For several years now, the Organization for Economic Co-operation and Development (OECD) has been cautiously enthusiastic about blockchain technology. Beginning with a 2014 working paper titled, “The Bitcoin Question” the intergovernmental organization has been considering the economic possibilities opened up by distributed ledgers and cryptocurrencies — and, on the whole, it has found these possibilities exciting, even if such working papers “do not necessarily reflect the official views of the Organization or of the governments of its member countries.”
But for the most part, reports on “Blockchain Technology and Competition Policy” and “Corporate Governance” — among other subjects — have struck a largely ‘wait-and-see’ tone. They’ve outlined the areas in which distributed ledger technology (DLT) could potentially offer innovations, yet they’ve also affirmed that institutions should acquire a more complete understanding of DLT and how it works before integrating it into their operations. As June’s report on corporate governance concluded, “it may be worth exploring” is the kind of phrase often encountered in such analyses.
However, this preliminary phase in the OECD’s standoffish evaluation of DLTs is drawing to a close. On Sept. 4 and 5, it held its first-ever Blockchain Policy Forum in Paris, where a range of public officials and private leaders came together to meet, to network and, most importantly, to explore just how blockchain technology is being and will be used by businesses and governments. Over the course of the two-day conference, scores of delegates presented a wide variety of use cases of DLTs, from self-sovereign identity to competition law. And in the process, they began to map a way forward for those organizations that have entertained the notion of trialing blockchain tech without actually taking that all-important first step.
Bitcoin for central bankers
The OECD’s first foray into reports and policy recommendations regarding blockchain came with its June 2014 working paper, “The Bitcoin Question: Currency Versus Trust-Less Transfer Technology.” Like many traditional institutions that represent the mainstream global economy, the general position expressed by the report’s author was that Bitcoin is “volatile” and has “an important scalability problem,” and that “a raison d’être for Bitcoins is to carry out illegal activities.”
But as has been seen with such Bitcoin-detractors as, say, Mark Carney and Yanis Varoufakis, the report also sung the praises of the blockchain — as it referred to the underlying protocol. According to author Adrian Blundell-Wignall, the special advisor to the OECD secretary-general on financial markets:
“[The blockchain] is the key innovation in this technology — that is, a technology that removes the need for a trusted third party and the intermediary costs associated with such institutions (banks, credit card companies, payment companies, non-bank financial intermediaries).”
Expanding on the theme of disintermediation, the working paper surveyed the different benefits blockchain technology — rather than Bitcoin — could deliver for businesses, institutions and the global economy more generally. Blundell-Wignall wrote, noting that the imposition of regulation may increase costs for crypto exchanges and other blockchain-based service providers:
“This technology has the potential to reduce transactions costs for retail spending with credit cards, e-commerce costs and money transfers. But such companies are intermediaries too, and it should not be forgotten that competition in the cryptocurrency world is fierce, and new decentralized technology innovations may reduce costs dramatically.”
Having noted the scalability issues Bitcoin encountered at the time (but which are now being addressed), the paper’s author extolled Ripple as an example of a DLT-based system that enables banks to transfer remittances at a fraction of the usual cost and of the usual speed. And while it acknowledged that Ripple may not be the “ultimate winner” in the cryptocurrency race, it concluded by advising the OECD’s member states to seriously consider looking at comparable, less decentralized blockchain-based technologies.
“Policymakers do need to focus on how to ensure that the new technologies operate in the most socially-useful way. That is, it should be possible to make use of a new technology to facilitate the medium-of-exchange transporter and ledger functions and increase competition in financial services, while eliminating the ‘anonymity’ problems [of certain cryptocurrencies].”
In sum, the working paper recommended blockchains that don’t attempt to usurp the power of governments and central banks over a nation’s money supply, but that still retain certain aspects of Bitcoin’s transparency and efficiency. And since then, succeeding reports and papers from the OECD have elaborated on this blockchain-friendly approach, with more recent documents outlining particular applications of DLTs.
In June, the Directorate for Financial and Enterprise Affairs Competition Committee published an issue paper that outlined the implications blockchain tech would have for competition policy and regulation. As with virtually every other report published by or on behalf of the OECD, almost half of the paper dedicated itself to introducing just what ‘the blockchain’ is, offering an indication of how public bodies are still very much in the early stages of their flirtation with DLT. It goes, as if a sizeable proportion of its readers have never heard of either Bitcoin or blockchains before:
“The most prominent example of a blockchain thus far is Bitcoin. Bitcoin is a non-permissioned or public blockchain, meaning that there is no restriction on who can spend Bitcoin or take part in verifying the authenticity of blocks of transactions in the blockchain (an energy intensive process known as ‘mining’).”
