Crypto and web3 matters because the potential use cases are broad and growing, and could have meaningful implications for the issues that policy makers and voters care about.

Most articles about crypto/web3 and policy tend to focus on issues like consumer and investor protection, whether particular assets should be classified as securities or not, the merits of Central Bank Digital Currencies (CBDCs) and the right way to regulate stablecoins, or macro questions like whether Bitcoin could challenge dollar hegemony as the global reserve currency. These are important issues, and we’ll come back to them in future posts, but they tell only part of the story.

This article is about some of the less talked about but equally important innovations that web3 might bring, and why policymakers should care about them. We’ll write more detail on each of them in future posts.

There’s nothing new about fake news or censorship. But disinformation has become a feature of modern life through social media platforms, and our digital footprints mean that we are increasingly exposed to campaigns to alter history or obfuscate truths. And these platforms have made it much easier to spread false information, whether for financial or political gain, or to use deepfakes - convincing but fake AI related content. Whether related to election results, data on the pandemic or details about the ongoing war in Ukraine, we are all exposed to different degrees of disinformation.

So how could blockchain technology help?

Blockchain technology makes it difficult to alter information after it’s been created due the decentralised consensus system used. This means it could track all sorts of content, and provide a new trust layer to the internet. According to Starling Lab, web3 provides “a new methodology to restore trust in digital media”.

HBR suggests it could:

1. verify provenance → track and verify sources of information;

2. maintain online identity → as trust in news media falls and social media feeds rise as a source of information, blockchain system could verify content and the reputation of creators; and

3. incentivise high quality content → for instance, by offering rewards for publishing accurate information.

This technology is already being used to store evidence of war crimes in Ukraine, providing a new way to collect and preserve content, and target perpetrators of human rights abuses. As Jonathan Dotan, co-founder of Starling Lab, told the NYT: “The goal isn’t a single ledger of truth. It’s to have it exist in as many places as possible so we can have a consensus of trust.”

As our thesis makes clear: financial inclusion is about more than just having access to a bank account. It’s about having a meaningful stake in the capital economy.

The ownership economy means that the internet could be based on a system where people own their own data and assets. So rather than having web2 platforms suck up large volumes of data and sell it back to users in the form of advertising, and where the capital upside is captured by the platform owners not the users that create the value, web3 offers a different way forward. By owning your own data and assets, web3 means that capital upside will flow to users; there is an opportunity to gain yield on assets through defi, which cuts out costs from transaction fees and financial intermediaries; and benefits can be provided to users of brands or communities via social tokens.

A combination of ownership of personal data and the creation of new assets/tokens that are accrued through usage not financial means will enable a more diverse group of people to have a direct stake in the capital economy. This is in effect what Yat Siu of Animoca Brands calls ‘universal basic equity’.

For policy makers, this has a wide range of implications - from the nature of a new capital structure for corporations, to corporate governance, to redistribution and taxation, to the labour market.

Decentralised Autonomous Organisations (DAOs) are a new type of internet native governance model. According to a16z:

A DAO (Decentralized Autonomous Organization) is a mechanism that enables online communities to form and coordinate economically. It makes it possible for an online group with members from anywhere in the world to pool capital and hard-code rules — entirely in software — for how that capital will be managed and deployed. Those rules are then enforced by the underlying blockchain.

This automation and lack of central authority could create interesting new ways to coordinate economic and social activity, for a broad range of reasons. For example, we could look at a local regeneration project and an international coordination problem.

• A local authority could decide to test a more direct approach to democracy on certain issues. Regarding a local renovation project, a bespoke DAO could create a smart contract that said that if a) more than 50% of residents in an area agreed with the proposal, and b) more than £X was contributed by residents (held in escrow by the contract until it was finalised), then the smart contract would automatically execute and i) publish the planning rights and ii) transfer funding for the project to the contractors.

• A dispute over international mineral rights could be managed by a DAO. Here, a non-centralised DAO governed by code would establish voting rights on the basis of land ownership, defined by on-chain records, retain funds in a central treasury and automatically pay royalties to those entitled each year. None of the parties would be managed by the other as it would be self executing.

