21/06/2023 Alexander

Understanding Blockchain Technology and Predicting Future Trends

Pawel Kuskowski discusses blockchain technology with Lee Schneider, General Counsel for Ava Labs, a leading blockchain software company.

Lee’s transition from law to crypto started with co-founding Genesis Bloc, a consultancy firm in the blockchain and crypto space. He originally started following Bitcoin back in 2013/2014 because he was interested in the technology and the idea of creating digitally unique items. In 2016, he decided to find clients interested in blockchain. He then worked for Coinbase in 2016 on the original securities law framework for blockchain tokens and has dedicated himself to what’s going on in blockchain and tokenization ever since.

Lee says that when he saw potential of the blockchain technology beyond the initial use of Bitcoin as an alternative currency, he realized that tokenization of assets can further digitally unique items by enabling one to tokenize anything.

Securities Exchange Commission vs Binance

At a high level, Lee explains that Binance is a global company who operates in many markets. There are many jurisdictions with crypto assets’ regulation but Binace is unlikely to go out of existence even considering what’s happening with the Securities Exchange Commission.

What is tokenization?

Tokenization of assets is creating digitally unique representations of bundles of rights. This can be seen in many Non-Fungible Tokens (NFT)s, governance tokens which is basically a voting right. However, those things are going to be governed by existing traditional financial instruments’ regulation. The area that is most interesting to the regulators is crypto assets that are not representations of traditional types of assets.

Why is there a confusion between what does and doesn’t count as securities?

Lee claims that people don’t understand what problem blockchain solves. Blockchain solves three big problems in computer science:

  • How to get a diverse number of computers to agree on a common data set
  • How to create digitally unique items
  • How to establish transferred ownership to digitally unique items

People tend to forget that this was a huge step forward in computer science as a whole and not just a step forward in creating and maintaining information for financial instruments. This is potentially because most developers and users of blockchain were primarily focused on creating information for financial instruments. A rigorous legal analysis is needed here.

Tokenization in gaming

The idea of tokenizing in-game assets and making them transferable from one game to another and creating gigantic universes where people can participate in different planes of existence captures Lee’s imagination. Lee is also excited about having a Decentralized Autonomous Organization (an organizational structure built with blockchain technology) in the game, creating a whole political system using that system and voting tokens, mimicking what goes on in the real world.

If we put anything that is similar to securities on decentralized exchanges, do we need to comply with Anti-Money Laundering (AML), Compliance and Know Your Client (KYC) rules?

This is where tokenization of traditional financial instruments can be combined with digital identity to provide ways of trading on decentralized platforms which can still be in compliance with AML and KYC requirements and other jurisdiction-specific requirements. Lee adds that the era of customized blockchains and Smart Contracts is approaching.

Avalanche, for example, supports the capability to do subnets which are customized blockchains.

Do you think we can create an ecosystem where no one is an obliged entity and are therefore under no obligation to comply with AML requirements?

Lee thinks this is conceptually possible but it would be difficult to determine how the actual implementation would work. However, it is an ecosystem that we could move to. Disadvantages would include privacy and policy questions but it could be a possibility in the future.

Do you think Artificial Intelligence (AI) may steal the attention of developers or will we be keeping the current momentum?

People who become involved in crypto are likely to stay involved in crypto for a foreseeable future but like anything else, people with interests in other things will do other things. With blockchain as a base layer protocol, it allows people to build a lot more things on top of it and so there should be room for a blockchain person to be a gamer or a stock trader.

Where do you see the biggest threats in terms of regulatory compliance in the industry?

We need goodwill actors all the way around. The same goes for:

  •     Stakeholders
  •     Developers
  •     Regulators
  •     Policy makers
  •     Lawyers
  •     Those involved in compliance

What is required in terms of regulatory compliance is positive people with a vision for the future and the idea of solving problems instead of creating problems and that is what will push things forward in the best way.