|Date||April 10, 2019|
|Speaker||Katerina STROPONIATI (Monday Capital)|
|Speaker||Yiannis VARELAS (Monday Capital)|
|Moderator||MOGI Takashi (Deputy Director, Finance Division, Small and Medium Enterprise Agency, METI)|
|Language(s)||Japanese/English (with simultaneous interpretation)|
Monday Capital is a venture fund based out of San Francisco. We are both founders and engineers and tend to see things from a founder and engineer perspective. We have been investing in blockchain since 2012. We also do a lot of artificial intelligence (AI) and virtual reality (VR).
In this presentation we are going to discuss about the future of blockchain, how we see it evolving, and what use cases we see happening all over the world. In order to see the future, we need to go to the past and see what happened.
What bitcoin is and what it introduced us to
The Bitcoin network was created in 2009 by a person or a group of people with the pseudonym of Satoshi NAKAMOTO. The only thing that the network introduced was the digital transfer of value. It was the first time in history that we could actually transfer value digitally with nobody physically being involved.
We already have the banking system that does that digitally. We go online, do a wire or internet transfer, and suddenly transfer the value. However, when you do bank transfer through a bank, you do not transfer hard currency.
It is a very complicated system that consists of five layers. The custodian bank, central banks who control the issuing of the assets, the internal bank system like the Single Euro Payments Area (SEPA) or the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the government who needs to oversee the whole thing through governance, and overall we expose our identity to a lot of entities or people from a know your customer (KYC) and anti-money laundering (AML) point of view, which is perhaps unwise.
With bitcoin, the only thing that acts is the bitcoin network itself, which manages to complete all the previous procedures using only the same piece of code, math, and cryptography. We can transfer value the same way we did with banks, but at any time, and with no physical entities or people involved. The moment you do a bitcoin transaction, you actually transfer the assets, so naturally it is used as a payment system. However, cryptocurrencies are not blockchain.
Bitcoin introduced the concept of blockchain which is the true value of Bitcoin. Blockchain technology is an immutable database where everything that gets in is validated by the network itself. It cannot be changed or deleted, and no person can change what is recorded on the blockchain itself. This means that a single database can do the work of the entire banking system mentioned above.
What is the future of this techonology? The answer is that we do not really know.
Going further: programmable law...
What if we could actually have some logic on top of the blockchain so that we could automate repetitive tasks whose most important variable is the trust of the parties involved? For example, if I want to sell my house, I need to go to a lawyer and he has to create the contracts, validate the bank transaction, and then transfers the title. It is a very simple and repetitive transaction for which humans are not really necessary if trust is ensured. In 2015, what was introduced to us was the concept of smart contracts. Smart contracts are just one layer on top of the blockchain so essentially, it is adding the law itself to blockchain. It adds a contract to a transaction which cannot be forged, and which itself completes all necessary procedures once the necessary conditions are met. For example in Georgia in Eastern Europe, these smart contracts are used for real estate property transfers, so once conditions are met, payment, etc. is completed instantly and automatically. You can imagine how efficient this is compared to going through tons of papers, databases, and historical transactions to figure out who the actual owner is and how to do the transaction. This is one example of government use. There are prominent smart contract platforms such as ethereum and Rootstock Smart Contracts (RSK).
The analogy with the internet
It is very important to go back in history and understand how our societies can use these technological revolutions in order to get the most out of them. A very good analogy of the future of the blockchain technology and networks is the internet. Back in the 1990s there was a war over protocols. There were many public protocols but they were not connected to each other and eventually big companies like International Business Machines Corporation (IBM) and Xerox wanted to take advantage of this new technology of the Transmission Control Protocol (TCP) and the Transmission Control Protocol/Internet Protocol (TCP/IP) and they started building their own internal, private networks where they could share information and reduce costs.
We saw many isolated internets; one in IBM and one in Xerox. They could not communicate with each other but eventually in the 1990s we saw the first browser, the first interfaces, and public protocols coming from universities. New entrepreneurs started building on top of the TCP public network and there was a lot of public software. Eventually Xerox and IBM could see the value and they wanted to connect with this new public thing and this is how the internet evolved and became the internet as we know it. The catalysts were better interfaces, security networks, and publically accessible software tools.