The war in Ukraine has highlighted the role that cryptocurrency can play in cross border remittances (as well as the risks around capital outflows). But there is a wider set of potential use cases that relate to humanitarian aid more broadly, as discussed recently on Money Reimagined by Jeremiah Centrella, a partner at the law firm of Nichols Liu and former general counsel at Mercy Corps. The Frankfurt School Blockchain Center describes a number of inefficiencies that could be solved, in part, using blockchain:

• transparency – tracing funds through supply chains and improving impact assessment;

• coordination – between donors, governments and aid agencies, as well as with partners in country;

• fraud and corruption – with immutable data and transparency, it is harder for funds to be syphoned off for corrupt purposes;

• transaction costs and speed – from cross-border money transfers, to financial intermediaries, to supply chain management;

• sources of funds - as seen in Ukraine, the technology creates the potential to diversify sources of funding; and

• methods of aid – create the potential for more direct cash transfers, which some studies have shown to be particularly effective in alleviating poverty.

This is far from a comprehensive list, but provides some initial ideas which development agencies are no doubt beginning to think about in more depth.

There has been much debate about the notion of technological sovereignty in the last few years, particularly in Europe. This has been pushed by French President Emmanuel Macron as part of his wider strategic autonomy narrative. In 2019, European Commission President Ursula von der Leyen said “We must have mastery and ownership of key technologies in Europe. These include quantum computing, artificial intelligence, blockchain, and chip technologies”.

The next paradigm of the internet will be built on web3 rails. So to have strategic autonomy or technological sovereignty will require leadership in the field of blockchain technology. The White House seems to have recognised this and in its Executive Order on March 9 2022 on “Responsible Development of Digital Technology” stated that:

The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate.

As Adam Tooze noted in his recent blog, leadership will mean different things to different states: for the UK, it might mean a attracting business in this space using forward leading regulation; for the EU, it might mean setting standards via MiCA which it hopes will shape global norms, as it did with GDPR, including with respect to its green credentials and proof of work consensus models; for the US, it might mean ensuring that it remains at the forefront of innovation and retaining dollar dominance so that it can continue to impose a sanction regime successfully.

But who “owns” the infrastructure will also be important. This isn’t as simple as the companies involved: it’s the miners/validators that are paid a fee to maintain the security of each block; it’s the firms, some of which are structured as DAOs, that run the exchanges or defi protocols that enable other activity; and it’s the communities that create, develop and own parts of the web3 space, including in the ‘metaverse’. Understanding strategic advantage doesn’t just mean headline regulation or binary decisions on banning vs allowing certain technology, it means understanding all of the technology stack that will constitute a new version of the internet and everything that this entails.

The crypto tax conversation tends towards evasion or that the rules aren’t yet very clear (in some jurisdictions - the UK is better than most) about where liabilities lie. But little has been written about the potential applications of blockchain technology for revenue raising or the efficiency of tax collection. Again, let’s take two examples to provide some colour.

• Payment streaming → employment is likely to be managed by smart contracts in future. Companies are already offering payment ‘streaming’, where funds are automatically used in different ways on the basis of certain conditions. For example, if my income was higher than £X one month, I could choose that some portion of this be automatically invested in a defi protocol, gaining me yield on this saving. But this could also be used to automate tax payments: no more filling out forms or calling HMRC — the tax rules could be embedded in code and money managed automatically, cutting costs and and increasing efficiency.

• Fuel duties → the OBR suggests that in 2021-22, fuel duties are forecast to be £26.8bn or 3.1% of all tax receipts in the UK. As electric vehicle use expands, this source of revenue will be eaten into. But what if vehicles were required to track usage, which could be stored on chain so that it would be immutable, and would disconnect fuel type from tax? And what if, rather than having tolls on just some roads, this data was used to create a rolling toll, which was automatically paid via streaming (as above)?

Once the surface is scratched, the tax policy experts (and lawyers) are going to have a field day.

Governments spend a lot of time and resource thinking about competition policy. In the UK, the Competition and Markets Authority has just established a Digital Markets Unit - which will grow to include hundreds of staff members - to regulate major internet players like Facebook and Google.

But there are two ways to combat anti-competitive practices: the regulatory approach and the innovation-led approach. Different bits of government think about them largely in isolation, and it is right that the CMA focusses on using the tools it has at its disposal to level the playing field; while the Treasury, BEIS or DCMS focus more on innovation.

But to date, there has been little meaningful policy dedicated to supporting the web3 industry anywhere in the world, including the UK. That is a mistake – in part for some of the reasons set out in this article – but also because the technology could help to disrupt and compete with the major FAANG companies that hold so much market power. We set out a vision for a new sort of social media site in “The world in web3”.