To be fair, despite retreading what must be very familiar ground for anyone who’s even glanced at a technology website in the past couple of years, the paper does go on to examine how competition policy will have to be updated in view of blockchain adoption. In particular, it highlighted the need of a public debate on whether competition authorities should be given access to blockchains in order to police markets and corporations.
“This might enable them to monitor trading prices in real-time, spot suspicious trends, and, when investigating a merger, conduct or market, have immediate access to the necessary data without needing to impose burdensome information requests on parties.”
Interestingly, it also underlined the possibility of blockchains being used by companies to collude or “tacitly coordinate” in a way that hurts competition, perhaps by enabling members of a trade cartel to know when another member has failed to comply with the terms of the cartel, and by enabling the cartel to mete out punishment accordingly — possibly by the use of smart contacts. The report’s author, Antonio Capobianco, wrote:
“The potential transparency offered by a market-wide blockchain might also help firms in oligopolistic markets to coordinate tacitly without any direct or indirect contact, or any agreement to do so. Might full access to observe a market-wide blockchain constitute a ‘plus-factor’ that competition authorities might consider to suggest that parallel conduct was the result of coordination among the parties?”
The paper also placed specific attention on the use of blockchain to facilitate anti-competitive behavior, on monopolies in the cryptocurrency industry — e.g., mining companies, crypto exchanges — on setting technical standards, and on ensuring competitive neutrality in the face of subsidies for blockchain adoption. Together, such a focus reveals that the OECD has begun to grapple with how blockchain technology will affect businesses, national economies and international trade. And even if it didn’t attempt to address how any of this would be achievable on a technical level, it treats the widespread adoption of blockchain tech as if it were an inevitability, something which any startup or corporation working within the industry must welcome as an encouraging vote of confidence.
It’s not only reports and working papers that the OECD has produced with respect to blockchains. In March, its director of financial and enterprise affairs, Greg Medcraft, delivered a presentation at the OECD Friends of Going Digital Meeting in Paris. Titled, “The OECD and the Blockchain Revolution,” it urged policymakers to be “proactive and forward-looking” in how they treat blockchain from a regulatory standpoint, and to work closely with “key stakeholders” — i.e., people and groups within the industry — on drafting appropriate standards and laws. “This will help us avoid regulatory knee-jerk reactions and resist the temptation to jump in before we properly understand developments,” Medcraft explained, while still cautioning his audience on “high-profile theft of assets like Bitcoin, and scam Initial Coin Offerings.”
And aside from policy recommendations, blockchain technology has received indirect support from the OECD by way of appearing in its “Embracing Innovation in Government” reports for 2017 and 2018. In its 2017 edition, for instance, it reported on the use of blockchain-based voting in the Colombian 2016 peace referendum (related to the end of the conflict between the national government and the Revolutionary Armed Forces of Colombia—People’s Army [FARC] rebels).
“[The] tech nonprofit Democracy Earth Foundation set up a digital process that allowed Colombian expats, who were unable to vote through the official process, an opportunity to participate in a plebiscite on whether to approve a peace treaty. This process raised interesting questions for governments about the future use of blockchain in electoral processes, and in the public sector more broadly, and could potentially lead to new ways to ensure the integrity of the election process.”
In much the same way, other reports issued this year take a generally positive attitude toward DLT. In “Blockchain Technology and Corporate Governance” (also published in June), the author — Vedat Akgiray, professor of finance at Bogazici University — focuses on how DLT is likely to make corporate governance more accountable and efficient.
“All users on the network can see trading by managers, activists and corporate raiders. Legal insider trading channels are no longer needed. Disguised derivatives hedging, backdating and similar undesirable actions are almost impossible on a blockchain network.”
In another working paper from June, “Blockchain Technology and Its Use in the Public Sector,” Jamie Berryhill, Théo Bourgery and Angela Hanson — all present or former members of the OECD’s Observatory of Public Sector Innovation — argue that blockchain technology has the potential to increase automation, efficiency and knowledge within the public sector. In particular, the authors note “at least 46 countries around the world have launched or are in the planning stages to launch over 200 blockchain-related initiatives.”
This is another encouraging seal of approval for the adoption of DLT — and to further reinforce this point, the authors run through many of the specific areas in which blockchains are witnessing usage, writing:
“Just about every area of the public sector could benefit from blockchains in some way.”
According to the paper, these areas include identity, privacy, financial services and banking, land title registry, supply chain management and logistics, benefits, public energy utilities, contractor management, voting, copyright, fraud detection, and facilitating interagency operations.