Back to the blockchain; the same thing is happening in the blockchain right now. For example, J.P. Morgan created their own stable coin for international settlements for their clients. Then we saw Western Union create a blockchain for their supply chain, as well as the United Parcel Service (UPS) for logistics. So we see the exact same analogy where they create private and isolated blockchains that are not yet connected to each other.
The big question for us here is what the bigger picture of the future will look like, and what is the internet of value going to be like? We are all using the internet of information and soon we will also go to the internet of value. How is it going to evolve once all the blockchain is eventually connected?
This is a great opportunity for you. If we all have our minds open, Japan can actually be the first country to really understand what this will become in the future and actually create the future services and solutions on a global level.
Right now, we naturally understand the blockchain as a payment system because we all understand money because it is so familiar. Therefore, the main sectors right now in the blockchain are banking and finance, in addition to manufacturing, as previously explained with the smart property, and a few technology companies and in healthcare. However, we have not seen a lot of public software yet. We are not there yet, so the field is limited to mainly finance and banking solutions.
The top banking solutions are of course international money transfers, like the J.P. Morgan example. Right now we have to use SWIFT in order to make international settlements. It takes time and it is costly. This is one of the things that J.P. Morgan wants to solve so that they can provide better services to their institutional clients. Of course we have the KYC and AML procedures and in the future we will need to respect human privacy. Governments understand the need for privacy and that is why there are so many regulations, especially in Europe that aim to protect the human end-user and their privacy, and to provide a sense of security that their data will not be exposed. Therefore, KYC and AML is one strategy and it provides a good tradeoff between government regulations and individual privacy by protecting the individual and respecting their privacy and at the same time preventing money laundering and any fraud that might happen. An appropriate tradeoff is when we protect their privacy and avoid money laundering.
Western Union is a huge monies remittance service that is very popular all over Southeast Asia, in the U.S., and in Europe. Western Union basically targets mainly immigrant workers or people who live abroad. It allows money to be transmitted immediately from one location to the other, charging 10% for every transaction they do. They take cash payments and transfer the payment and remit cash to the customer in the receiving branch in the other region or country. It is completely inefficient in many ways. To improve their operations, they are using the blockchain developed by IBM called Hyperledger in order to transfer money immediately using a cryptocurrency to settle the transactions between the branches. With this they want to reduce the cost to 0.5% and also reduce the risk of somebody submitting fake money, or somebody not showing up, or a location being closed. This is are very simple use case in transferring money.
This is important for Japan. If you want to encourage immigration to your country, this is a great benefit, because you can provide lower costs for remittances, for example to support family members in a foreign country and you can do it much faster. The government may encourage more immigrants to come to Japan by providing such services. By using blockchain it becomes a public ledger, so money laundering is probably impossible. In general, blockchain has the benefit of being completely transparent so tracking transactions and figuring out money laundering is amazingly simple. This is the fastest growing field in industrial and financial forensics in the U.S.
Let's look at another example relevant to Japan. Japan takes pride in its food. You have amazing variety of food all over the country and the quality is amazing. You do not need to think if something you are going to eat is going to hurt you, but all over the world, that is not the case. In the U.S. we have foodborne illnesses every single day and the biggest problem we have is that we do not know where this foodborne illness started, who was responsible and how they spread. Walmart is a huge retailer in the U.S. They are forcing all of its suppliers to track all of the data in its own blockchain. Their goal is to track foodborne illnesses or malfunctioning products. The moment you detect a foodborne illness you can detect exactly where it originated in two seconds, down to the actual farm. Japan is in the unique position of being able to implement this as a nation, additionally allowing tracking of imports and exports, market trends etc., but due to its current high standards and level of uptake of new technologies, this technology will not only improve and lower the costs for implementing this nationwide and providing safety, but will also place a spotlight on Japan as a very good example for the rest of the world.
This is futuristic example, but it is happening in the car selling economy. Through blockchain, people can pool money as shareholders to buy a self-driving car and the car can operate as a business, transporting passengers. At the end of the day, the revenue is distributed back to the shareholders of the car with nobody being involved. This is only possible with blockchain because it is transparent and can settle payment immediately.
A very interesting example is AI in combination with blockchain in order to improve how we prevent and detect illnesses. For example, currently there is a 90% accuracy rate in detecting cervical cancer simply from examining one picture. The problem is that at least in the U.S., it takes two to three weeks for results to return from the laboratory. AI is much faster in detecting this kind of stuff. AI can be used to save time by looking at the picture to figure out if this is a cancer or not. However, currently this does not work because we do not have the data to train the data sets for detection because of privacy concerns. Every hospital or doctor has isolated data, but for regulation reasons they do not want to expose it to other doctors, hospitals, or countries.