My information feed comes from a decentralised social media site [gm.xyz], which could be embedded into my Gallery homepage. By uploading content to the site I gain $GM tokens proportionate to the number of views or engagements there is with the content. This means that I share in the advertising revenue that the platform receives. The chat function is gated, so that I can choose to speak with people that I share values or interests with - for instance, groups based on NFT ownership [Playground]. I also own the data that is captured by this and other similar sites, so I can decide whether I want to be part of polling or allow my data to be used for cohort/marketing analysis through providing permissions via my wallet, for which I would then be rewarded automatically. And given I own my data, I can quickly switch between social media providers or interfaces – moving my posts, followers and data with me. Moderation on the site is managed by a network (or networks), rather than a central authority.

But it is also possible to imagine competition in this respect for any of the major platforms: what would happen if an Uber alternative sprung up that gave its drivers a share in the profit that they had contributed to make; or an airbnb alternative that’s users gained some of a $HOUSE token when they rented or rented out a house? These innovations are coming, and policy makers should be supporting them to drive competition and a more open, equal and fair internet.

One way to measure momentum in a technology sector is the speed with which people and capital are moving into it.

Electric Capital, a crypto VC fund, put out an interesting report last year showing the speed that developers were moving into crypto. You can interpret it in different ways, but I see something that looks a lot like exponential growth.

In terms of capital, according to Galaxy - a digital research firm - over $33bn was invested into crypto/web3 startups in 2021, more than all previous years combined. This was around 5% of all VC deployed in 2021.

This implies that Web3 and crypto will be a major growth industry. If the UK wants to position itself as a leader in this new infrastructure layer to the internet, it will need to attract the right talent and make itself visibly supportive. It has started on the latter with press gimmicks like the Royal Mint NFT, but there is a long way to go to attract capital and the very best developers and entrepreneurs.

So what’s the take away? Web3 and crypto matters. And it matters not just because lots more people are using it and they need to understand the risks, as the FCA thinks about consumer protection; or that regulation might be needed to manage the riskier elements within the industry, including with respect to national and cyber security.

It matters because the potential use cases are broad and growing, and could have meaningful implications for the issues that policy makers and voters care about.

If you want to discuss these or other issues further with us, please get in touch. And please also subscribe to hear more.

Crypto and web3 matters because the potential use cases are broad and growing, and could have meaningful implications for the issues that policy makers and voters care about.

Most articles about crypto/web3 and policy tend to focus on issues like consumer and investor protection, whether particular assets should be classified as securities or not, the merits of Central Bank Digital Currencies (CBDCs) and the right way to regulate stablecoins, or macro questions like whether Bitcoin could challenge dollar hegemony as the global reserve currency. These are important issues, and we’ll come back to them in future posts, but they tell only part of the story.

This article is about some of the less talked about but equally important innovations that web3 might bring, and why policymakers should care about them. We’ll write more detail on each of them in future posts.

There’s nothing new about fake news or censorship. But disinformation has become a feature of modern life through social media platforms, and our digital footprints mean that we are increasingly exposed to campaigns to alter history or obfuscate truths. And these platforms have made it much easier to spread false information, whether for financial or political gain, or to use deepfakes - convincing but fake AI related content. Whether related to election results, data on the pandemic or details about the ongoing war in Ukraine, we are all exposed to different degrees of disinformation.

So how could blockchain technology help?

Blockchain technology makes it difficult to alter information after it’s been created due the decentralised consensus system used. This means it could track all sorts of content, and provide a new trust layer to the internet. According to Starling Lab, web3 provides “a new methodology to restore trust in digital media”.

HBR suggests it could:

1. verify provenance → track and verify sources of information;

2. maintain online identity → as trust in news media falls and social media feeds rise as a source of information, blockchain system could verify content and the reputation of creators; and

3. incentivise high quality content → for instance, by offering rewards for publishing accurate information.

This technology is already being used to store evidence of war crimes in Ukraine, providing a new way to collect and preserve content, and target perpetrators of human rights abuses. As Jonathan Dotan, co-founder of Starling Lab, told the NYT: “The goal isn’t a single ledger of truth. It’s to have it exist in as many places as possible so we can have a consensus of trust.”

As our thesis makes clear: financial inclusion is about more than just having access to a bank account. It’s about having a meaningful stake in the capital economy.

