Professor Syren Johnstone Q&A: Paper 3 “Inhabiting Different Realities: Incrementalism, Paradigms and the New Prospect” Part 2
We continue on with Professor Syren Johnstone this week to discuss the release of his third paper “Inhabiting different realities: incrementalism, paradigms and the New Prospect”.
We talk about the regulatory space and the development of the ecosystem. But we cannot ignore the fact that the whole world has also been hit by very serious circumstances this year.
How do you feel the current Covid-19 pandemic will help to shape (or shift) the development of regulations in the CCTech space if any?
It seems like everything, particularly everything digital, needs to be positioned against COVID-19, and I’m not sure that always keeps things in the best perspective. I certainly don’t see COVID as a stimulant for policy makers to suddenly do something different about the problems of applying financial regulation to CCTech. However, projects seeking to design decentralized architecture that traces potentially infectious COVID contacts in society have brought focus to the governance of decentralized networks, particularly as regards balancing the relationship between public and private interests. The work on governance of decentralized networks is very relevant to the development of crypto-assets and the New Prospect, and it is something my proposed Designed-By-Architecture (DBA) taxonomy is able to address whereas it is not within the scope of the current fit-to-existing regulations (FER) approach engaged by regulators.
In your paper you talk about the development of a digital ecosystem and the factors that might foster or inhibit its development. How does that relate to the New Prospect and regulation?
Evolving a more complex digital ecosystem is part and parcel of realizing the New Prospect. We can think about this in biological terms — the emergence of a pioneer species that influences the environment in a way that enables a secondary species to emerge, and so on. If the possibility for new commercial relationships, institutional arrangements and interactions is to be explored, there needs to be a variety of CCTech-based commercial species that are able to interact in an economically efficient manner and with legally certainty. Financial products may be a pioneer species, but ecosystem development requires more than just the purely financial . This requires fit-for-purpose regulations to be in place that constitute a fertile environment. The precursors to growth in western capitalist societies has certainly included supporting legal conditions and an efficient economic organization, and it is no different when considering the New Prospect. So, innovation, ecosystem development and the regulatory environment are closely linked issues.
The market and circumstances change so quickly. Do you think regulators will ever be able to stay in step with technology developments? Or is there even an appetite amongst regulators for change?
Historically, industry races ahead and regulation plays catch up, though things do change. For example, if one applied today’s social conditions in 1920 it would have stalled commercial air travel prior to adequate safeguards being in place. Think of the safety standards — and laws — that will need to be in place before commercial space travel or drone taxis for humans would be generally allowed. Social expectations of regulatory protection has changed significantly in the last 100 years. The challenge is that regulation needs to allow room for informed risk taking. That said, regulators have an ambit of authority and there is the problem of what I’ve referred to in my paper as “predictive interference”, which influences how one looks at new data. Change likely needs to originate from outside regulators.
What, in your opinion, would be the greatest challenge or roadblock in development and implementation of these proposals?
The industry has grown so quickly that there are now vested interests in driving crypto-assets along a primarily financial regulatory model. In my paper I discuss Carlota Perez’s account of technological irruption, which suggests there is typically a first phase in which it is dominated by financial capital (actors using wealth in the form of money to create more wealth), and a second phase in the form of production capital that serves to grow the technology and propagate the paradigm across the economy. How this dynamic plays out can have profound effects on the direction and intensity of innovation. My concern is that the financial regulatory model could cause CCTech to become stuck in the first phase for a prolonged period.
You make the analogy of the development of air travel in the 1920s and the creation of the IATA which was essentially founded by the airlines themselves. But you also make an analogy with the development of the corporate over the past hundred plus years. How do these relate to your argument?
I’ve referred to IATA as some people think of it as a model for the crypto-industry, for standard setting, interoperability, and such like. I don’t disagree with that but it doesn’t help us understand more fundamental issues about the present intersection of CCTech with financial regulation.
The evolution of the corporate is of more interest in this regard because we see it changing over time in response to social and political factors, and it works because it has, by and large, served the interests of society as a whole. Prior to the 19th century corporates served State purposes rather than private purposes but that changed as commercial activity shifted away from centralized sovereign power. Today we have social forces seeking decentralized alternatives to centralized ones enabled and accelerated by CCTech, and the law and regulation will need to respond to that. Such an evolution would give rise to considerations as to how such decentralized alternatives would work, both at a private level and as regards protecting the public interest. But to be clear, I’m not proposing CCTech iterations be treated as corporates — far from it; its merely an analogy that shows how we need to respond differently to new social forces and opportunities.
And finally, you’ve been watching the crypto space with its regulation for a few years. What do you predict the regulatory space to look like in a year from now?
For the time being, regulatory incrementalism seems well entrenched. There is a notable lack of adequate cross-jurisdictional coordination that is prepared to think outside existing regulatory constructs, despite the obvious issues created by a borderless technology. Different jurisdictions will continue to introduce policies to de-risk or to attract (or avoid losing) financial capital to get a slice of the economic activity. Further regulatory reversals, stopgap solutions, inconsistencies and other regulatory tinkering should be expected as part of that process. However, in the absence of a fundamental rethink about how to allow CCTech to innovate beyond a financial template, there will be limited success in promoting genuine innovation and development on a sustainable basis.
Once again, we thank Professor Johnstone for helping to shape our understanding of the regulatory space in this exciting new era. We look forward seeing the work he’ll be doing in the future.
The full paper can be downloaded here: http://ssrn.com/abstract=3605107. Registration to download the paper is not required, and can be accessed by scrolling down to the “download with registration” link.
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