The report is perhaps the most positive and encouraging the OECD has produced to date, not least because it was written by employees of the organization — rather than by outside experts who may not reflect its views. In its conclusion, its authors state:
“In the future, centralized authorities could become increasingly irrelevant in the context of blockchain technologies, or their role could shift to providing a platform and governance for decentralized services rather than being at the centre of every transaction. It is imperative that the public service builds its knowledge in this area and consider its possible applications and how it may affect its role.”
The Blockchain Policy Forum
But while such reports find the OECD taking the step of addressing specific areas in which blockchain tech can be applied, two points of caution need to be made. Firstly, these papers are still often written in decidedly general and preliminary terms: The corporate governance report, for example, failed to name any single blockchain that can or could deliver the kinds of benefits it outlined in its conclusion, while none of the above documents attempted to unpack the different types of distributed ledger — e.g., permissionless or permissioned, proof-of-work (PoW) or proof-of-stake (PoS) — and explain which ones might be useful for certain functions. Similarly, the conclusion of the public sector paper offers the familiar reminder that blockchains still need “to be understood in order to understand the potential solutions to a range of challenges.”
Secondly, these reports are also fairly limited in their number, in that only four such papers have been published by the OECD this year, with each handling a limited area of application. And given that the OECD has the power only to issue model tax conventions, policy recommendations and research papers, its reports have no legal weight or official force whatsoever with respect to its member states.
However, the beginning of this month marked something of a turning point for how the OECD regards blockchain tech. On Sept. 4 and 5, it held its inaugural Blockchain Policy Forum — which, as the name suggests, had the aim of discussing the best practices and constructive policies related to the use of DLTs. Accordingly, it kicked off with a ‘high-level’ talk on how blockchain tech can be harnessed to produce ‘better policies,’ with OECD Secretary General Angel Gurría providing the opening remarks, in which he stressed the need for international cooperation and alignment on how blockchain technologies are developed, used and regulated.
“Blockchain is a tool. And the idea is, to what extent can we make the tool a standard so that, when it is a generally accepted standard, it can then become part of the regulatory process — therefore mandatory in the regulations, so that it can serve the policy purposes better.”
Yet, as Gurría quickly made clear, the OECD’s enthusiasm for blockchains does not extend so far as believing that DLT is likely to supplant the role of governments and of international institutions such as itself:
“But let’s not confuse what this is about: Again, the role of government is in setting the policy, and then seeing what they absorb into the regulations, what tools they absorb into the regulations. That is the role of government and it cannot be substituted. But once you [introduce blockchain], once you have it as a standard and you start applying it, then of course it just goes on and on and on. It just keeps giving.”
Put differently, the OECD regards blockchain as a technology governments can exploit to improve their efficiency, rather than a technology that might conceivably make governments — or at least certain governmental functions — redundant. Still, even if the vast majority of the speakers and guests at the Forum were united with Angel Gurría on this point, they nonetheless had plenty of encouraging things to say about blockchain tech, with many speakers citing multiple examples of how DLTs are already being used throughout the globe. Similarly, many spoke about how the governments they represent had already taken decisive action to foster the development of the blockchain industry, while some had even worked to nurture cryptocurrencies as well.
“Now, with the emergence of distributed ledger technology and digital assets, Bermuda is once again demonstrating its ability to be a center of innovation,” said David Burt, the Premier of Bermuda, during his speech on Tuesday morning. “As the first country anywhere to introduce comprehensive ICO and digital asset business legislation, Bermuda aims to be a model for the world […] Over the past nine months, we have delivered the first phase, which includes a robust compliance environment, with bespoke legislation for ICOs, digital asset service providers, and the banking of digital assets in Bermuda. Our legislation is designed to provide clarity, certainty and consistency, with protections for investors, consumers and service providers.”
David Burt, the Premier of Bermuda
Such positive statements were common, with the prime minister of Serbia, Ana Brnabić, as well as the state secretary of Slovenia, Tadej Slapnik, also explaining to the assembled audience how their respective nations had already begun benefiting from the emergence and harnessing of DLT and crypto. However, as the first day progressed, this initial mood of optimism was tempered with qualifications regarding the limits of what blockchain tech could do, and regarding the legitimacy of Bitcoin and other cryptocurrencies. During a Q&A discussion David Burt said:
“The challenge is that there [are] so many people who actually believe that this is a technology that can be used for bad. And the question is how do you change that from a policy perspective, to make sure that it’s something that can be used for good? And I think that’s the most important thing that can come out of the policy discussions which we’re having, is to get us to a place where that mindset can begin to change, and people can start talking about not Bitcoin, but can start talking about the different type of applications that can make lives better.”