The ownership economy means that the internet could be based on a system where people own their own data and assets. So rather than having web2 platforms suck up large volumes of data and sell it back to users in the form of advertising, and where the capital upside is captured by the platform owners not the users that create the value, web3 offers a different way forward. By owning your own data and assets, web3 means that capital upside will flow to users; there is an opportunity to gain yield on assets through defi, which cuts out costs from transaction fees and financial intermediaries; and benefits can be provided to users of brands or communities via social tokens.

A combination of ownership of personal data and the creation of new assets/tokens that are accrued through usage not financial means will enable a more diverse group of people to have a direct stake in the capital economy. This is in effect what Yat Siu of Animoca Brands calls ‘universal basic equity’.

For policy makers, this has a wide range of implications - from the nature of a new capital structure for corporations, to corporate governance, to redistribution and taxation, to the labour market.

Decentralised Autonomous Organisations (DAOs) are a new type of internet native governance model. According to a16z:

A DAO (Decentralized Autonomous Organization) is a mechanism that enables online communities to form and coordinate economically. It makes it possible for an online group with members from anywhere in the world to pool capital and hard-code rules — entirely in software — for how that capital will be managed and deployed. Those rules are then enforced by the underlying blockchain.

This automation and lack of central authority could create interesting new ways to coordinate economic and social activity, for a broad range of reasons. For example, we could look at a local regeneration project and an international coordination problem.

• A local authority could decide to test a more direct approach to democracy on certain issues. Regarding a local renovation project, a bespoke DAO could create a smart contract that said that if a) more than 50% of residents in an area agreed with the proposal, and b) more than £X was contributed by residents (held in escrow by the contract until it was finalised), then the smart contract would automatically execute and i) publish the planning rights and ii) transfer funding for the project to the contractors.

• A dispute over international mineral rights could be managed by a DAO. Here, a non-centralised DAO governed by code would establish voting rights on the basis of land ownership, defined by on-chain records, retain funds in a central treasury and automatically pay royalties to those entitled each year. None of the parties would be managed by the other as it would be self executing.

The war in Ukraine has highlighted the role that cryptocurrency can play in cross border remittances (as well as the risks around capital outflows). But there is a wider set of potential use cases that relate to humanitarian aid more broadly, as discussed recently on Money Reimagined by Jeremiah Centrella, a partner at the law firm of Nichols Liu and former general counsel at Mercy Corps. The Frankfurt School Blockchain Center describes a number of inefficiencies that could be solved, in part, using blockchain:

• transparency – tracing funds through supply chains and improving impact assessment;

• coordination – between donors, governments and aid agencies, as well as with partners in country;

• fraud and corruption – with immutable data and transparency, it is harder for funds to be syphoned off for corrupt purposes;

• transaction costs and speed – from cross-border money transfers, to financial intermediaries, to supply chain management;

• sources of funds - as seen in Ukraine, the technology creates the potential to diversify sources of funding; and

• methods of aid – create the potential for more direct cash transfers, which some studies have shown to be particularly effective in alleviating poverty.

This is far from a comprehensive list, but provides some initial ideas which development agencies are no doubt beginning to think about in more depth.

There has been much debate about the notion of technological sovereignty in the last few years, particularly in Europe. This has been pushed by French President Emmanuel Macron as part of his wider strategic autonomy narrative. In 2019, European Commission President Ursula von der Leyen said “We must have mastery and ownership of key technologies in Europe. These include quantum computing, artificial intelligence, blockchain, and chip technologies”.

The next paradigm of the internet will be built on web3 rails. So to have strategic autonomy or technological sovereignty will require leadership in the field of blockchain technology. The White House seems to have recognised this and in its Executive Order on March 9 2022 on “Responsible Development of Digital Technology” stated that:

The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate.

As Adam Tooze noted in his recent blog, leadership will mean different things to different states: for the UK, it might mean a attracting business in this space using forward leading regulation; for the EU, it might mean setting standards via MiCA which it hopes will shape global norms, as it did with GDPR, including with respect to its green credentials and proof of work consensus models; for the US, it might mean ensuring that it remains at the forefront of innovation and retaining dollar dominance so that it can continue to impose a sanction regime successfully.

But who “owns” the infrastructure will also be important. This isn’t as simple as the companies involved: it’s the miners/validators that are paid a fee to maintain the security of each block; it’s the firms, some of which are structured as DAOs, that run the exchanges or defi protocols that enable other activity; and it’s the communities that create, develop and own parts of the web3 space, including in the ‘metaverse’. Understanding strategic advantage doesn’t just mean headline regulation or binary decisions on banning vs allowing certain technology, it means understanding all of the technology stack that will constitute a new version of the internet and everything that this entails.

