Episode 2 – Jason Brett of Consensys Transcript

Jason Brett:                        Listen, blockchain's not a panacea. It's not going to stop the next financial crisis. There's probably going to be another financial crisis that you and I have to live through in the next five or ten years. I would just prefer that there not be a replica of someone like me on a white board trying to figure it out in the middle of the night.

Doug Bridges:                    You're listening to the Blockcast Show, where we talk with the world's leading entrepreneurs and innovators regarding blockchain technology and business.

                                                I'm your host and technology lawyer, Doug Bridges, partner at Capital Legal Group.

                                                Today, on episode two of the Blockcast Show, we are speaking with Jason Brett, Director of Government Relations and Regulatory affairs for Consensys, about government regulation of Blockchain and what lessons the Blockchain community can take from the 2008 financial crisis.

                                                All right, Jason, how are you doing today?

Jason Brett:                        Good, how are you, Doug?

Doug Bridges:                    I'm doing all right. Why don't we talk about how you got into blockchain, as well what your background is a little bit?

Jason Brett:                        Sure. So, I was a financial regulator at the FDIC, so I'm a former regulator. I worked in the division of finance at the FDIC in 2008, at the beginning of the summer ... Where I was told it would be a really quiet summer, turned out not to be the case, of course. Indymac Bank, and then started, and I was actually the first person to develop a spreadsheet during the financial crisis to show the outflows of deposits at Indymac Bank, which was definitely an interesting experience watching people's behavior during a bank run. From there I went to the capital markets group in September, where I was ut in front of a Bloomberg machine and then of course, Washington mutual, Wachovia, and Lehmann Brothers failed. I'd say the joke about me in terms of putting me as a financial regulator is don't follow me around the horse track, because I seem to go from one place to another right to the epicenter of everything that was happening.

                                                From there my career's really sort of taken off from that crisis, because I just started tracking all the things that were happening out of the Federal Reserve, I started going as far back in 2008 at the request of my superiors of comparing the American regulatory system versus other countries, when they were taking a look at maybe how we could do things better. Seeing how an AIG would impact us in such a great way, by being this one company that's not even a bank to influence the system the way it did. All the way up to ... I'll never forget Christmas eve looking over Merrill-Lynch bonds with the whole Bank of America, Merrill-Lynch deal.

                                                So it was definitely an interesting four or five months into 2009. I went on to work at the FDIC for a few more years as a regulator, then got interested in Obama's Making Home Affordable program, where I became a compliance examiner to look at some of the large banks, and the robo-foreclosures, and really sort of how that program was being used, and how the industry sort of picked up on what the politicians were trying to encourage, which was helping people stay in their homes if they could, or giving them some options. I really enjoyed that work for a few years, and then I did a little regulatory consulting work for the FDIC and other agencies, sort of prepping them on how to get ready for the next crisis, and that's exactly how I fell into Blockchain, because to me Blockchain seemed like a very transparent way of sharing a ledger, and as a regulator having worked off of a white board during the financial crisis trying to figure out counterparty risks, I certainly saw the value of how technologically it might give a regulator a better view of things.

Doug Bridges:                    Yeah. I know that a lot of people are sitting here going, "wait, you were the first person to put a spreadsheet together to cover this?" I guess a lot of people think you have these DC regulators sitting there with large databases of all this information, all summarized with these huge graphics trying to figure out what's going on, and the idea that you're just sitting here on a white board with some Excel spreadsheets trying to look at the flow of money might give people a little bit of pause.

Jason Brett:                        Yeah. Let me be clear, there are a lot of people working the problem, and a lot of people working on a lot of very different angles, to try and understand where things were coming from. I was at the FDIC, and the FDIC was not really in the forefront of capital markets, so in a sense we were just monitoring it. But certainly became important as we were having to watch the bank runs, but ... Indymac Bank really caught ... I'll be honest, that caught everyone by surprise. I will not forget in 2008, we became the guarantors, so we became ... In other words FDIC by law became in charge of the bank, so we were suddenly the board of directors. We had people there who usually did resolution stuff for small banks, and here they were all out in Indymac Bank suddenly running a bank.