Despite the general excitement surrounding blockchain tech, this kind of cryptocurrency stigmatization was common. During the “Blockchain at the Frontier of Trust” session on the first day, the moderator, President of the Chamber of Digital Commerce Perianne Boring, asked the audience to participate in a poll, in which attendees were asked to respond with the percentage of Bitcoin transactions they believed were ‘illicit.’ As the image below reveals, 57 percent of the audience believed that anything from 1 percent — 25 percent of BTC transactions are for illegal purposes. Meanwhile, 17 percent and 10 percent of the audience went for 25 percent — 50 percent and 50 percent — 75 percent, respectively. Only 13 percent of the audience went for 1 percent or less, which Boring revealed was the correct answer, indicating the gulf between perception and reality — even among ‘enlightened’ leaders and experts — when it comes to crypto.
Indeed, during the “Blockchain and Economics: Global Impacts” speeches, Lord Meghnad Desai — the Emeritus Professor of Economics at the London School of Economics — presented the familiar argument that Bitcoin is not money. In fact, Desai also blamed the cryptocurrency for sowing public confusion and concern with regard to blockchains.
“I think calling the very first cryptocurrency ‘Bitcoin,’ was really very harmful, because it looked like it was money, but it’s not money. Money has to be a means of payment, and a unit of account, and a store of value. It is just a store of value. It’s not a means of payment; it’s a very expensive means of payment, and it’s an uncertain store of value. So now that we call [cryptocurrencies] ‘tokens,’ had originally Bitcoin been called a ‘ZenToken,’ which I think is my favorite word for Bitcoin, nobody would have bothered, nobody would have had these fears about blockchains and all these specters.”
Given this semi-hostility toward Bitcoin and other cryptocurrencies, it was unsurprising to find that the prevailing definitions of ‘the blockchain’ largely detached it from the kinds of decentralized ledger on which currencies such as Bitcoin are based.
“So there are technical differences, but in general parlance, we generally talk about the blockchain industry as a blanket term that includes distributed ledgers. Blockchains are a subset of distributed ledgers, the key difference being, instead of updating the decentralized ledger transaction by transaction, they do it almost in a batch process […] When people talk about blockchain or they talk about DLT, they really do so, at least in a general business purposes, as [two things] that are synonymous.”
Here, R3’s MD Charley Cooper underlined how the OECD and many of its invited guests tend to regard permissioned, even largely centralized ledgers as equivalent to decentralized, permissionless blockchains.
Even forgetting the overly negative perception of cryptocurrencies at certain points, there was still a general, sober recognition running throughout the Forum that DLT won’t be a panacea for the all world’s ills. Correspondingly, there was also the recognition that it won’t completely live up to some of its unique selling points, such as its ability to create ‘trustless’ relationships, systems and/or networks.
“The ledger itself, or the applications that are built on top of it, allow various types of business activity or other activities to be conducted without a middle person, without a third party,” explained Charley Cooper. “That is trustless. However, trust doesn’t disappear […] you do need to trust the software and you need to trust the people that built it […] when you, as an entity, are trying to decide whether or not to deploy an application or deploy a blockchain solution within your organization, it’s not totally trustless in the sense that you need to be comfortable with the software itself, that it was built appropriately, and that it was built to the specifications that you need for your entity.”
Still, while the first day was characterized by a wide-lensed perspective on DLT that regarded it with cautious enthusiasm, the second day saw a higher number of panels and talks that specifically addressed particular applications of blockchains. From health, migration, development, SME financing and water to transport, energy, agriculture and infrastructure, the second day witnessed multiple parallel discussions, and each offered clear examples of how blockchain technology is primed to solve important problems.
“We started with 100 people, six months later we had 10,500 people, another six months after that we had over 100,000 people on the system,” explained Bernhard Kowatsch of the World Food Program, which began an initiative last year to use DLT to process cash-for-food payments to refugees. “Now, with the 100,000 people that we already have on the system, up until now we have processed more than $23 million through the blockchain system so far. Which means it’s no longer a smallish kind of thing; obviously we take this very seriously.”
And even though the first-ever Blockchain Policy Forum didn’t produce any concrete guidelines or proposals on how businesses, institutions and nations should work with DLT, the fact that it has taken place is an important step for blockchain technology. By providing a platform through which groups and institutions were able to explain how they’ve successfully used blockchains to improve their operations and services, the OECD has made it much likelier that other groups and institutions will follow in their wake. And with the idea and practice of blockchain spreading, the prospect of positive standards being introduced by the OECD and other governmental — or intergovernmental — organizations moves closer, as does that of increasing blockchain adoption more broadly.
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