If the 2008 global financial crisis (GFC) wasn't inflammatory enough, then the ensuing central bank stimulus probably was. There were €12.6 trillion of negative yielding debt instruments at one point last year. We're unequivocally living in the lowest interest rate environment of the last 650 years.
Bitcoin was born out of the GFC and forged its identity through this controversial central banking stimulus experiment. If you haven't read the Bitcoin whitepaper, we'd recommend it. It'll only take a couple of minutes to get through its 8 pages. Satoshi set the tone for cryptocurrency to be anti-establishment and anti-regulation in that paper which was published on the back of the GFC. The macroeconomic environment certainly did nothing but ratify anti-establishment sentiment.
You'll remember cryptocurrency enthusiasts lobbying for "self regulation" in 2017. The hope was that distributed ledgers could skirt traditional financial regulation. What they didn't realize was that widespread adoption requires interfacing with the traditional financial system. Crypto needs capital to enter and exit via on/off ramps just like any other asset class, and those ramps look like banks, traditional custodial agents, and payment processors.
While the DLT world was trying to avoid regulation, the traditional world of finance was still tender from the GFC. Regulation has long been a feature of traditional finance, and the GFC strongly reinforced its necessity in the eyes of Wall Street. Numerous research papers flowed out of prominent institutions following 2008 calling for tighter financial regulations.
Adrian and Shin at the New York Federal Reserve wrote a paper entitled The shadow banking system: Implications for financial regulation. Here's one written by a Harvard PhD, a finance professor at Chicago Booth School of Business, and an economics professor at Harvard who was also advising the Secretary of the U.S. Treasury: A Macroprudential Approach to Financial Regulation. And here's the Geneva report on the World Economy written by economists from Princeton, JPMorgan Chase, London School of Economics, and Max Planck Institute: The Fundamental Principles of Financial Regulation.
When this many prominent people from so many upstanding institutions are all talking about the same thing, you know there must be something there.
We've gone on to learn that "self regulation", in fact, doesn't work, and that institutions need official regulatory clarity before putting their reputation (and legal department) at stake. IOTA has learned this the hard way.
Dan Simerman, the IOTA Foundation's financial partnerships extraordinaire, spoke to some of these difficulties in his recent IEN interview. The key takeaway is that some potential IOTA partnerships have been held up by two things:
- Lack of an institutional custodial solution for IOTA
- Lack of regulatory clarity on IOTA
Dan points out that both of these points are being solved by the IOTA Foundation.
First, the reason for a lack of institutional custodial solutions can be attributed to IOTA's non-reusable addresses. IOTA has been using the Winternitz One-Time Signature scheme to sign transactions (w-OTS). w-OTS is quantum resistant, but the trade-off is that after one transaction is signed from an address, it becomes easier for an attacker to brute force a second signature from that same address. Unlike other DLTs, this renders it unsafe to leave funds in a spent address. Exchanges have had a particularly difficult time adopting this different technology.
Chrysalis promises to implement a different signature scheme - EdDSA - which isn't quantum resistant, but grants the ability to spend multiple times from the same address. Apparently this will make it trivial for custodial services and exchanges to implement an IOTA solution into their platforms.
Second, the well-respected Crypto Rating Council (CRC) gave IOTA a score of 2.0 in April! Here's how to interpret the CRC rating system:
A score of 1 means the CRC’s analysis found that an asset has few or no characteristics consistent with treatment as a security while a score of 5 means the CRC’s analysis found that an asset has more characteristics strongly consistent with treatment as a security under U.S. law
Dan says that with this nearly perfect rating, IOTA now has much improved regulatory clarity that can be touted to potential partners. He's more enthusiastic than ever about adoption.
Watch the entire interview below, or scroll past the video to read our abridged paraphrased notes. We're leaving out most questions and doing our best to compress Dan's answers for more efficient reading.
- Dan's primary takeaway from Zuboff's Surveillance Capitalism: If you’re not paying, then you’re the product. Zuboff takes a step back and says we're not even the product - we’re the raw material. New interfaces have just become data capturing mechanisms, so they’re incentivized to provide more and more free services to rope in more users for more data.
- Dan says that data tracking is done under the guise of personalization. "Give us all this info about you so I can make this interface blue or anticipate your next illness." Relating it back into the context of IOTA: it’s one thing when this happens on social media or our apps. It’s upsetting when our data gets breached. But it’s quite another when this gets embedded in our physical systems. Smart cities. IOT. Devices in the house. Incentivized to move you around the city in ways that are better for the company. Having a non-partisan neutral data protocol, and the potential of the data to be owned by the participant. Creates a much different environment for people to live in the future.