Here is where blockchain can come with a technology called zero-knowledge proof. It is a technology built on top of some blockchains. With zero-knowledge proof all the data can live on the blockchain. All the doctors can access the exact same data and train their own data models without exposing the identity of the client. The other problem you have is that you do not have enough doctors training this data. Blockchains can solve this problem as well by creating collaborative communities online.
Roche Pharmaceuticals is backing a blockchain company and what they have achieved is 500x faster detection of cervical cancer, 97.9% accuracy, and reducing the wait time for results from three weeks to a couple of hours.
This is another healthcare example. For example, a person has a medical problem in a foreign country and they have to go to the hospital, nobody really knows them and their doctor needs to get their medical history to figure out who they are and what is going on. Using blockchain and zero-knowledge proof, a person can allow access to their medical history data in real time to doctors all over the world only when needed. This dramatically reduces the chances of a doctor misdiagnosing a problem.
We have seen several start-ups here in Japan that innovate a lot on virtual reality and augmented reality. They imagine the future in a virtual way. Imagine in the future that we are going to have several virtual worlds. The assets that you create in one world should interact or be transferable to the assets of the other world. In order to do so, these assets need to be able to communicate. For example, you generate some revenue in the virtual world and then want to spend that money at Seven-Eleven. You should be able to do so.
A use case for you could be a response to your aging population. You are going to have many citizens over 65 years old and this is going to happen worldwide because of better healthcare, better nutrition, and better social systems. Japan could see that as an advantage instead of a problem. Imagine connecting to a virtual world which you can give your advice, services, and skills, to anybody in the world from your virtual office at home and you get paid with virtual money. These are social consumer services that Japan can be ahead and provide to their citizens. It can help your economy and make the elderly population productive again.
Bubbles and crashes during technological revolutions
Many out there believe that cryptocurrencies and blockchain are a scam or fraud. If we go back to history, we will see that in every single technological revolution, we have the exact same pattern. We always see a bubble and a crash. In this initial installation and adoption period where we have the bubble, we see a lot of excitement. We see crazy entrepreneurs, a lot of speculation, and a lot of investments and inappropriate or inefficient use of the technology. The market is immature and people are still trying to understand what this is so they do things that they do not really think about and use the technology mostly in the wrong way. And then, there will be the recession which usually lasts for two to five years. After the crash, all the speculators are out, and this is usually where the companies and corporations come in and try to utilize the technology. Then we will see the second wave of deployment where we usually see regulations, the government enters, and this is the golden age where we see a real economy, production, products, jobs, and growth of the economy.
We need to understand that it is not a fraud, it is a technology and the way we use it is going to define what it is. Technology is just a tool and it is up to us to understand how it can benefit our societies.
Societies shape their own futures by understanding the potential of technological revolutions. The society that better understands how to utilize these technologies is the one who wins. This is key for Japan. You already understand better than anyone how to utilize bitcoin. You were the first to set up clear regulations on what bitcoin is. We believe that you can continue that with the blockchain technology in general.
Another point is how to encourage this new technology to be blended into an existing culture. We cannot expect a new technology like blockchain to be established, proper and 100% right, so we need to experiment a lot and the ones who will experiment will be a lot of the young people and companies like start-ups that are willing to try until they figure it out. It is important for companies to inject new DNA into their culture in order to be able to keep up and in fact be ahead of the game. To us, Japan is already ahead of the game in many ways, but there needs to be more movement and experimentation from the younger generation.
Feel free to contact us if you want to learn more. We are venture capitalists in San Francisco, we come in contact with new start-ups and new technologies, and we are willing to transfer and bring this knowledge to Japan because we can see the potential in your country. If there is a use case or potential in your company, we are open to educating you and let you know how you can use and also come into contact with entrepreneurs so that you can apply it to your case.
The other thing is that we do not know everything. This is an experimental technology. We are originally from Greece, but we live in the U.S, and we are in Japan now. These are three different cultures. Each culture is different and unique and they can utilize this technology in many different ways. We do not have the answers to everything and we are just here to share with you what we have seen all over the world.
