• by William Mougayar
    Venture advisor, 4x entrepreneur, marketer & strategist. I live in Toronto, curate a lot, blog a bit, and help startups.

Blockchain Inside Regulations Is NOT Innovation

The discussions about permissioned vs. permissionless blockchains are masking a fundamental difference between the various possibilities in implementations of blockchain solutions, and it is rooted in the degree of innovation that is allowed.

The default state and starting position for innovation is to be permissionless. Consequently, permissioned and private blockchain implementations will have a muted innovation potential. At least in the true sense of the word, not for technical reasons, but for regulatory ones, because these two aspects are tied together.

We are seeing the first such case unravel within the financial services sector who seems to be embracing the blockchain fully, but they are embracing it, according to their own interpretation of it, which is to make it live within the regulatory constraints they have to live with. What they are really talking about is “applying innovation”, and not creating it. So, the end-result will be a dialed-down version of innovation.

That is a fact, and I’m calling this situation- the “Being Regulated Dilemma”, a pun on the innovator’s dilemma. Like the innovator’s dilemma, regulated companies have a tough time extricating themselves from the current regulations they have to operate within. So, when they see technology, all they can do is to implement it within the satisfaction zones of regulators. Despite the blockchain’s revolutionary prognosis, the banks cannot out-do themselves, so they will guide the blockchain to live within their regulatory constrained world.

Screen Shot 2015-12-30 at 11.57.50 AM
Yes, moving assets at the speed of light and at the cost of pennies is a wonderful achievement; as compared to the speed of molasses, taxed by the overhead costs of bean checkers and slowed further by the breathing nostrils of compliance processes. But that’s probably where the “innovation” will stop within banks. And if you step back from it, all you see is going to be cost savings to back-end operations.

A related blind spot is when regulated companies start to believe they can co-operate with regulators as “partners”, so they can develop innovative solutions together. Well, that is also a flawed conclusion, because innovation always emerges from outside of existing regulation.

I’ve said this in my slides deck on the 2015 state of the blockchain in financial services: blockchain and old constructs, such as clearing houses and private exchange networks (e.g. SWIFT, CCP, FIX, DTCC) are like oil and water: they will not mix well because one is based on centrally trusted intermediaries, and the other is based on “no” intermediaries and peer-to-peer trust. I’m not sure how the banks could break free from that regulatory dilemma, unless they start something totally new. So the crux of the matter is they are a central body, and the blockchain doesn’t like anything with a central flavor.

This message is not entirely directed at the banking sector, as I don’t want to pick on them in particular. This applies to any other sector that is regulated. Innovation always happens outside of regulation, and that message is worth repeating. The blockchain’s fundamental characteristics are puzzling regulators, central authorities and large corporations because it challenges centrally orchestrated trust, and enables a new kind of trust: one that is decentralized and not centrally controlled.

If you want to look at true innovation with the blockchain, the common denominator will be that there are no incumbents in that equation. The innovation is happening within new white space areas. I’ve already written about this, in With Decentralization, Where is the Money?
These new areas will include banking without banks, gambling without a house, title transfers without central authorities stamping them, e-commerce without eBay, registrations without government officials overseeing them, computer storage without Dropbox, transportation services without UBER, computing without AWS, online identities without Google, and that list will continue to grow. Take any services, and add “without previous center-based authority”, and replace by “peer to peer, trust-based network”, and you will start to imagine the possibilities.

If you’re a center of something, you live within the same dilemma as being regulated. If you can’t break free of your center-based services, the blockchain is not for you.

  • bruno cecchini
    • http://www.startupmanagement.org/ William Mougayar

      It says video not available.
      What is it about?

      • bruno cecchini

        Lynyrd Skynyrd *Free Bird*, Like you write, working on permissionless blockchain is the pur definition of being a free bird.

      • bruno cecchini

        Today 20 millions peoples know coding, by 2020 the number should reach 100 millions, today we have for around a $100B of unused data storage capacity on personal computer by 2013 GB/$. What keep me up at night, is the *how* I will create richness for this 100 millions free birds.

  • awaldstein

    Exchanging bits, moving transactions as a gimme for brand commerce I’m all in.

    Transportation services completely decentralized, not there.

    Draw a picture that a child can understand of this please.

    • http://www.startupmanagement.org/ William Mougayar

      Will do that prob in my upcoming book. thanks for asking the right questions.

    • Beautyon

      When you say, “Transportation services completely decentralized” what you really mean is the railways and roads not owned by a central authority. In the case of railways, this is how they started before being stolen from their owners by the State (“Nationalized”).

      With Bitcoin, the production of money is being removed from the State, and the service of banking is being removed from banks, and regulation is made moot.

      It’s interesting, but not required that anyone draw a picture of how a system would work for the premiss to be true. For decades men have been trying to solve the Double Spending Problem, knowing what the result of such a breakthrough would be in advance of it being done.

      Finally, take a look at this video, which gives an example of the counter intuitive results when you de-regulate something:


      This experiment applies directly by analogy to Bitcoin running without regulation. Its better for the public with only edge cases (the blind) where new special accommodation needs to be worked out; otherwise its a complete win for everyone.

  • Another Crowd

    You seem to have misunderstood both the nature of innovation and the purpose of regulation. If we want to understand the value of blockchain, we need to look at its uses in the real world, not some hypothetical utopia. What gets regulated are activities, not the mechanisms that help to accomplish them. If somebody want to use blockchain to record blood donation, register the ownerhip of land, import and distribute coffee, all of those are innovative, and valuable, and regulation doesn’t affect that.

    One example: there’s no demand for unregulated blood transfusions. A peer-to-peer system could prevent donors and recipients knowing each other’s identity, but still allow traceability and verification by third parties. There’s a big difference between a hierarchy with a top, and a network with multiple centres and edges.

    Another example: blockchain addresses is the ‘double spending’ problem. The blockchain ensues the transfer of rights is controlled by their owner, unequivocal, and not easily revoked, except by a second transaction. I don’t know any country in the world that doesn’t have laws about ownership and theft.

    There is nothing inherently superior, or even default,about a permissionless system. In a peer-to-peer world, most people want to be able grant and revoke permissions, and have their choices respected. That’s whatblockchainsare good at. The question of what configuration of blockchain is more suitable, more innovative or better is not one that can be answered independently of the needs of the parties involved.

    • bruno cecchini

      By your point of view our society is the reflection of perfection, I don’t think so…This imperfection represent a sea of opportunity! I don’t know if you got the intellectual financial knowledge to understand reverse engineering of IOUs, actually it is what is! I would love to explain more but I’m too busy building “QNN”.

    • http://www.startupmanagement.org/ William Mougayar

      But the real world exists also outside banks. They have needs that are different.

      Innovation needs a clean slate, and no restrictions as a starting point in order to flourish. That said, banks are good at adapting some innovation after it has been out there.

  • http://www.sytaylor.net sytaylor

    I don’t disagree the best use cases will be outside regulated financial services. Much like the best users of cloud and big data are not the incumbent blue chip organisations. Still their curiosity is valuable for funding and driving forward the entire space.

    • http://www.startupmanagement.org/ William Mougayar

      I agree with your 2nd sentence very much too. I hope I didn’t imply the opposite.

  • Daniel Villarreal

    The simple and copyrighted image by William Mougayar represents. Look at the image, look at the unregulated.

    Banking regulations make impossible the creation of any improvement on the backbone of any banked regulated financial service, or business.

    Only by moving into the unregulated areas are we to find real space for improvement and development.