Perspectives: Opinions from our network of advisors, investors, operators and analysts on the risks and opportunities they see.

David Garrity, a co-founder of blockchain consulting firm BTblock, is the man helping billion-dollar companies get comfortable with Blockchain and embrace other emerging digital solutions to cut costs and improve efficiencies.

After having worked with a range of companies over the past 21 years, including early movers in the Blockchain space, he sees no clear Blockchain leader just yet.

Garrity, whose company serves as an independent director on the board of publicly held Blockchain technology company BTCS Inc., also thinks more can be done on the legislative side to expedite adoption of the digital asset economy, both in the U.S. and internationally.

Karma Network’s Managing Editor Daria Solovieva spoke to Garrity about some of the legislative breakthroughs in Blockchain development around the world and what J.P. Morgan’s landmark JPM Coin prototype means for the rest of the financial services industry.

Daria Solovieva: What do you think about companies like Facebook looking to launch their own cryptocurrency?

David Garrity: For Facebook, launching a payment token offers a means to monetize the company’s substantial combined messenger service user base. Nevertheless, there are likely to be some significant issues for Facebook in deciding how best to deploy such a financial service.

If Facebook relies on third-party cryptocurrency providers (e.g., to be handling the custody arrangements, the wallets, etc.), the benefit for Facebook will certainly be reduced regulatory scrutiny. However, with less risk in the form of a reduced regulatory burden, Facebook probably also faces a diminished opportunity to charge its customers fees to support these activities.

Clearly, Facebook is at present under an intensifying regulatory scrutiny on a broad range of fronts, given its violation of privacy standards and the exchange of data with companies such as Cambridge Analytica. Facebook may be facing a substantial fine from the Federal Trade Commission, an amount likely to set a record amongst social media companies as it is thought to be well in excess of $1 billion.

Daria Solovieva: Fines aside, what would be the significance of Facebook moving towards and adopting Blockchain technology, given the company’s size and social significance?

Garrity: In making a transition towards a blockchain-enabled technology platform, Facebook could allow its users better controls in managing how their individual information is accessed and used by others, something for which the individuals might be compensated.

As Facebook has been egregious in how it has allowed user data to be used both for its own purposes and by third parties, it is imperative for management for the company to demonstrate that it is paying more than just lip service to data privacy and security. Also, the May 2018 advent of the EU’s Global Data Protection Regulation (GDPR) followed by the June 2018 signing of the California Consumer Privacy Act (CCPA) for which implementing regulations will be published during 1H2020, the regulatory environment is effectively compelling Facebook management to act.

However, as Facebook has repeatedly violated consumers’ data privacy, I’m not sure how making a move towards a Blockchain platform is going to do anything to restore consumers’ trust in the brand, a more important consideration for Facebook than simply operating in compliance with the law and regulatory requirements in the various jurisdictions where it operates.

Daria Solovieva: Putting the headlines aside for a moment, could you tell me more about how you got into Blockchain?

Garrity: As a co-founder and partner of the technology consulting firm BTblock, we work with enterprise clients to assess and implement emerging technologies, such as Blockchain, cybersecurity and others since 2018. Some of our more salient engagements have been around enterprise supply chain deployment of Blockchain, in which BTblock works to facilitate faster throughput with greater visibility across the company, its suppliers, distribution channels and customers.

Daria Solovieva: What does your typical client look like, which sectors do you focus on?

Garrity: In the natural resources sector, our supply chain work allows our clients to achieve productivity gains while supporting greater compliance with regulatory requirements and other standards such as environmental sustainability.

The use of Blockchain does not only allow the company greater visibility, but also it allows it to work with third parties focused on compliance and sustainability standards, offering these third parties greater real-time visibility into the operations of the business.

From the compliance standpoint, rather than having periodic audits that may not be that effective in terms reviewing the operation, with Blockchain the enterprise client can transition to an arrangement that provides an ongoing observation of the business and greater clarity around upholding standards.

Blockchain technology helps to reduce compliance costs in the first place. Secondly, it allows for a stronger case to be made to customers that the practices have been observed and upheld and there is a greater guarantee in terms of these standards and environmentally sound practices being met.

In working with clients, BTblock examines their business, their organizational structure, their businesses and considers the critical assumptions under which they have been operating to find ways to reengineer processes and workflows so the client can achieve greater results for the same or lower costs.

Daria Solovieva: Since you started working with Blockchain in 2018, do you think there is a greater awareness and knowledge about what the Blockchain technology can do?

Garrity: As well all know well, 2018 was marked by the collapse of the 2017 cryptocurrency “bubble”. As the hype around cryptocurrencies subsided with the precipitous decline in the market price of Bitcoin and other digital assets, our clients saw this an opportunity to focus on the underlying technology platforms, namely, Blockchain and distributed ledger technology (DLT).