                                                They were looking around at each other as the board members of a bank, and the government, and they needed to decide, "Wait a minute, we have a lot of people running on the bank." The interesting thing for me with that, though is that regulators are very creative, and this is kind of my take why you need sort of smart, human regulators in the mix is one of the things we encountered at Indymac right off the bat, and one of the things I noticed was we were analyzing the deposit outflows of Indymac Bank, and the initial people that were taking all their money out, or trying to until we convinced them they didn't have to, were people who lived through the Great Depression, right Doug? So, people who lived through the Great Depression, they're like, "I'm not going through this again, give me my $80,000. I don't care, I'm going home with a briefcase full of money."

                                                So it took us a while, but we explained to them look, it's FDIC insured, it's owned by the government, your $80,000 is safe and sound. You can go home, you don't have to take the money home with you, it's actually safer here in the bank than if you have a fire tonight. So go home and that's fine.

                                                But the interesting dynamic that came up, speaking of looking at different dashboards or whatever people might imagine is, we were looking at all different angles, and one of the things we noticed was, immediately after the spreadsheet was put together of course, that there were a lot of people in the demographic ages of 20s, 30s, and 40s, and 50s, that were starting to take their money out too, and the runs were getting larger. We were really trying to figure out what's going on here? These people didn't live through the Great Depression. Were their grandparents telling them go run down to the bank?

                                                What we actually realized was it was ... And to me this was an important part of the crisis that's not talked about a lot, the sensationalism of Lehmann Brothers very often is what's talked about with September/October, and that was definitely a critical time of the crisis, but I'd say one of the most important moments was about in May or June when Chairman Bair, our chairman Sheila Bair of the FDIC noted that it was actually YouTube. That's what I realized, people were filming all these people from the Great Depression lining up outside the bank, and then everyone else who's in their 20s, 30s, and 40s, and 50s is like, "well, if they're running on Indymac Bank I should do the same thing."

                                                So people, we figured, were leaving their homes after looking at YouTube to go run and get their money out, and then all of a sudden we were talking to people outside the bank, and we were like, "What are you doing here? You didn't live through the Great Depression, go home." They're like, "Well, I saw on YouTube there are all these people lining up outside of banks so I thought I'd better do the same thing." So, we quickly realized, and I'd say this is where I think one of the moments is that's not really talked about too much, Chairman Sheila Bair really made a great decision was she said, "You know what? There cannot be another YouTube video like this for the rest of the financial crisis." And I'd say that was probably one of the wisest decisions.

                                                In fact, if you go back and look, you'll see She started to go on YouTube herself to explain what deposit insurance was. We started to pay for radio ads to help people understand what deposit insurance was. We almost took that same medium that was causing the initial panic, and instead ... And then of course we came up with loss resolution, where smaller bank could then be combined with larger banks.

                                                Because really, if you think about the calculus on it, Doug, if I were to tell you ... if you had money at Wachovia Bank, and it's a Friday afternoon, and all of a sudden you hear Wachovia's closed, but Wells Fargo now owns your bank, and I know Wells Fargo's had its issues recently, but at the time, it's a large bank. You're gonna go watch some college football, you're gonna watch ... Do whatever you do on the weekend, take a bike ride, read a book on Sunday, and then Monday morning you're probably gonna call Wells Fargo, or call Wachovia, right, your old teller and say hey, send me my new debit card that says Wells Fargo on it now, and send me some new checks. I guess that's what I've gotta do, right?

                                                But the alternative was, if you found out that Wachovia's now owned by the Federal Government, that was a whole different scenario. That weekend probably would be ... You waiting 'till Monday morning to go get your money out and put it in another private sector bank. So we ... That really was one of the theories behind the whole Loss Sharing, was realizing that the panic people had when they thought of the government as owning their bank versus a private sector ... Which is interesting, right? That people would be more comfortable with a private sector company owning their bank, owning and watching over their money than the government itself, but we found that to be the case.

Doug Bridges:                    What happens when YouTube meets It's a Wonderful Life. Here's the Jimmy Stewart of YouTube.

Jason Brett:                        Yeah, really. I mean, that's a really great point. I've said it once before, and I'll say it again, I still think that one of the areas ... and I'm now a former regulator, but one of the areas that needs to be focused on is a virtual run in the future. If we have a financial crisis, I mean, everybody has their money online. It's not even a matter of needing to go down to the bank. When was the last time you went down to your bank?