- IOTA 1.5 arose from demand by industrial partners. They needed these features. Single address reuse is a big feature. EdDSA is the new signature scheme that allows this
- Example: One of the biggest road blocks to adoption is getting custody solutions. Fireblocks, Curv, and Bitgo are institutional products where big industry players can hold the large market cap coins in a way that's compliant with their institutional requirements. But there also might be applications that connect to these custody solutions that are REQUIRED by the partner to be implemented. "Are you on Bitgo? No? Then talk to us when you’re on it." All custody solutions require EdDSA. With Chrysalis, the partners waiting for custody to integrate will be ready to go.
- How long will this uptake takes after the release of Chrysalis? The custody solutions partners are looking at are already in contact. Terry pressed him for Labor Day, and Dan answered that we might see they’re working on test net by then. Depends heavily on the testing of the new signature scheme.
- Dan is excited about the new 10 second confirmation time and the new higher cTPS throughput.
- Many competitors are going into DeFi right now because that’s all they can do. "If your protocol can’t do anything, why not go into DeFi?"
- Dan has been saying this to anyone who will listen: IOTA’s parallel architecture is the unique value proposition - the ability to send data and value. "As a community, we downplay how important that is."
- Example: When he goes to a corporate partner, they might say they love everything that he's presenting, but they don’t need the token for their specific use case, so they’d prefer to use the protocol just for the data. “We’re the only protocol that can do that!”
- The reason a potential partner might not feel comfortable: legal - holding a token, regulatory - waiting for clarity, accounting - don’t feel comfortable holding digital assets. Putting Ethereum into an enterprise app and having to debit ETH as gas tax every time somebody clicks a link just doesn’t work in real life.
- Every competitor he sees out there is just a “faster horse” - Polkadot, Cosmos, ETH, some of the others like Algorand and Hashgraph - they’re faster horses. The reasons people aren’t using ETH isn’t the reason that they’re going to move to the smaller ones.
- Dan says that IOTA is in a great position to capture a lot of that value once people realize it’s not about how fast the network is or how easy it is to build on, but the fact that nobody wants to use a protocol that uses a token for even data use cases.
- Terry: "We see IOTA as the automobile while the rest are horses" Dan: Henry Ford quote, “If I would have asked people what they wanted they would have said a faster horse.”
- There are so many other blockchains that have their own business development groups that are surely reaching out to the same people IOTA is and are running into the data layer snags. Why not make IOTA the fee-less base and allow a partner to make some sort of side chain on the Tangle? They’ve already captured the DLT IoT market, so why not leverage integrations like this to capture more market share?
- Terry: What volume of adoption is being sourced out of the US compared to the EU now? Dan: The kind of adoption I’ve been looking at is a little different - he points to the recent crypto rating council rating.
- "All I can say is that there’s a BIG back log and they’re all waiting for EdDSA"
- They’ve had quite a lot of adoption and excitement about using the protocol on the financial infrastructure side, just waiting on custodial stuff.
- We'll see better financial access (ability to buy) to IOTA in North America. They recently integrated with Simplex which is the credit card payment process within all of the major exchanges
- Back on the topic of surveillance capitalism: "Do I turn left or go right and up down the street? Right and up in the autonomous car to see the ad that’s posted over there. Eat this or eat that. Spend 3 minutes or 5 minutes on this?"
- “It all just boils down to this form of capitalism that is control for the sake of monetization. Not even for the control of any ideology”
- A brilliant insight by Terry: "Exactly. We all become like pigeons performing for the system in order to get rewards, rather than acting in what we think is our own best interest. People start changing their behavior to maximize their likes. Bizarre how people run their lives and do things - Watching You on BBC talks about how the world changed when the first episode of Big Brother aired on television. Anybody could all of the sudden be a media star by just being yourself. Now the lines have blurred between who you actually are and who you need to be for social media. It’s getting scary."
- Dan: “It’s super scary”
- How does IOTA mitigate that? Dan thinks this is one of IOTA's biggest value propositions outside of being fee-less. They really want to be a non-partisan, non-partial open platform without any incentives built-in. A lot of their competitors will say they’re fast or scalable, but they’re a for-profit. So then what’s the incentive for them to run the network. "Then you’re competing with products rather than an infrastructure layer."
- “I think that’s why governments and large companies find us so appealing and intriguing, because we have that attribute”
- Dan's biggest complaint in the space is pay to play. IOTA doesn’t generally pay vendors to build on them
- "I didn’t join the IF because of the payments, necessarily. We all work at the IF because we’re incredibly passionate ... It was really born out of desire and passion to do it”
- Terry: "You were running a meetup group in NYC before all of that, so you were a true believer in the early days anyway. So it’s not like you got hired purely as a job 9 to 5 sort of thing."
- Dan: "No. And to deal with all of the crap of talking with other crypto people/businesses, it would cost too much … anyway it’s very much a labor of love and I mean that honestly. I wake up everyday excited and passionate and looking for ways to build us out”
- The time scale here - from the outside looking in it might look like what do we have to show for those 4 months? - but it can take months for things to happen and I’ve learned to be patient.