To the extent business focus has shifted and in doing so gained a greater appreciation for the underlying technologies and what they serve to enable, there is a far more practical focus on what can be done to build out this technology platform and reap its potential benefits, not only in for private sector enterprises but across broader sectors of the economy as more and more deployments are brought online.

Daria Solovieva: In terms of GVA Research, could you walk me through your work with World Bank and some of the other clients?

Garrity: Certainly. I have worked with the World Bank since 2010 in terms of advising on integrating technology into their development programs, a great deal of which is related to the ongoing global adoption of mobile communications technologies. One critical area of application clearly significant for World Bank social development programs is the ability to move money by mobile phone.

Most likely you are familiar with the company M-Pesa in Kenya, a joint venture between the mobile network operator Safaricom and the Kenyan government that in 2007 began to offer consumers the ability to move small amounts of money at low cost across considerable distances and with relatively high speed – the set of applications known collectively as “mobile money” has served to bring financial inclusion much further into the base of the economic pyramid, the focus of The World Bank’s poverty reduction programs.

In working with the World Bank, my focus has moved to beyond “mobile money” to focus more towards digital assets. For example, I’ve been doing some work on deployment of Blockchain in the area of rural agriculture, specifically rice production. Rice is a significant staple in the global diet. As a commodity rice is worth $450 billion annually in terms of production, of which approximately $250 billion is traded globally.

There are important Blockchain applications being developed to make the rice trade more transparent and efficient, something (that would) benefit producers and consumers alike.

Daria Solovieva: How did you get involved with BTCS Inc. and what is your role there right now? They’ve positioned themselves as an early entrant in the Blockchain space as a public company, what are they focusing on right now? How do you describe their strategy?

Garrity: BTCS stands for Blockchain Technology Consumer Solutions. BTCS came public in 2014, I have known the management the company since it was private and was appointed as an independent director to the board in October 2017.

While many investment managers have sought to establish cryptocurrency products such as a Bitcoin Exchange Traded Fund (ETF), the U.S. Securities & Exchange Commission (SEC) to date has rejected all applicants. In this regard, note that BTCS after SEC review has previously and intends to going forward to manage a basket of digital assets (e.g. Bitcoin, Ethereum) along with building out and/or acquiring Blockchain-based businesses. BTCS is currently reviewing acquisition targets and is in discussion with potential capital partners.

BTCS is considering areas where the speed of digital asset adoption is going to be greatest and focusing on the technology protocol layers where industries could generate the greatest value with the least cost and risk. This examination is looking across both sectors and geographies as BTCS is looking for significant global opportunities.

Daria Solovieva: Speaking of geographies, Bahrain’s Central Bank recently introduced a comprehensive list of rules for Blockchain monitoring and regulation. When you look at the U.S. and the legislative groundwork here, how does it compare, not just to the rest of the Middle East but globally?

Garrity: In terms looking at global markets and having to consider the regulations applied to digital assets on jurisdiction-by-jurisdiction basis, it is very much a broad range of standards for management teams and investors to consider.

Certainly, I’m encouraged by what is coming out of Bahrain and see countries such as Switzerland taking a leadership role with the cryptocurrency regulations issued in December 2018 by the Financial Market Supervisory Authority (FINMA).

Zug, Switzerland has a very dynamic Blockchain community that we expect will only benefit from having clear, regulatory guidelines with which to operate as they develop new products and services.

Our hope is that rather than continuation of country-by-country differentiation, that regulatory development can take place at the level of a global forum such as the G20 or the Bank for International Settlements (BIS).

We have a number of countries, China, for example, who tried to shut things down. China thinks of itself as a technology leader, but we would think that China probably handicaps itself to the extent that they don’t necessarily cooperate in letting this sector move forward.

Daria Solovieva: What do you mean by that?

Garrity: China certainly has been very discouraging with a respect to the use of cryptocurrencies in seeking to impose a total ban on trading in July 2018. We think it’s something that’s a significant hindrance to the market.

China is the world’s second largest economy. If they were to participate, it would remove some barriers in terms of the development of the business.

For the time being, it would have been nice to have China. But for business purposes, the development of cryptocurrency applications does not necessarily require China as a participant.

Daria Solovieva: In the United States there are several U.S. House bills at various stages asking early-stage questions about how to regulate cryptocurrency. Do you think some of these smaller countries have made more progress? Is it fair to say that there is no federal-level comprehensive regulation in the U.S. right now?

Garrity: There is certainly in the SEC a regulatory body that’s taking a close look at how initial coin offerings (ICOs) are being used as a fundraising mechanism leading to the development of and integration with cryptocurrencies. To organizations who conducted such offerings of unregistered securities, the SEC is encouraging them to come forward and become compliant with its regulations.

That said, the SEC is not necessarily forbidding cryptocurrency-related activities. They just want them to conduct them within the bounds of the regulations as they are establishing them. To that end, witness how capital raising has shifted to securitized token offerings (STOs).