Doug Bridges:                    No, and I use a virtual ... Well, I say virtual bank. I use a bank that has no branches anywhere near me, that just refunds ATM fees. I deposit, taking a picture ... I deposit a check. I take a picture with my phone of the check and it sends it to them, and then I go to an ATM and withdraw money.

Jason Brett:                        Yeah, yeah. So it's fascinating too, of course, because you know obviously Bitcoin came out of the financial crisis when I was busy in government, looking over all those different things and trying to put everything back together with chewing gum and all that good stuff, and keep everything together. What I think about a lot is, in the modern day, if we were to find out, let's say a very large systemically important bank is going downhill, what do we do? What's the strategy? Because in 2008, we had the luxury of ... Well, not just me scanning up a spreadsheet, but flying out to California and actually talking to people in the line to say, "Look, you don't have to take your money out," because obviously we're not the kind of country where we can give out every dollar to every single person, right? It's a fractional reserve. I don't know what that would look like, but I certainly have thought a lot about that and people have said, well someone should maybe take a look at that.

                                                If we have a virtual run, if the money's all gone within an hour, what does that mean?

Doug Bridges:                    Yeah, I think there's a lot to chew on on that. Before we get to that, though, let's talk about what you're currently doing. You mentioned earlier that you were at the Digital Chamber of Commerce. What were you doing there, and how'd that get you into blockchain, and lead to what you're up to now?

Jason Brett:                        Sure, so like I said, my passion for sort of blockchain came when I actually went over to the CFPB, and I was interested in talking about blockchain, and how that could help with the regulatory aspect of helping regulators as a tool. So I backed into the Bitcoin aspect of things.

                                                In fact, the first meeting I had, was actually at the CFPB, with Calvin Chen, he thought I was there to talk about Bitcoin, but I was actually there to talk about blockchain. He had to step back for a minute and go, "wait a minute, I thought you were here to talk to em about digital currency like everybody else." I'm like, no, I'm here to talk to you about what I think is a really interesting topic, which is the technology behind Bitcoin, that everyone really started getting into and really what ethereum is about a lot too, in my current role at Consensys.

                                                So, I would say going into 2015-2016, I became basically the director of operations for the policy at the Chamber of Digital Commerce, which was focused on blockchain technology, and really did a lot of different working groups that got me really embedded in the space. I ran the state working groups, all the different state laws that came out, we had a consumer policy group. We had another working group, mainly member driven by the lawyer's committee where I helped put together a paper on smart contracts, where actually the foreword was written by Nick Szabo. So I really got embedded in the space, and from the chamber really learned just about everybody in the whole industry in about a year. Was fascinated, and haven't looked back.

                                                After about a year was up, I really got interested in the ethereum, and talking to Joe Lubin and the folks over at Consensys, and it sort of became my dream to say, hey, can I maybe work in Brooklyn and sit next to Joe all day, and around these people working on this ethereum, and sure enough that happened, where he came ahead and said, "Why don't you just come on and do what you're doing at the chamber, come over here and do it for Consensys?" I was actually, as of July, the very first government relations hire by Consensys. It's now 450 people, but I'm in charge of their government relations and regulatory affairs here in Washington, DC. I'm their first employee as of July.

Doug Bridges:                    Right, and that was something which I know we talked about previously that I found interesting, that Joe Lubin ... He wrote a post on Medium when he was talking about the founding of Consensys, and what got him into ethereum, and into the blockchain space, and it was the financial crisis in 2008, which drove a lot of the creation of Bitcoin, and drove his interest, and I think a lot of people's interest into the blockchain space, and as things have developed, ethereum specifically. I know, personally, Bitcoin was interesting, but I know I didn't see how it would become what it has now, for sure, but the idea of ethereum and all the different things that can be done with it I think is interesting for a lot of people in the financial, regulatory, and government spaces as well.

Jason Brett:                        Absolutely. I think that Consensys, and Joe Lubin's vision really tied into mine in terms of what his experience was, and a lot of people's sort of ... I'd say disillusionment in terms of what happened from that financial crisis.

                                                If you look at the way our country works, Doug, we're kind of cyclical by nature. SEC, because of the Great Depression, FDIC because the Great Depression, CFBB that's we're all now debating about is from what happened in 2008. We tend to stand up agencies as a reaction to when there's something really bad that happens.

