Blockchain and Inclusion
with Professor David Lee Kuo Chuen
Professor David Lee holds the appointment of Professor and leads the FinTech and Blockchain Group in Singapore University of Social Sciences and is also the founder of Blockasset Ventures. He was named as the 2015 Visiting Fulbright Scholar at Stanford University.
Prof Lee is also an independent director of two SGX-listed (Singapore Exchange) companies and Lu International, which is a subsidiary of PingAn Insurance. He is the Vice President of the Economic Society of Singapore. He has more than twenty years of experience in business and fund management. He was the Founding Vice Chairman of the Alternative Investment Management Association (Singapore Chapter), a member of the SGX Security Committee, and MAS Financial Research Council. Professor Lee was also the Group Managing Director of OUE Limited and Auric Pacific Limited, as well as the Non-Executive Chairman of MAP Technology Limited. He managed property funds and was a property developer.
PROFESSOR LEE: My career has always been closely correlated with financial innovations. In some ways, I have specialized in the world’s business innovation cycle without delibration. This specialization started with a lot of research in econometrics. In the early days, this was semiparametrics that combined modeling and pattern recognition. That slowly spilled over into Adaptive Estimation and Data Mining. Since then computing power has increased dramatically. My research included studying, programming, validating and applying semi parametric combinations of parametric (deduction with data) and non-parametric (let data speak for itself). At the time, non-parametric related work was not as well received because computing power was low and data was scarce. But digital transformation changed all that. This was a big transformation for big data and AI from an academic vantage point. In the early 1990’s, with the rise of fibre optics and Internet, Bloomberg, Reuters and financial agencies were growing rapidly with huge data collection capabilities. These were the early days on the Internet; Windows was spreading and changed the financial world into more of a digital approach from paper reports to email for financial products. With realtime data, financial modelling on time series was used for hedge fund strategies and investment decisions.
With the Internet and mobile technology, things have been moving much quicker in terms of information and capital flow. We saw an influx of financial engineers into the corporate world to structure products and engage in high-frequency trading. That accelerated the inequality as inflow of funds were into financial assets rather than the real economy. The fiscal and monetary policy have empowered people to have digital knowledge and executable capabilities across the world in a much faster pace than anticipated. This is much faster than the pace than any policymakers could keep up with. Unintentionally policymakers were empowering smaller and fewer sets of people that have access to cheap capital, huge computing power and large database. The creation of money was seen to be for the benefits of a few. Therefore, the invention of bitcoin was not a coincidence.
PROFESSOR LEE: In 2012 I retired from the business world and left Ferrell Asset Management, a wealth and hedge fund manager that I founded in 1998. Despite having engaged in finance, financial engineering and data analytics for many years, I couldn’t understand how economies were changing and how asset classes are affected. I started looking at moral economics, what ought to be done for the greater good and for the masses as opposed to for the few. I thought that moral philosophy will provide some answers. In 2013, I started to study bitcoin and wrote six chapters for Digital Currency, a book that I edited and the very first academic text on the subject. Then, I realized that the underlying technology of bitcoin, which is a chain of blocks of data linked by cryptography, had a lot more implications and uses than a simple payment token.
PROFESSOR LEE: In 2013 people frowned upon bitcoin. In 2014 I started believing bitcoin can change the world and focused on the underlying technology. In 2016, I realized you couldn’t do much without tokens as a form of rewards for reinforcning behavior for a desired outcome. It became much clearer to me that we were not just solving a problem of production efficiency, but more importantly, collaboration efficiency. At that point, I understand that we may have reached a plateau for production efficiency given a certain level of endowment and to reach the next level of efficiency, we need to entice and reward untrusted parties to collaborate.
Two major events became clear with the 2008 the bitcoin paper. The “Nobel prize in economics” (The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) was won by the late Elinor Ostrom [along with Oliver E. Williamson. Ostrom is the only woman to ever win a Nobel prize in economics.] in 2009 for analysis of economic governance, especially her work that challenged Hardin's approach to the “Tragedy of the Commons”, arguing that individuals and communities could manage their own collective resources. According to her, the tragedy occurred when external groups exerted their power to gain a personal advantage. She was greatly supportive of the “bottom-up” approach to issues and argued that government intervention could not be effective unless supported by individuals and communities. Her research was focused on what we termed as today in token economics as “decentralization” and how people can work together through incentives. She was not focused on digitization but real economy, but at the same time Satoshi was. If we put both together, there were the signs of new times ahead.
I have a big concern. There are two directions where blockchain can head. It can become more inclusive with the convergence of technologies: IoT, AI, big data. In the second direction, blockchain could get hijacked by the same old finance world, where they tokenize the old economy in the old way. This would enable the traditional industry to further the concentration of wealth and power. In that later case, it is more a consolidation of the old financial world on steroids and unlikely to foster sustainable growth.
PROFESSOR LEE: It is very important for government, regulators and the community to focus on serving this segment of the population. This will provide sustainable growth by tokenizing the non securitised, as opposed to tokenizing securities. Tokenising securities can give strong results in the short term but it real has little long-term contribution to the real economy. The major advantage of tokenization is to eliminate the costly intermediate legal identity such as a company in the form of a security. If the problem is to turn a cow from a dead capital to a live capital, it is a lot more cost effective to tokenise the cow rather than the round about way of setting up a company to own the cow and then tokenise the shares of the companies. This intermediate layer with a legal entity is very costly and the main reason why many are excluded from the financial system. In fact, tokenizing existing securities will worsen inequality as it is just putting old wine into new bottle with added complexity of technology.
