Decentralized finance (“DeFi”) raises the bar on traditional financial services by starting from different core concepts.  It changes what is important and what is irrelevant in the delivery of the services.  By disrupting existing concepts and structures, DeFi seeks to become the new paradigm not only for financial instruments but for all manner of financial and commercial activity in digital assets.  This is  the start of a new paradigm.  As part of the Global Blockchain Convergence (GBC), a global think tank set up in March to collaborate on ideas in the blockchain space, a group consisting of myself,  Emma Channing, Lee Schneider, Lilya T. Tessler and Sunayna Tuteja, thought further education on DeFi was needed.

The DeFi movement flows from two important precursors.  The first is automation through software, especially software as a service.  This development occurred in many industries with financial services companies in particular constantly improving their automation capabilities.  These improvements have led to the seamless integration of systems across financial services, allowing an individual at a computer terminal to use software, directly or indirectly, to accomplish every step of a financial transaction.

Several examples illustrate how traditional financial services have been automated through software, not necessarily just DeFi.  The order for a securities transaction is entered into the computer and flows through various systems at different intermediaries to a marketplace for execution, after which the trade is automatically reported to appropriate intermediaries who make sure the securities or cash are reflected in the appropriate accounts.  The request for a mortgage loan with accompanying documentation is entered into the computer and processed by the lender, from acceptance through to the sale of that loan to a substitute lender and its addition to a mortgage-backed security.  A credit card application is filled out from the computer, sent to the card issuer and processed then the card is automatically added to one of the many payment apps to allow immediate usage.  As we see, all of these processes have become increasingly automated.

The following trade flow illustrates the tighter connections that blockchain and smart contracts enable.  A trader enters an order to buy an asset directly into the smart contract on the blockchain.  The algorithm within the smart contract executes the order in accordance with its programming.  Immediately upon completion of the trade, the smart contract automatically debits from the trader’s blockchain account the payment for the asset and credits the asset to that same account.  This simplified flow is the culmination or natural progression from the more complicated trade flow required to buy an asset through traditional financial services because everything happens on the same platform rather than moving from one intermediary’s platform to another until all processing is done.  Of course, more complicated scenarios are possible for the smart contract; they are just a matter of programming.

From the simple illustration, we can see what DeFi makes important and what it makes irrelevant.  The computer code is important while intermediaries have become irrelevant.  Automation and immutability are important while the asset type has become irrelevant.  Open source software for the smart contract has become important, including the composability it brings, while physical location has become irrelevant.  The result is not only smoother activities but also economic inclusion.  The new paradigm of DeFi has social benefits in addition to process benefits.

Core Concepts

The essential foundation of DeFi is that it is “decentralized”, by which we mean, no single point of failure, no single source of truth, no single authority capable of or responsible for making changes to data.  This is a distinctly different approach to traditional financial services activities such as trading, lending, deposit-taking, where the activity revolves around a centralized entity, a broker, dealer, lender, custodian.  All those services are available in DeFi at this time, but applies to any type of crypto asset instead of fiat. This last point is extremely important and often overlooked in the rush to claim DeFi’s role vis-a-vis traditional financial services, so it bears remembering in every discussion of DeFi:  DeFi does not exclusively involve financial instruments because cryptoassets can be anything.

In the market, the term DeFi is used interchangeably to mean all types of smart contract-based platforms. The following describes the key features for a DeFi platform to conform to the definitions and principles outlined in this article by identifying what is important as compared to what is irrelevant. An analysis of these features will help determine whether a platform has achieved DeFi or is merely “emergent” or “pseudo” DeFi, the latter subject to increased regulatory oversight.

With this perspective, then, this simple “DeFi-nition” is a good start to familiarize the uninitiated:  Take the traditional financial services, distill them into their component rules and procedures, and convert them into self-executing code  on decentralized networks accessible to anyone with a computer and internet connection.

Moving a step further to help define DeFi, a key question is the extent to which DeFi will be regulated.  The intermediaries in conventional equivalents, such as brokerage activity, payments, lending and custody, are all highly regulated.  What happens, however, when code on a blockchain (a smart contract), is the intermediary?  We would seem to be in the world of peer-to-peer transactions, which traditionally have not been subject to the same level of regulation.  Thus, for DeFi to have a low level of regulation the following three characteristics would be arguably necessary, if not sufficient:

1. The activities (transactions) should not be moderated, intermediated  or validated by a single or centralized party, other than the smart contract that creates and implements the ability to do those activities.
2. The smart contract also should not be moderated or controlled by a single or centralized party, but instead should leverage a multiparty or decentralized governance mechanism.
3. Software updates provided by a founder or other operator would not mean that a platform is moderated or intermediated by that party, unless the platform and such party cannot meet the foregoing two criteria.

