Felix Hufeld, a Harvard graduate who started his career as a lawyer then switched into banking to end up as president of Germany’s FSA (BaFin), has compared blockchain technology to the internet and has called decentralized applications (dapps) as potentially revolutionary.
In a speech published today, the head of Europe’s biggest regulator wrestles with the challenge of allowing innovation to flourish while minimizing risk.
“Anyone who sets up his life in such a way that he never falls on his nose can only crawl on his stomach,” he says while quoting former research minister Heinz Riesenhuber.
That’s after he took us to 1993 when two years after the internet opened to the public, Bill Gates said, according to Hufeld, “the internet was just a hype.”
Yet if we try to understand through this speech where Germany stands, we are left none the wiser. On the most cutting edge topic, he says according to a very rough translation:
“As a BaFin, however, we also have to keep an eye on consumer protection issues, such as the initial issue of new tokens, the Initial Coins Offerings, or ICOs for short.
So far, this form of crowdfunding has been an unregulated and highly speculative process, especially for private investors. That’s why we warned ICOs last November, pointing out the high price volatility of crypto-tokens.
We will not be able to protect every single investor from his fate, and that can not be the task of state supervision. Once again, the maxim is that we must act on a prudent or regulatory basis if financial stability as a whole is threatened or if consumers are systematically undermined.”
Leaving the question of just how exactly they will approach ICOs very much in the air, with the regulator appearing both warm and cold by finding it appropriate to subjectively speculate in stating:
“A real hype, if not a bubble, were the exorbitant price gains of crypto-tokens like the Bitcoin, which also explain the boom of the ICOs.”
Yet, overall, he shows some understanding of this space. He mentions FlightDelay, now known as Etherisc, which is currently participating in FCA’s sandbox.
He argues smart contracts are not quite contracts, but computer programs. A distinction which is very blurry for if you take Etherisc, the I pay you x if you pay y and there’s z condition, does sound very much like a contract.
He also mentions the Slockit DAO events of two years ago, but while that might make him sound dated, he or the team that advises him has kept up with the news. Hufeld says:
“The concept of a decentralized computer program, which was made possible by smart contracts, could actually be revolutionary. This is also referred to as distributed apps (“dapps”).
These apps are not only safe from failures of individual computers or providers, they also promote the development of a “blockchain economy.”
This economic model is considered by some to be a real alternative to the centralization tendencies of progressive platformization, as we see it today in North America or Asia, where leading big-bills run millions of people in addition to traditional online services and banking.”
To our disappointment, he does not then go on to elaborate on how Germany will treat tokens from a regulatory perspective in light of their awareness of the potential the token economy can have.
Nor does he really clarify much on how exactly they will approach this balancing act, but the regulator does say that in the financial sector, blockchain technology “has the potential to turn an entire sector upside down.”
He goes on to say that’s because blockchain technology can make intermediaries – at least technologically – superfluous. And since the waiver of intermediary service providers saves money, the Blockchain is very high on the list in many boardrooms. In addition, processes can be automated, BaFin’s president says.
We can’t help but notice however than in this speech which at least plays with trying to predict the future, the regulator has missed something. He says:
“True decentralized blockchains, even those of the younger generation, are so limited in their performance and scaling that they are by no means able to meet the early promises of replacing intermediary-based securities trading or retail payments.”
That’s a bold prediction in a speech which tries to make none, but if we were the regulator and tasked with guarding against risk, we would ask what would happen if that scale can be met in a truly decentralized way, and can be met within a year or two?
And if we were tasked with answering that questions, we would say: well, then we have to clarify our regulations since a year or two is hardly much time. Because while we do enjoy listening to regulators attempting grand narratives, what we would enjoy a lot more is some clarity.
Specifically, how will Germany approach tokens which are sort of the oil in decentralized applications? Are they thinking of backing a self-regulatory organization? If blockchain projects replace such intermediaries, should the same banking/financial laws apply?
Will they hint at entrepreneurs that the regulatory approach will be, where “good men” are concerned, that you’re fine with asking for forgiveness until we figure out just what comes out of all these movements?
And a final pressing question for BaFin and all other regulators is whether they think their economy is better served by allowing capital formation with little permission slip requirements for sums up to say $10 million or $20 million.
Hopefully some of these questions will also be asked and answered at the EU Blockchain Observatory & Forum Ask Me Anything session.
But Europe does appear to have become a bit more friendly towards this space as they potentially see an opportunity to take some of the Venture Capital money that would have gone towards Silicon Valley following SEC’s hostile approach.
Yet whether they will be able to move fast and move right in striking the appropriate balance where entrepreneurs say it makes sense, remains to be seen as this space continues to go through this decisive 2018.