                                                Certainly the nice thing about ethereum that really attracted me to Consensys was the way it leverages the platform. I think of Bitcoin, and you're right, it's interesting and it's definitely caused a lot of changes in the way people think about how to transfer money, and it's definitely the very ... First Blockchain 1.0, but in a sense it's sort of like the calculator, and I often think of, if you had Steve Wozniak with the calculator, you sort of had folks like Steve Wozniak, or in current day, Joe Lubin and Vitalik Buterin who are sitting there telling their leaders at HP, "Look, this is just a calculator. I think I can make this into a computer." Famous story, of course is Steve Wozniak said to HP five times he wanted to build a computer, and five times they said no. So he finally quit and went into his own garage, joined up with Steve Jobs, created a computer.

                                                So you have the with ethereum, it's the same thing. It's a virtual machine, it's more Turing complete than Bitcoin, because you're enabled to do smart contracts, and really develop whatever you want. So we can do any kind of human agreement, or human transaction over the internet, versus just transferring money. Whether it be land rights, voting rights, you name it. So that's what's, to me, the beauty of ethereum.

Doug Bridges:                    Right, and it's like ... I remember ... this is I guess going really far back. When I first got on the internet back in, I guess it's 1990 of all times, dialing into a bulletin board system, which I thought was the coolest thing in the world. I dialed into a UNIX machine, and then TELNETed into a bulletin board. I thought that was pretty cool, to be able to do that across the internet, to not have to make long distance phone calls to dial into some bulletin board.

                                                Then, when I first saw what was happening with mosaic, and going to a website in '95. It really changed things from TELNETing into some bulletin board, to going to a website, and then back then I had no idea what would have happened in 20 years across the internet, from '95 to even 2015, now to 2017. What happens, and how the world has changed based off of just little incremental improvements over something that was neat, but now it's huge.

Jason Brett:                        Absolutely, and we say this all the time, we really believe that we are, in terms of the internet timeframe with blockchain, really almost 1993 of 1996. We're still very early days with public ethereum, so we're still ... It's still very early still figuring out a lot of different things on it, but it really is that ... I remember the AOL, getting those discs and having just a few hours, and people talk, Oh, ethereum's not as speedy just yet, or it's a little slow, or even bitcoin's a little slow. I'm like, don't you remember dialing in and being excited when you connected, because you had to try five times before you actually could connect to the internet?

                                                One of my roommates in college was so fascinated by writing emails. He'd write emails that were like, five pages long, just because he couldn't ... It was mind-boggling to him that he could send a note to somebody in Europe. So yeah, it's ... And that little thing, you're right, absolutely, is now we have this ability to connect all around the world. There's really a lot of benefits. There's certainly issues, too, right? I mean, we've learned issues that we have with the internet both in terms of our personal security. We look at the Equifax hack from a few weeks ago, and other issues. We realize we still are living in this world of Siloed data that is something that needs to be fixed.

                                                If anything, what we're seeing now, I think is sort of the next phase. We've sort of built this amazing internet. We've gotten to where we've gotten to, which is incredibly, but there's certainly some tweaks that we need to make to maybe improve it.

Doug Bridges:                    So, let's talk about how Consensys fits into this world first, and then I think that your role in Consensys with respect to regulatory and policy is critical. But Consensys itself has ... Consensys calls it a hub and spoke setup. Why don't we talk about how Consensys works with respect to ethereum and the ethereum ecosystem?

Jason Brett:                        Sure. So, Consensys is very much a company, as you said, built on a hub and spokes. We work mainly off of the ethereum platform. Joe Lubin with Vitalik Buterin and seven or eight other folks ... Joe Lubin read the Vitalik Buterin white paper in 2013, believing that ethereum could do more, and helped get ethereum started, and worked for the ethereum foundation, and didn't really leave there until he felt like things were on the right track.

                                                So, Consensys, as of now, we have launched in September of 2015. We took eight months of planning from January to September before actually launching, because we wanted to make sure we followed all the correct regulations in launching the company. Joe was very careful to do that. Started with about five people in Brooklyn. Consensys is a design studio in Brooklyn, for software.

                                                So, What Consensys's goals are is really from a perspective of what types decentralized applications can we build off of the ethereum network, and when we have spokes, we have different types of companies, numerous, that we hope to spin off into its own company someday. We don't necessarily want to become a major conglomerate. We recently hired Kavita Gupta, who's leading out $50 million fund for investments and ventures, so for a time we weren't really doing venture funds, but now we're looking really to ways to spark the ecosystem.