Q1: My name is YOSHIDA from METI. In the EU, the General Data Protection Regulation (GDPR) was introduced. There are various debates going on as to what extent intervention by companies should be allowed in privacy management. Google, Amazon, Facebook and Apple (GAFA) are getting a huge volume of personal information. What are some related obstacles to implementing this regulation or protecting personal data as GAFA continue to advance their control over data, and if GAFA is not creating any obstacles to regulation or other privacy measures, then why aren't the measures moving forward more quickly?
As for GDPR, all countries will have something like it at some point. Blockchain by default is not compatible with GDPR because you can have nodes all over the world. You do not know where your data actually lives, especially if every country has specific regulations which are different. You could have multiple copies of your data on every node or you could have portions of your data on multiple nodes.
Nodes live in a server and this is where you store it. Servers are worldwide and the way the internet is structured, even if I use my computer here, I might use a server outside of Japan.
In a centralized internet, you can force where your data are stored based on the country. In a decentralized internet, you cannot. Zero-knowledge can be used to obstruct the data accessible to governments or to people who search for it, based on the location or the individual the moment they search for the data.
Q1: Using GDPR to protect the privacy of the data should be within the jurisdiction of governments, but if individuals start using blockchain and protect their own privacy, the government would not need to have such a regulation. To have this happen, what would we need to do technology-wise?
Blockchain in fact represents the ultimate solution for privacy in which individuals have control of their own data. What we need is a global ID. If everybody has their own ID on the blockchain, meaning something that identifies them uniquely and can bind with the things they own, then they can transfer their individual value or data on the blockchain. We are looking very actively at this sector to find solutions to create the ID and start protecting the data.
We do not need more regulations. We need better utilization of the technology. Technology can solve the problem in this case. For example, Duke University and Harvard University are creating the student IDs on the blockchain and everything is encrypted and protected on the blockchain. They can recognize that as your ID. Japan could do the same and even be the first one to apply this at the national level.
Q2: My name is TANAKA from the Ministry of Economy, Trade and Industry (METI). I would like to ask about the possible usage in the future from a venture capital perspective and from the perspective of investors. Which area of the technology do you think will grow the most, and why? Also, which particular country do you think will have the most success in this field, and why?
I have another question. For transactions, how can we create a mechanism to stabilize the value of tokens?
One of the biggest problems in the world is financial inclusion. Almost two billion citizens in developing nations including in Africa, Mexico, and many other developing countries do not have access to a bank. This is one of the problems that blockchain can solve. We see a lot of the deployment and application of blockchain technology in Africa, especially in Nigeria. This is where we see a lot of eagerness from consumers to use digital services on the blockchain in order to have access to financial services like lending, saving, earning money from interest, and so on. The same with Mexico; 70% of the population there are unbanked. We believe that they are going to grow in such economies.
We strongly believe that the only way to stabilize this thing is through usage and adoption. Usage will increase velocity, and velocity will stabilize value. The more we have practical use cases with bitcoin or any other cryptocurrency, the more stable it will become.
Another way is to try and hack our way around and programmatically stabilize the value is by trading or hedging positions. However, this is just a workaround and not a long-term solution.
The third solution could be coins pegged to a national currency. For example, the U.S. has Tether (USDT). These currencies are stable because they are pegged to the underlying asset which is the government-issued currency.
The fourth solution might be to denominate everything in bitcoin, but this is an extreme case. This could happen in the future if there is a massive adoption of Bitcoin.
Q3: My name is NITTA Yoko working for a government institute as a security advisor. Some governments could take advantage of blockchain to control or monitor citizen's activities and behaviors. Can you provide us with cases that you have seen of potential risks, security implications, or downsides to the technology in the future?
The moment you have exposed data on the blockchain, you are exposed globally. Every transaction you do is publicly available. If somebody is able to find your private key and decrypt your data, then they can steal your identity and you no longer have control over it.
Mainly it is happening because the user experience right now is very hard for the average user or consumer. We are used to the banks holding our assets. It is a new thing for the consumer and the user experience is not there yet. The technology is solid and if we create a better and more familiar experience for the average user, fraud can be eliminated. Everything is public and not anonymous. We need to understand that.
The moment you expose your private key, everybody can track all of your financial history. There have been cases where people were kidnapped because they did exactly that. It is again the user experience.
*This summary was compiled by RIETI Editorial staff.