you yourself also have input into the system in a way that if you buy a share of whatever or some kind of trading fund, you don’t have that kind of input. Now, I don’t want to get coy about this, because I do think that what we’ve seen in some of the DeFi Treasuries is that there still is some consolidation potentially of control because people do things like proxy or hand their votes over to other people, whatever. That kind of thing still happens. But there’s certainly an opportunity for us to rethink what the roles of these
different players are and then layer in what might be appropriate recourse or protections or other things that might be appropriate for that ecosystem. That is not something I think is even a conversation that’s being had by any regulator anywhere in the world I certainly have been talking to. Absolutely right. And yes, it is critical to the stability of systems right now. I mean, if you take a look at it, every other month it seems that there is a flare-up, an event, a political event, an uprising, a protest that’s happening somewhere in part of the world. And it is a clashing of two sides and one is often against the traditional system. And so, if cryptocurrency that represents value, that is critical to the average person, wherever they are in the world and whatever system that they are in, can return that power or some semblance of legitimacy back to the person so that they feel heard, this is their opportunity to share their voice in governance, in whatever the system is. You know, I’m
going to call it crypto for world peace. This is why, you know, I think, I use this term premature regulation because I am not, as a general matter against regulation full stop. I mean, I don’t think that’s a reasonable stance to take as regulators are going to regulate. It’s a matter of how they regulate,
when they regulate, is critical. I personally believe it is too early to regulate something like DeFi, because what you’re really going to wind up doing is either regulating it in a way that shapes it into something legacy that the whole point was that it’s not that. But if you regulate it, given what we know about how to regulate, then you’re assuming, you’re imagining. you’re creating a picture of a system that mimics a legacy system and therefore you’re cutting off so much of the innovation that makes the space potentially really empowering and I really worry about that. We’re not far enough along, in my view that regulation is not going to almost inevitably put us on a path, or a direction, or close this off in a way. And I think back to the early days of the internet, if that
had been regulated the way a lot of regulators wanted to come in, there was a big debate back in that back at that time about is the internet, is it more like radio, or is it more like television, or is it more like a utility? Right. None of those things turned out to be quite right. Instead, it was a little bit of each of them and it was a brand new thing. And that is what I think DeFi is. It’s a little bit of a number of things, but it’s
really a brand new thing. Obviously, there have been goods and bads that have come to the internet and the same thing will be true for crypto and DeFi, but I don’t think we want to be so worried about the bad, that we also wind up stomping out the good, because there’s clearly going to be both here. I love that – premature regulation. I completely agree with everything Sheila said. And I think another thing in this space is, we don’t need to regulate technologies specifically.
Yes, exactly! Regulations are supposed to be about activities, not technologies. And so when there are these calls to regulate a technology, I find it really concerning. And I really do think that it’s a myth just in the broader cryptocurrency space that cryptocurrencies are unregulated. That’s because the activities around cryptocurrencies fall in line with a lot of the existing regulations.
So just to give you one example, the on ramps and off ramps, where people are buying and selling, and custody in crypto, are chartered banks or trust companies or state-licensed money transmitters, they have to post bonds, they have to open their doors to yearly examinations. They have to register with FinCEN and know their customers and share details of suspicious transactions. And so that’s just one example of where you really do have a lot of regulation in the cryptocurrency space. But somehow people seem to think that cryptocurrencies are generally
unregulated. And then when you’re talking about something like DeFi or this, you know, new space, you do have incidents where maybe there’s fraud and we have ways of dealing with fraud that don’t involve technology specific regulations. If someone is committing fraud, it doesn’t matter whether they’re committing fraud using cryptocurrency, or the phone, or email, or pen and paper. You can take actions that CFPB, the FTC, the CFTC,
the SEC state attorneys general, they can all take actions in addition to private lawsuits. And so, in other words, we can and do already sensibly apply existing laws and regulations to the cryptocurrency space. And we can do the same in DeFi. We don’t need specific regulations for this space. I just find it kind of laughable, this idea that all this activity is happening in this other parallel universe that has zero regulation or attention paid to it and no transparency, blah, blah, blah. You know, it’s kind of like the mythology around ransomware that
I find hilarious, like, oh, my God, Bitcoin is being used for ransomware, therefore… Like, did you guys see how fast they caught all those people. Exactly! So that’s one of the dumbest things you can do is actually ask for payment of ransomware in Bitcoin, because, surprise, you know? So a lot of this just is misunderstanding of what is actually happening, like what’s actually happening versus what’s talked about or what is theoretical. What’s actually happening. And to your point, Marta, about how much of this has these moments of intersection that are heavily, heavily regulated and also just the opportunities I actually think. Those that are paying attention will understand this and recognize that well. Throw something on a blockchain and you actually have a lot more touchpoints where there can be transparency, that there is incentive to actually catch fraudsters because they’re not wanted in the community either. My hope is that as there’s more communication and more education and more trust is built between people, who are some of the people who are testifying and others, who become more trusted resources to some of these decision makers and regulators, we’re going to see a little bit more, well, maybe it’s a little bit less panic about the potential bad here and a little more emphasis, at least, if not a lot more emphasis on what is the direction this could actually go and how could we, if anything, how could regulation harness it to channel for the benefits and to say, like, hey, we want to get more people involved in being able to generate intergenerational wealth for their families or even for themselves. We want to be able to provide opportunities
for meaningful credit or whatever it is for people. We want to provide different kinds of insurance that don’t capture and extract a lot of value to big companies. These are all things that are societally beneficial. So maybe there’s a way we can structure
incentives to actually support those opportunities rather than stifling everything, because we’re so worried about the instances where there’s a potential for wrong action to be taken. And the ransomware issue is one that the industry is going to be facing for a really long time. That was something that came up repeatedly at the hearing. And that lawmakers are really concerned about is they turn on the TV and they see that Bitcoin is being used for ransomware and they instantly go to blaming the technology. And they’re overlooking the fact that cash is used to commit many, many crimes.