The crypto tax conversation tends towards evasion or that the rules aren’t yet very clear (in some jurisdictions - the UK is better than most) about where liabilities lie. But little has been written about the potential applications of blockchain technology for revenue raising or the efficiency of tax collection. Again, let’s take two examples to provide some colour.

• Payment streaming → employment is likely to be managed by smart contracts in future. Companies are already offering payment ‘streaming’, where funds are automatically used in different ways on the basis of certain conditions. For example, if my income was higher than £X one month, I could choose that some portion of this be automatically invested in a defi protocol, gaining me yield on this saving. But this could also be used to automate tax payments: no more filling out forms or calling HMRC — the tax rules could be embedded in code and money managed automatically, cutting costs and and increasing efficiency.

• Fuel duties → the OBR suggests that in 2021-22, fuel duties are forecast to be £26.8bn or 3.1% of all tax receipts in the UK. As electric vehicle use expands, this source of revenue will be eaten into. But what if vehicles were required to track usage, which could be stored on chain so that it would be immutable, and would disconnect fuel type from tax? And what if, rather than having tolls on just some roads, this data was used to create a rolling toll, which was automatically paid via streaming (as above)?

Once the surface is scratched, the tax policy experts (and lawyers) are going to have a field day.

Governments spend a lot of time and resource thinking about competition policy. In the UK, the Competition and Markets Authority has just established a Digital Markets Unit - which will grow to include hundreds of staff members - to regulate major internet players like Facebook and Google.

But there are two ways to combat anti-competitive practices: the regulatory approach and the innovation-led approach. Different bits of government think about them largely in isolation, and it is right that the CMA focusses on using the tools it has at its disposal to level the playing field; while the Treasury, BEIS or DCMS focus more on innovation.

But to date, there has been little meaningful policy dedicated to supporting the web3 industry anywhere in the world, including the UK. That is a mistake – in part for some of the reasons set out in this article – but also because the technology could help to disrupt and compete with the major FAANG companies that hold so much market power. We set out a vision for a new sort of social media site in “The world in web3”.

My information feed comes from a decentralised social media site [gm.xyz], which could be embedded into my Gallery homepage. By uploading content to the site I gain $GM tokens proportionate to the number of views or engagements there is with the content. This means that I share in the advertising revenue that the platform receives. The chat function is gated, so that I can choose to speak with people that I share values or interests with - for instance, groups based on NFT ownership [Playground]. I also own the data that is captured by this and other similar sites, so I can decide whether I want to be part of polling or allow my data to be used for cohort/marketing analysis through providing permissions via my wallet, for which I would then be rewarded automatically. And given I own my data, I can quickly switch between social media providers or interfaces – moving my posts, followers and data with me. Moderation on the site is managed by a network (or networks), rather than a central authority.

But it is also possible to imagine competition in this respect for any of the major platforms: what would happen if an Uber alternative sprung up that gave its drivers a share in the profit that they had contributed to make; or an airbnb alternative that’s users gained some of a $HOUSE token when they rented or rented out a house? These innovations are coming, and policy makers should be supporting them to drive competition and a more open, equal and fair internet.

One way to measure momentum in a technology sector is the speed with which people and capital are moving into it.

Electric Capital, a crypto VC fund, put out an interesting report last year showing the speed that developers were moving into crypto. You can interpret it in different ways, but I see something that looks a lot like exponential growth.

In terms of capital, according to Galaxy - a digital research firm - over $33bn was invested into crypto/web3 startups in 2021, more than all previous years combined. This was around 5% of all VC deployed in 2021.

This implies that Web3 and crypto will be a major growth industry. If the UK wants to position itself as a leader in this new infrastructure layer to the internet, it will need to attract the right talent and make itself visibly supportive. It has started on the latter with press gimmicks like the Royal Mint NFT, but there is a long way to go to attract capital and the very best developers and entrepreneurs.

So what’s the take away? Web3 and crypto matters. And it matters not just because lots more people are using it and they need to understand the risks, as the FCA thinks about consumer protection; or that regulation might be needed to manage the riskier elements within the industry, including with respect to national and cyber security.

It matters because the potential use cases are broad and growing, and could have meaningful implications for the issues that policy makers and voters care about.

If you want to discuss these or other issues further with us, please get in touch. And please also subscribe to hear more.