                                                One example of a spoke, and what Consensys is doing is uPort. uPort is a digital identity system, and the idea of it is, and I've already heard the term in DC, Doug, it's already and acronym so it means it must be true. It took me a while, because I was reading a paper and it said SSDI, and for a second I thought I was reading about Supplemental Social Security Disability Income or something, and I had a pause, and I go, wait a minute, they've just used an acronym to describe Self Sovereign Digital Identity.

                                                So that to me is really where it starts. Like I said, we really believe very strongly that things like Facebook, Twitter, LinkedIn, got us to where we needed to get to today, but what has happened is we've seen these huge companies that really own our data. They own our identity so to speak, and we believe that with a Self Sovereign Digital Identity, you in a sense would have the ability to give out your identity as you choose, possibly even monetizing your own identity.

                                                So the idea is to have your own identity, not have it linked to any kind of password, but have it be biometrically driven. The idea of ... Right now we're testing it in Zuoz, Switzerland. People can do things like online polls, voting ... You have the sort of Estonia model where you can pay your taxes in Estonia, in three minutes it takes you to do your taxes. So there's all these kinds of benefits of having your identity, where it's your identity, and you only can give out parts of it.

                                                The best example, of course is when you are thinking about let's say if your daughter goes out to a bar, why does she have to give her driver's license or passport to the bouncer, say hey I'm over 21 and I can drink? What if you had your phone, it was biometrically blockchain enabled identification that you could just say, "Look, I'm over 21, and that's all that you need to know about me, and I've just verified that." As opposed to knowing all the other details about myself.

                                                This is something that I know NIST is even looking at. For the first time in 15 years they rewrote their digital identity guidelines, NIST 863-3, and one of the things that they're looking at is a point where you could either use your blockchain enabled Self Sovereign Digital Identity to say this is who you are at an airport, wherever that might be, or your passport or driver's license. You have an option, kind of either or because they know it's that secure.

                                                Similar to Delaware. Delaware just recently passed laws that allow companies to register their shares either on a blockchain, or they can do it on paper. If you talk to the folks that work in Delaware, they'll tell you, you should probably do the one that's on the blockchain, because that's actually more accurate. And then you can even not only keep track of your corporate shares on the blockchain, and who has voting rights and all that stuff, but you can even put your board minutes on the blockchain, your books on a blockchain.

                                                We're really seeing mainstream adoption, and the role that consensys is trying to play in this is to see where there's opportunities within the ethereum blockchain to really ... because we believe ethereum is the next internet, so to speak, of human agreements versus just human communication where you and I don't have to know each other, we can trade land, we could ... and through my identity, that's the key right, once you know that I can identify myself through the blockchain, then I can actually start trading things in the blockchain, and it means something to say I have this amount of land, or I have this diamond, or whatever, and it's tokenized.

                                                So it's all digitized. If you think about the power of the technology that we have, just like we figured out with the internet the way we could communicate with each other, we're now realizing how we can store value on the internet. I'm a big proponent, and I've talked to Joe Lubin about this in terms of, of course thinking of it from a policy perspective, we could be perhaps looking at a new discipline. We have internet technology, what if there was, what if we were entering into a world where now this is value technology, or VT? What if people are going to be getting value technology certifications? What if someone were to stand up a value technology institute, just the way we have with internet technology?

                                                You have, like you said, tech junkies like yourself who are really into the financial aspect of things, and then what's the secret sauce? How do you make sure you identify that if I have this bunch of zeroes and ones somewhere in a computer, that means that I have this much of value?

Doug Bridges:                    Right, and I guess with all their power, however, comes both risk as clearly the ethereum community has seen from the criminal aspect, to having to fight back against the risks there, but also the issues with respect to valuations, the issues with respect to where the power is concentrated with these large digital communities. That leads into, how does the government respond to that, and I guess that goes toward your role at Consensys, being the primary interaction with government for Consensys. Or how do you see that going forward right now?

Jason Brett:                        That's a great question, Doug.it's a little humbling, because it reminds me sort of how on the cutting edge we are here because ... So, I'll put it to you this way.