Exactly. But we don’t blame the Fed for that. And I think also ransomware is really not a cryptocurrency problem. It’s a cybersecurity problem. Exactly. Yeah. And I mean, as you said, I think it’s really helpful that with the recent Colonial Pipeline ransomware attack law enforcement was able to track down the Bitcoin that had been paid in ransom and get it back within days, because I think that gives us a good example of why this is actually a terrible technology to use to commit a crime because you’re creating a public transaction record of each of these transactions.
Yup! And do you both think that when it comes to decentralization anyway, that maybe the train has left the station when it comes to regulators and policymakers? The whole point that it’s decentralized is what role can regulators even want to play, even if they desire to do so? Well, it’s less about shutting it down, as I take your point, Angie. And it’s really more about shaping it and pushing it and reinforcing it almost to form itself, the ecosystem, I mean, in the shape of legacy financial systems like if we regulate it a certain way, it’s going to act a certain way, like these are symbiotic relationships. Like if you treat something like a thing, like a different thing, it winds up almost becoming a little bit that thing in response. And that’s what I’m worried about. You can’t port regulation from one sector to another cleanly. All you can do is pick up the principles that underlie it. And what are those principles? OK, we don’t want people to lose their entire livelihood, or their retirement savings, or their whatever. Or if that happens, we want to have some kind
of recourse. Hence, we have things like the FDIC. You don’t want people to be easily able to engage in illicit activity. The threat vector around cybersecurity, as Marta noted, is ever evolving. I think the best you can do is, is recognize you’re always going to be chasing that behavior. You know it’s almost impossible as a regulator just because of the timing of how long it takes to pass something like a regulation, right? You’re never going to be ahead of that activity. And given that’s the case, should you not see what kind of grows in the wake of that kind of activity and what it fuels? So I don’t feel like it’s a bad thing to say that the early days of Bitcoin really were nerds and criminals. Right? I mean, that’s kind of what people were doing with it. I don’t
think that’s bad because look at what grew up, all the flowers that bloomed in the wake of some of that activity. Not that I’m saying, yay, criminals are our biggest innovators, but the reality is that a lot of illicit activity, there’s a history of not so popular activities in society; porn, other things, drug deals, these being things that have led to innovation, that has had tremendously beneficial social consequences. And we should acknowledge all of that as true. I think it’s right that, like there’s a there’s definitely a correlation around new technologies having early adopters who are, maybe unsavory, and that was certainly true of the internet.
That’s exactly right. I mean, all of us who have ever done any IP law really understand that a lot of early IP innovation was happening, you know, in an industry that we don’t like to admit it, but there was a lot of concern in the porn industry about licensing and this kind of thing. And a lot of that led to, I think, very powerful rules and norms of behavior around how you think about content on the internet.
I’m not capable of sitting here today and telling you everything that DeFi can be used for 10 or 15 years from now. No one’s capable of that. Even people who are building in this every single day are not capable of that kind of imagination. And if we cut off that potential, I just feel that would be not just a shame, I think it honestly, without meaning to be dramatic, I think it would be a tragedy.
I wonder from both of you, as you think about policymakers, some of the advice. You know, your experience, in what they’re pushing back against and in how you want to open eyes. I mean, you know, making the trip to D.C., what was that like, Marta? It’s been eye-opening, but also really good to have direct conversations with offices of senators and hear directly what their concerns are, because I think their concerns are different than what we maybe think they are. So the things they’re concerned about are – is
this going to be used for sanctions evasion? Ransomware was a big one that came up over and over again. Another one that came up over and over again, that I’ve been pretty surprised about, has been the environmental impact of cryptocurrency. So that’s one that’s become such a huge talking point for folks on the anti-crypto side of things, including Senator Warren. I was really surprised at how much that was a concern.
Well, thanks so much to our guest today, Sheila Warren, Head of Blockchain, Digital Assets, and Data Policy at the World Economic Forum, and of course my lovely co-host Marta Belcher, Chair of the Filecoin Foundation. Thank you Sheila and Angie! You can listen and subscribe to The Future Rules wherever you get your podcast fix and you can find the full series on the Forkast website. We hope to see you all here again in the future.
2021-09-05