Granted, the SEC was not out in front of the ICO market in 2017 as it ought to have been. It is now trying to demonstrate that it’s possible to develop businesses here in the United States that can use cryptocurrency.

Away from the hype around cryptocurrencies, we at BT Block are working to help established companies, to deploy Blockchain technology within their operations. Once the Blockchain technology is deployed, the case to be made for using cryptocurrency as a means for settlement and to provide incentives for various supply chain participants to participate in a more engaged manner.

The Blockchain and cryptocurrency sector needs to develop first in an orderly fashion. As things are stand now in the United States, there is at least a path forward to achieve this.

Daria Solovieva: Based on your experience with your clients, what would be helpful to see specifically from there regulatory bodies?

Garrity: Rather than leave it as a matter solely where regulators take the initiative, the establishment of the legal framework necessary for a vibrant Blockchain and cryptocurrency sector requires the involvement of the current U.S. Congress, specifically the House of Representatives where there are members who are positively inclined to move forward with new legislation, namely the Congressional Blockchain Caucus.

Also, there are a number of different industry organizations that have become active in working with both legislators and regulators at the federal and state levels. Among these, the Digital Asset Trade Association (DATA) has made significant contributions in developing and assisting in the passage of supportive legal frameworks in states such as Wyoming and potentially in Colorado.

Daria Solovieva: There is SEC, Commodities Futures Trading Commission, DATA — do you think attempts to create a legislate framework and regulate these new digital assets have been fractured in the United States?

Garrity: Well, I think up until now, there were different areas of focus within the scope of each regulatory agency. In some respects, there was overlap and thus potential friction between them. To address and resolve potential friction, there could be an inter-agency working group established. U.S. Congress, through its oversight, could work to unify some of these activities under one committee. That could certainly help to simplify the process of developing and move forward with the implementation of a well-coordinated and supportive laws and regulations.

Daria Solovieva: And when it comes to the rest of the world and advanced economies and Blockchain regulation, you mentioned Switzerland. But who do you think is taking the globally right now?

Garrity: Globally I’m very interested to look at a number of different markets. We’re in a situation where Blockchain is in a ten-year process of implementation and we are most likely in the first year, possibly early in the second year. There is much to be done to address existing and emerging opportunities and I do not believe we are yet in position to call out any clear winners.

There is a case to be made for a number of different countries to have a significant role in terms of development of Blockchain and digital assets.

We have discussed Switzerland and the U.S., but note that there are significant economies such as Australia, where the government has taken a very affirmative role in the development of the Blockchain-based or digital-asset sector. However, we are not at a point now where any one particular country has established a definitive durable lead relative to other countries. It’s still very much an open field for global competition.

Daria Solovieva: JPM Coin initially introduced this prototype for institutions and now they’re saying it could be open to a broader range of consumers as well. What do you think are some of the pitfalls and concerns about banks moving ahead of regulators on this? Who is going to be supervising this process?

Garrity: I think it’s significant that J.P. Morgan was the financial institution to take this critical first step.

J.P. Morgan as a company over time has operated very closely and in concert with regulators. Any innovation that J.P. Morgan launches, we view as highly likely to have been vetted with its regulators. Thus, J.P. Morgan arguably sets the market for the current round of innovation in the Blockchain and digital financial services space with the introduction of the JPM Coin.

Going back to our conversation about Facebook and its plans to launch a payment token, I would put my money on the management team that would be more successful longer-term working with regulators in the financial services space than acting in ignorance or defiance of them. Consequently, I will pay far more attention to what Jamie Dimon of J.P. Morgan is doing than I would Mark Zuckerberg of Facebook.

Daria Solovieva: Even though he personally was outspoken and sceptical about Bitcoin and cryptocurrency initially?

Garrity: Well, you never want to draw too much attention to what you’re really trying to do. Jamie Dimon was publicly highly critical of Bitcoin, something that was supported by Bitcoin’s widely acknowledged challenges and flaws.

However, some of Dimon’s Bitcoin criticism might seem self-serving, particularly to the extent that it served to conceal the efforts J.P. Morgan made to develop and deploy the JPM Coin. Nevertheless, the fact remains we now have the JPM Coin and it will be very interesting to see the degree of success it attains. So, from the standpoint of financial services innovation with Blockchain and cryptocurrency, hats off to Jamie Dimon.

Daria Solovieva: Last question. Do you think other lenders will be watching J.P. Morgan’s prototype, do you think others could follow with similar products?

Garrity: We are likely in a situation where other lenders are going to be watching this with great interest. If there is indication the JPM Coin is successful either other financial institutions approach J.P.Morgan to form a consortium around which they could all collaborate or come quickly to market with a competitive product.

Who would be the other banks likely to come up with a competitive product? Certainly, Bank of America and Citibank have the scale and global reach. Against this industry backdrop it is smaller institutions will line up with larger banks to form a consortium.