Governments in the region are keen to serve this segment of the population but they need connectivity inclusion, cheap capital, literacy, talents, interoperability, digital identity, cybersecurity, consumer protection, appropriate regulatory environment, data ecosystem and talents. These are important “enablers” for e-financial inclusion. The blockchain community seem to have the solutions to strengthen these enablers, especially from the technical and incentive perspectives. For example, leveraging decentralized mesh networks in remote areas with an incentive token can be a powerful mechanism to support populations in different regions for connectivity inclusion. Another example is to tokenise a cow using blockchain in order to access cheap global capital and insurance. Many of the enablers for e-financial inclusion can be cost-effective if tokens are served as a reward for collaboration and/or as a fractional claim to asset ownership.
PROFESSOR LEE: In terms of technology development, China will lead the way because of the sheer population, funding, resources and talent. But the markets are in ASEAN with economies that can leapfrog.
PROFESSOR LEE: There is only one area of ICOs that I am very interested in which is using the technology for inclusion. Most of these projects that I am involved in have an angle of e-financial inclusion. In order to scale, it is not just a technical problem. How open is the mindset and technology, business model for more people to come on board to consume, utilize and collaborate?
We want a change in the mindset. Some people are trying to now use ICOs as a way to package the old economy as new, with the same business model, narrow intention of raising money and increasing liquidity of complex instruments. They are trying to raise funds without trying to create real economic impact and to include new business ideas. Blockchain allows new business model to achieve social objective and at the same time, profit objective. In fact, there is now a convergence of both objectives in order for these projects to be viable and sustainable.
PROFESSOR LEE: Singapore has done very well in attracting good ICOs (Initial Coin Offerings) such as Sentina Chain. JEDTrade and Aid:Tech are good examples of inclusive blockchain projects. The Singapore government provides clear regulations and warnings for ICOs to the consumers. Utility tokens that achieve real impact are welcome. The regulations are balanced to support innovation at the right level, neither to front run or lag behind. Most good ICOs have been very forthcoming about warning consumers and providing transparency. But at the same time, the regulator understand the difficulties in encouraging and attracting risk capital in allocating to new and nascent technology. It has been a major problem for Singapore for years as few investors in the world have the appetite to fund projects that have low probability of success and low occurrence of supernormal returns in technology. ICOs address that issue with investment from sophisticated investors that understand the risk and technology. Provided the financial illiterates are not exposed and involved, ICO remains a good and convenient way for experimental crypto projects to raise tokens. Singapore regulators are among the few regulators in the world that have spent a lot of time running their own projects in order to get a better understanding of the technology.
MAS (Monetary Authority of Singapore) has a FinTech and Innovation Group which not only looks at new regulations but also to spend a lot of effort to understand community concerns.
PROFESSOR LEE: Corporates need to find ways to balance short-term profit ambitions with long-term growth potential. Large corporates always have difficulty in taking the long-term view that can cause disruption to its own business. They need to see the macro picture and social issues in a much deeper way to examine if their business model is sustainable.
Blockchain will change the way society is organized and how business is conducted. They should view blockchain, not as competitor, but as an enabler of the way to operate in the future. This can help them adapt and move towards a new economy especially if they leverage crowd input. They can contribute to the ecosystem from which they will benefit eventually.
Having said that, one of the major reasons why companies are not taking a dive into this new and nascent technology is the composition of the Board of Directors. If most of the members of the BOD are not familiar with technology, it will be naïve to expect a company to be good at technology risk management at the board level. Listed companies may be a very good starting point to change the landscape and the mindset. It may be a good to require listed companies not only to have more independent directors, but to ensure that the board composition reflects the need of the new digital economy. That will entails having enough board members who are conversant with cybersecurity, privacy protection, distribution of trust and other technology risks.
With the right composition of the BOD, it will naturally be easy to convey the right message to the shareholders regarding long-term sustainability with technology transformation. The support of the stakeholders is important in getting the right level of technology risk management. I believe the natural tendency, once the BOD is familiar with blockchain, will be to adopte blockchain and other nacent technologies to not only enhance efficiency, but to create new business models for the digital economy. Many of the Chinese banks and companies are now engaging in blockchain because the Chinese BOD are familiar with the latest technology, not so for other countries where BOD are still consisting of directors that are more comfortable with the old economy. One of the reasons why I am optimistic of Singapore future is that there is an ongoing exercise in Singapore not only to include more women in the BOD, but more technology savvy directors to assist the corporates to implement technology transformation.
PROFESSOR LEE: We either have reached a tipping point of chaos or we all start seeing eye to eye towards building a more inclusive world. I am hopeful and optimistic for the latter to happen. Despite not liking to expose myself, I continue to advocate the potential of blockchain for all of us to have sustainable growth.
Compared to other technologies, the biggest advantages with blockchain are to enable fractional ownership, new business models and to create new jobs. The goal should be to not replace human jobs, but support collaboration efficiency that will help production efficiency to create new opportunities. Collaboration efficiency can help close a gap between government needs and their population.