DeFi platforms rely entirely on computer code for all functions, including communications with various blockchains. Users interact entirely with the program, often called a smart contract, which is implemented on a permissionless public blockchain. If the code malfunctions, is hacked or otherwise has a problem, there is no recourse. As such, understanding and auditing the code becomes a hugely important due diligence exercise for the users. This is as opposed to traditional finance where users perform due diligence on intermediaries who then are responsible for the diligence and oversight of the technology.

As such, DeFi is designed for direct participation by any user. All transactions are peer-to-peer or peer-to-platform without a “middleman” and their associated fees, counterparty risk, gated access and limitations on who are acceptable customers. Wallet software or other interfaces are available to interact with the blockchain and directly with peers. Interfaces may hold assets but often are just a bridge between programs and a gateway to access counterparties. Banks, broker-dealers, lenders, money transmitters are unnecessary, but may develop DeFi products to be used by its customers in certain instances. Although decentralization typically shifts risk from intermediaries to smart contracts, risk is not eliminated, just moved from middlemen to middleware.

A key characteristic of DeFi is autonomy, whereby all features and functionality are in the code (from the simple to multi-faceted or AI-driven) such that, once activated, execution of all components occurs without interference in response to relevant inputs, including from oracles.  Oracles are the reporters who exist off-platform and contribute necessary data or information required to trigger and/or execute certain functions.  In conjunction with automation, there must be immutability, whereby once the processes execute (including movements of items), the results are recorded permanently on the underlying blockchain, are tamper-resistant, transparent and auditable.

Given the presence of blockchain assets, DeFi platforms allow for the mingling of asset types in ways never before achieved.  This is because any type of digital asset is assigned digital uniqueness on blockchain to assure it has value.  The functions and features of a digital asset determine its utilization, valuation and legal classification. This is why DeFi is not just limited to financial instruments.  If an asset can be created and implemented on blockchain (which anything tangible or intangible can, with the right combination of technologies), it can move through a DeFi platform automatically and immutably.

Open source software (OSS) is available to anyone for use and updating; this includes the algorithms that run the processes.  Composability refers to the ability to combine different OSS programs to create new platforms and also the ability for one platform to easily access other platforms for their liquidity and other features.  DeFi platforms live on the internet and on public blockchains, empowering anyone with a computer and internet connection to access and participate in the ecosystem. There are various means to access, obtain and engage with digital assets, including airdrops.

DeFi markets and users are not constrained by physical jurisdictional guardrails, encouraging broader participation. In contrast, in traditional financial services, the markets are centralized, which means that custody of assets is centralized with regulated custodians in a particular jurisdiction.  For DeFi, however this lack of physical location also poses a challenge for regulators and policy makers, legal enforcement as they continue to solve for and design appropriate controls to monitor transactions and activities that can cross borders seamlessly.

Economic Inclusion

The ethos of DeFi to break down barriers and democratize financial services for the masses is anchored in the simple yet aspirational promise that anyone with a computer/smart phone and an internet connection can engage with DeFi platforms and products, and take charge of their economic freedom. Often, the entry point into DeFi can be as efficient as an airdrop, eliminating intermediaries and gatekeepers that can be blockers to participation in centralized markets. Likewise, the frictionless global access creates a big tent, inviting users who are otherwise forgotten or ignored by existing financial systems. As DeFi continues to proliferate, an added focus on user experience, education and enabling a diversity of use cases, can help unlock opportunities and make a meaningful dent in solving for global economic inclusion.

Final Thoughts

DeFi is the natural culmination of several trends as exemplified by the twin precursors of automation through software and blockchain.  It has brought to the fore open source code that is composable combined with the immutability of blockchain.  It has left behind the need for intermediaries, asset-specific trading venues and physical location. DeFi envisions a simpler, more efficient world where platforms are evaluated by their code and the activities it allows through algorithmic mechanisms.

While the opportunities are boundless, it is prudent that we acknowledge DeFi is not a panacea and there are still many challenges that require attention and action — questions about trust and governance, lack of regulatory frameworks, concerns over valuation, scalability and user experience, and a much higher level of individual responsibility for usage of each aspect of the DeFi platform, from the due diligence in understanding its operation or ensuring the right activity with the right assets is chosen.  None of these challenges is insurmountable and several efforts currently underway seek to tackle these and other hurdles and continue to build towards an inclusive and sustainable DeFi ecosystem. From this foundation, this new paradigm should attract lots of adherents and, most importantly, users.