                                                My first job out of college, I worked at a Bank of America, and I'll never forget my manager at the bank told me, "The way you deal with the public is very important, and if you ever mess with two things with the public, you're going to have a problem, and that's when they're going to lose their minds, and you're just going to have to deal with them losing their minds until they recover."

                                                One is if you mess with their kids. So, I liken that to sort of what we had with the internet, right? I still hear stories. Just last night I was listening to a radio interview about people terrifies that their kids could plug into the internet at the age of five or six. So, messing with your kids, right? I don't want my kids some weird whatever to be influencing them by getting into the home and talking to my kid. You've got to protect your kids. People really lose their minds over that aspect of things with the internet.

Doug Bridges:                    And I will say there's no doubt that's true, as somebody who's spent a lot of time last night trying to lock down his daughter's iPod.

Jason Brett:                        Oh yeah (laughter).

Doug Bridges:                    You're preaching to the choir here.

Jason Brett:                        Yeah, no, absolutely. So, if you turn that to where we are, the second thing that my manager taught me that I think is what I'm basically dealing with now when I talk to government, is people's money. Right, Doug? Messing with what your daughter hears over her iPod is number one, my number two if I were to suddenly be like, Oh, well you know I'm not sure exactly how much is in your bank account, you'd be like, well, let's have a conversation, Jason. Let's talk about this, because I kinda care how much money I have in the bank.

                                                So, what we're seeing is really there's been five times in human history, and this is number five, when we're going through a change in the way that we view value. If you talk to millennials, you've talked to your daughter, talked to a lot of people, a lot of people won't ... Cash, is like, what is cash? People really are familiar with digital. If you think about a lot of digital money, 90% to 95% of it's already really digital, so what you're seeing from a monetary policy perspective is people starting to adopt to this concept of, "Oh, I can use just digital money, I can just trust that I don't have to have it all in cash. I liken that back to, if it was the 1840s and I was bringing my bushel of corn to you and you were handing me a little gold nugget every time, I'd be good with that and say, "thanks, Doug," and I'd go back with my gold nugget to my farm and work on getting some more corn.

                                                But if one day, one year I show up and you hand me a gold certificate, and it says it's good at the bank of Kansas, and I have to go down to the Bank of Kansas to get my gold, I might look at you kind of funny for a while, and be like, "You know what, just give me the gold nugget." But after a while, I might be like, okay I get it, it's a piece of paper, it's good, it's at a bank.

                                                You mentioned the one thing I do want to touch on, which is sort of dealing with the ethereum community had to deal with. I thought it was a really great moment for the ethereum community back ... I think you're referring to sort of the DAO Hack, when we had to deal with people entering into what was its own company, the DAO, which was this Distributed Autonomous Organization, and some hacker found a recursive call in the code, went in, took about $50 million, so the community came together to kind of make things right and get everybody restored back to where they needed to be, and then get people an option with a fork, either going on ethereum, or ethereum classic. To me that is more representative of the fact that, again like I said, we're in 1993 of 1996.

                                                If you remember the internet, it wasn't exactly like the internet was perfect. People used to actually respond, people still do respond to the emails that they say, "Hey, I'm a Nigerian Prince and you need to send me $100,000." I was joking to a federal official the other day about this. It's like spam mail, it took us a while to realize that if you're getting a note from somebody in Nigeria saying "Please send me $20,000 or somebody's gonna die," that we realize that that was just a fraud. And that person looked at me, and he goes, "You'd be surprised how many times we still have to tell people after they've given their $20,000 that it was a fraud."

                                                So we're still dealing with this concept of ... It's a new thing. Unfortunately, with the internet we had a lot of the bad people come onto the internet first, just like I think we always will. We'll always have this difficult element of society, and it's a matter of how we manage that.

Doug Bridges:                    I think it's interesting you brought up the DAO hack, and I was actually speaking more in just how the ethereum community's had to fight off a lot of people trying to work their way through the ICO process and hijack ICOs, and take money. But the DAO hack I think is interesting because the ethereum community in general has been a little less fractured with respect to forks than the bitcoin community has. I don't think that's saying anything considering all the fighting that's going on in the bitcoin community about segwit2x and things like that, but with the power of the core of ethereum and the power of the core ... That's probably a bad term to use, the power of Bitcoin itself, the Power of ethereum itself being in the people running the nodes, and the adoption of the community of the nodes, how does government interact with the idea of ethereum, and what is ethereum, or the idea of Bitcoin and what is Bitcoin, when that's maintained by a very loose community based on who's running the nodes, which do the validation and do the authentication of trust?

