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RegTech Endgames


This is a slide deck for a forthcoming Government blockchain seminar/symposium later this year (2016). The key question I’m exploring here is: what would be the proper blockchain tech strategy for a small European nation state during the years when algorithmic regulation starts to replace western welfare state processes and regulatory technologies undergo a paradigm shift.

The drivers behind this paradigm shift are 3 simultaneously developing forces: 1) Fast progressing mobile ecosystems (especially in some Asian countries with very large populations and excess of financial capital – see WeChat/Tencent) and the special role of the mobile UI (messaging – chat bot AI on top of Android) that generates an accelerating trend of innovations and ecosystem level change, 2) platform economy – especially the way the multisided platforms can create positive externalities and social benefit for the global population and third 3) blockchain & distributed ledgers which has the potential to change the distribution of wealth created and cumulated by the platforms and the role governments will have in the two first mentioned changes.

The pictures below are from the early versions of the slide deck. Feel free to comment or start the discussion in twitter with @joukosalonen.

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#RegTech refers to regulatory systems governments are using today. The way we use this terminology gets inspiration especially from Tim O’Reilly.   You should understand that the RegTech systems are the very basic enabling fabric both for the welfare states and the entities – firms and individuas – operating within the jurisdictions of nation states. It is necessary to have up to date RegTech if you want that taxation works in global – more and more fragmented value chains. You need RegTech to have legal entities – firms and tax-responsible subjects in your nation state territory. You even need RegTech if you want to document and report GDP growth. Examples of RegTech systems are government case management systems, government registries, identification and identity systems necessary for legally binding relationships between entities, tampering resistant immutable archived digital documents with signature systems and digital document delivery systems. All this RegTech has been built in the contexts of previous generation IT technologies – it reflects the world as it was 15-20 years ago. RegTech is ready to be disrupted.

And it has started. The technology stack you use to build value adding services is moving. Something that now is called cloud computing is changing it’s shape, after ten years we will call it fog computing. When there, in that fog, you cannot collect taxes effectively any more. You cannot identify entities – not with the tools you are using today.

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Why “endgame”? During this presentation we will discuss Carlota Perez book Technological Revolutions and Financial Capital (2003). In that book Perez describes how financial capital, regulatory cultures and technological paradigm shifts can open opportunities for geographical areas for catching up or forging ahead. As you can see from the picture above, Perez is a Shumpeterian who sees and understands the difference between financial capital and production capital and understands how the debt cycles are connected with technological paradigm shifts. Carlota’s contribution here is to point out how the current profuse availability of Chinese financial capital for cryptocurrencies, AI Bots and blockchain investments can be explained. What follows from that explanation is bad news for the European governments.

Perez’ analysis (op. cit. pp.102-103) gives examples – how Soviet Union and Japan used the fourth surge, France and Belgium the second, USA and Germany the third industrial revolution for catching up and forging ahead. The book also describes the other side: for those lagging sectors and areas who stayed too long tied to waning paradigm the same shift brought long lasting stagnation periods.

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Who has the people now?   Benedict Evans – the author of the next slide – may be right when he estimates that after five years – in year 2020 there will be 5 billion smart phone users on Earth; what is more difficult to predict is how would the ecosystem around these devices – the connecting tissue – evolve in five years and after that 2020 – 2030, that is, 5-15 years from now.

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When the cloud computing paradigm shift happened a significant part of the engines of value creation moved. The next paradigm shift does not have a name yet but we already know something about it. The pictures on the next 8 slides are telling a story about fog computing.

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Mobile platforms and positive externalities

The market power of platforms and networks is not only an interesting point of focus for the leading business schools. Global market dominance of multisided platforms and mobile ecosystems leads to the need of automating the economic processes connecting the hundreds of millions users with the platform. Taxation and KYC are the obvious issues and drivers.  It also leads to the questions of  regulating the service platforms, how to tax the anonymous in fog? If you do not know the identity? Not only the consumers’ identity but also the producers using these multisided platforms.

The next slide tries to illustrate the miniaturisation of gatekeeping focused governments and regulation 1.0 systems. Next generation platform firms who will dominate 2020-2035 cannot be regulated with the current regulatory technology. Instead algorithmic regulation focusing on messaging standards and API-sensors and using cryptocurrency bonds and escrows will replace the current government agencies, their case management systems and registries. As a result of this shift only in a small country like Finland can set free tens of thousands 120+IQ humans – former gov case workers and legal experts who now can focus on value creation instead of process focused gate keeping work.   Here again I am happy to quote Tim O’Reilly’s notes on regulation 2.0 here:  …“and we have the data that’s feeding back to making the service get better and better as people use it. today it is so largely absent from the way that government does regulation. What I would love to see is, I’d love to see a partnership between cities and the services they want to regulate, where there is real shared data, shared visibility, clear objectives.”

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The next slide is provocative. It should be read like this: what would it mean if there really is something in all that hype around blockchains and distributed ledgers…. We have already quoted Carlota Perez above. The second slide was a reproduced picture of technological paradigm shifts and how they have been related with debt cycle phases.  The five first rows of that picture were from the Carlota Perez and the source was mentioned in the bottom right corner of the slide #2. But the sixth row in that picture is not from Carlota. It is my addendum. But i think it underlines the whole point Carlota Perez is making in that book: paradigm shifts do happen and the end of Intel era must come one day.

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So here’s the question: what is that next paradigm? Intel era ends. So is the next one Nvidia GPU accelerated deep learning era where computers morph and blend us better fitting realities? Or is it the near skin mobile satellite thing ecosystem augmented with cloud  or fog AI?

What added value would blockchain tech bring into these scenarios? Value web? If you read more Carlota Perez you may soon start to wonder what role does Government regulation actually play in these paradigm shifts. Didn’t the TELCO regulation play a significant role in the previous paradigm shift? Yes it did. Would blockchain tech bring in something that could enable deep impact changes in regulation? Well, it could.

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Here is where I got.  I will continue working with this slide set every night and I really appreciate if you have any comments, critique or proposals. I’m happy to come and discuss the regulation 2.0 / blockchain golden age theme with other audiences too. Invite me!  You can use this form or email me directly: jouko@nordledger.com