Jason Brett:                        That's an excellent observation, and I think the government, when they look at this and it's interesting because recently the SEC had an investor advisory commission, and one of my good friends, Jeff Bandman, who founded LabCFTC, gave testimony at this committee last ... it was just this last week. He said, "you know, we need to probably work on procurement rules," and it was the first time he ever said it publicly. He had thought about it privately for a while. "We really have to work on procurement rules that allow the regulators to learn how to use ethereum." Right now the procurement rules are such that it makes it difficult for the regulators to even try ethereum.

                                                For instance LabCFTC is a lab for the Commodities Future Trading Commission, but it's an empty warehouse. It's a conference room. They can't put, whether it be R3's Corda, or IBM's Hyper ledger, which are competitors, or let's say the protocol of ethereum in without putting in 100 other different protocols just because that's the way the procurement rules are written. You can't leave anybody out. So, he actually called for an Act of Congress to say look, I think we need to, for this specific technology, allow the regulators to start just picking up ethereum.

                                                Definitely procurement rules, as he said, are written for a good reason, it's so you can't bribe government officials to get your own business in to ... And those are very important rules, but he's saying just a temporary sandbox regulators, just to allow them to get familiar with this technology I think will make them more comfortable with it, and realize the way the system works is a way that ... They can be able to realize that this is actually probably their best friend, because they could be a node themselves on the blockchain, and see what's happening in real time.

                                                This goes back to my point about when you asked me sort of with the financial crisis, the AIG and the cringing of the idea of a whiteboard is we could develop regulatory dashboards, where the regulators could see what's happening in real time, and ... Listen, block chain's not a panacea. It's not going to stop the next financial crisis. There's probably going to be another financial crisis that you and I have to live through in the next five or ten years. I would just prefer that there not be a replica of someone like me, on a whiteboard, trying to figure it out in the middle of the night. Whereas if maybe a few months beforehand we could say, "Oh look, all the banks have shifted all their risk to a whole other sector of the economy, all in one company," and give the regulators a chance to go to those executives and say, "This isn't okay. We need to make some adjustments before stuff really goes bad."

                                                So, to me, the whole flexibility of the nodes is the ability to see all the different counterparty risks. If you have a ... The way we have it now, were comfortable with this idea of their being one person, a CEO, who's in charge of everything, and depending on that one person, and their committee, and their board, to run things. We have these systemically important financial institutions. I would argue that means that we have like, eight or nine institutions, or eight or nine people, who if they don't do their jobs right, could ... Yes, we do have procedures to follow with Dodd-Frank, but could cause an economic crisis. So it's very siloed, the way the systems are now because of these really large banks that have so much power over the economic world. I think that with time we'll realize that to be more decentralized is better.

                                                I'll leave you with this as a good example. We had Equifax, right, the Equifax Hack to weeks ago? Regulators are used to going to talk to the official, right? Remember Enron, Doug?

Doug Bridges:                    For better or for worse, yes (laughter).

Jason Brett:                        We were after the CEO. Like, where's that CEO going, and is that CEO going to jail. Well, what's the first thing the Equifax CEO did in this case? Resign.

                                                So now it's ... Yes, he's a private citizen, but we still ... It doesn't mean he's off the hook. We're still going to go talk to that one person. I think what is hard, and I think will take some time, but is to realize there isn't one person in the community that you can just take and put on a stand in front of Congress and say "Why did you do this?"

                                                And I think that's going to be a learning process, and hopefully very much a public/private collaboration that happens over the next few years, where people in the community can work with the people in government in a very collaborative process to decide what is the right governance cadence? What is the right mechanism? What are regulators comfortable with? Because it is a change of the way things usually are done. Usually it's top down, you go after the big kahuna. Now it's a matter of it's spread around amongst a lot of people, so who do you hold responsible?  So the question is maybe whom do you hold responsible? Whom in the community, how do you figure it out?

                                                There have been white papers ever since the dawn of blockchain that have been about the governance of it, and I think that's something that we're still all figuring out.

Doug Bridges:                    So, right now what would you think would be the best way that the ethereum and blockchain community could interact with governance to make it so that the coming regulation of blockchain, which there's going to be government interaction with blockchain, and even with the SEC we're already starting to see some of that, but what's the best thing that the community could do right now to make sure that that interaction happens in a rational manner?

Jason Brett:                        I think that those in the community that as you said care about this technology realize that the regulators don't want to regulate the technology, they want to regulate the businesses in the technology. So I think what you're starting to see are some sort of self-regulatory organizations that regulators will rely on, and I think it's going to take really a public/private alliance within the United States of a ... Where the industries get together and help monitor when there's a bad player. If you and me and ten other people are really trying to do the right thing on the ethereum blockchain and we learn of one person that's really a bad actor, that maybe is running an, as you called it, an ICO, or blockchain token raising, and they're trying to just do it to scam people, that we find ways to kind of as a community say, "look, this is going downhill fast, how do we alert the regulator that this person is just taking advantage of people, they're not really true?" How do we verify from a technological standpoint that someone has written a white paper about blockchain and it's really about blockchain?

                                                To me, though, that's really the enthusiasm people have about this space. As soon as you start getting all this money that's flowing in, people are wanting to get in at the ground level, even to be an investor in the space, because they see it as being as exciting as the internet. Anytime you have that excitement, it has to be somewhat balanced, but the positive side to me is ... If you look at government today, most recently you'll see that ... if you Go online you'll see that ... How do I say it? They're working with the public in a way they haven't before. The NIST guidelines for digital identity that I mentioned earlier were done on GitHub.

                                                Just recently, Justin Herman of the GSA announced, and his role is sort of leading the blockchain effort on the public side, announced a GitHub repository called the Blockchain Atlas. He's openly asking for people to please contribute to this atlas, to show how blockchain use cases can work in the federal government. And it's a GitHub, so you can just go on, you can add your ideas. It's a new way, really where you can just interact with what the public's doing, the public sector and the private sector. I think the way forward is going to be for us just to have lots of conversation, lots of education about what blockchain is and what it means, and help most importantly, the regulators understand. If it takes this Act of Congress, it's something we're definitely considering and thinking about what the right way forward is ... If you're supposed to regulate something, Doug, and you can't even use it, how are you supposed to regulate it, right?

                                                So we have to find a way to maybe loosen up the rules a little bit so at least the regulators, and I know what this is like having been on the other side, can at least get my ... I can get my hands dirty. I can at least understand how this stuff works. Definitely, there's something to once you actually see, feel, and touch it, then you get more comfortable around it. So I think we need to establish that baseline of comfort, and continue to work together in ... As Justin Herman is leading the way on the public side, looking for that private sector public interaction between the two. That's ultimately what it's going to take.

                                                We're really excited about the positive steps, particularly with what the GSA is doing with this Blockchain Atlas that I encourage you and everyone to go check out. It's under emerging technologies, it's under their new Citizens Engagement program. So the GSA is specifically going out to try and engage with citizens on the public sector. So, as much as there's ... We hear about the SEC and the regulations, the SEC itself is still trying to understand what this is about. The GSA is really a proponent of blockchain technology and sees it as maybe the next cloud, and is going things to try to learn as much as it can. In fact Justin Herman just last week was excited, because if you go on the GitHub, you'll see the number of government agencies that are working on blockchain ideas right now, it's astounding. So, definitely encourage you to check that out.

Doug Bridges:                    Well I'll definitely put a link to that Atlas in the show notes so people can go on and look, and see what's happening there. I appreciate you hopping on today to talk with me about all this. It's certainly going to be a lot that's going to be happening going forward in this regulatory blockchain space. It's an interesting new world, I think.

Jason Brett:                        Absolutely, absolutely. Thank you, Doug. Thank you so much for your time today.

Doug Bridges:                    All right, thank you Jason.

                                                Thank you for listening to the Blockcast Show with Doug Bridges of Capital Legal Group. If you like our show and would like to know more, please check out blockcastshow.com, or capitallegalgroup.com. Also, please leave us a review on iTunes. You can also follow us on twitter at @blockcastshow.

About the Author Douglas Bridges

Doug is an experienced technology and intellectual property lawyer. A former UNIX and telecom programmer, Doug uses his technical and legal skills to assist clients in the complex challenges they face on a daily basis.

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