Mining is a vital part of the cryptocurrency industry today. While some industry followers believe that crypto mining will go away sometime in the future, it remains an active pursuit for individuals and companies to mint digital money using racks of computers.

In the current regulatory environment, the status of cryptocurrency miners is unclear.  For instance, when miners approve a Security Token transaction that is built on top of a public protocol like Ethereum, are they essentially approving a transaction on behalf of another?    Does this make them a broker dealer because they are approving a securities transaction and receiving securities-based compensation?  SEC Corporate Finance Director Bill Hinman  publicly stated that Ethereum is not a security but, importantly, did not pass judgment on its issuance.

Ever the regulatory leader, on April 4, Templum, a FINRA-registered broker-dealer and approved alternative trading system (ATS) in the digital asset sector, submitted a Petition for Rulemaking to the SEC on digital asset mining. They state in the letter:

“Chairman Clayton has stated that nearly every Initial Coin Offering has involved the sale of a security. However, it is unclear if miners of digital assets that are securities be required to register as a broker-dealer under the Securities and Exchange Act of 34. We encourage the SEC to provide formal guidance to the industry on this issue.”

Co-founders Vince Molinari and Chris Pallotta state that “Given the heightened regulatory concerns in the market, we believe that clarity of technical applications of mining and their functions could constitute regulatory activity.  We believe the markets should evolve to standards to ensure best practices while protecting investors. We have concerns around public blockchains and mining as it relates to their anonymity of this function and what that could mean, i.e., who is doing the mining, and who is receiving the compensation for their service. For example, are they a bad actor or located in a banned jurisdiction of the US? Also, what happens to public chain securities if mining is no longer economical?”

Keep in mind there is no obligation for the SEC to answer this petition.  But if these miners are manufacturing securities or participating in securities transactions and must be registered as broker-dealers, the ramifications may be profound.  Somewhere between the anarchist cryptographers who want no regulation and the traditional institutional investors who will only enter with regulation, lies the future of the industry.  For instance, there are vestiges of the old world like Transfer Agents (a trust company, bank or similar financial institution assigned by a corporation to maintain records of investors and account balances), that could be made obsolete with blockchain.  The existing regulations assume they are necessary, so clarification is needed.

Right before this petition was filed, Blockstack, the New York-based blockchain software provider that launched in 2017 to create the infrastructure for a decentralized internet, filed a registration statement with the SEC on its intent to raise $50 million in a token sale that would leverage the SEC’s Regulation A+ crowdfunding exemption.   Introduced in 2012 under the JOBS Act, the Regulation A+ exemption enables equity crowdfunding campaigns to offer and sell securities to U.S. non-accredited investors via two tiers, either for $20 million or $50 million, each over a 12-month period.  In the filing, they say miners are not Broker Dealer’s, no Transfer Agent is required, no clearing agency functions are being performed.  This is largely due to the focus on “salesman’s stake” functionality of Broker Dealers absence in this case.  However, the SEC has said before that Broker Dealers do not have to have human involvement.

Reg A+ was specifically designed for eligible companies to offer debt or equities securities, or securities convertible into debt or equity such as options and warrants.  Blockstack claims the tokens don’t share the characteristics as might be expected for a traditional debt or equity instrument. Blockstack is saying they are eligible to conduct the offering without the services of a Transfer Agent because of the first reason mentioned, that the Tokens don’t constitute as debt or equities securities because “they do not have equity-like features.”

As the SEC is required to respond to Blockstack’s registration statement within 120 days, it will be interesting to see which way the SEC offers guidance here and whether Templum’s petition puts some sand in the gears.

Article first appeared May 2, 2019 on Forbes.com.

https://www.forbes.com/sites/nisaamoils/2019/05/02/can-crypto-miners-be-considered-broker-dealers

Is private and secure healthcare a crisis of modernity? The cost of seeing a doctor experiences significant increases yearly, baring many from realizing the benefits of modern medicine. In 1970, the expense per person for health care was $355, and in 2016 $10,348.  A community burdened by rising cost, debt, and complicated methods of access to a doctor are today’s healthcare consumers. The Centers for Disease Control and Prevention (CDC) conducted research claiming 40 million adults in America, one in five, are living without proper healthcare.

In 2017, the World Bank reported that half of the world’s population lacks essential health services and these numbers are growing. Approximately 100 million people have become impoverished under the burden of their directly funded medical expenses. As accessibility to medical professionals continues to decline, we see the most significant impact in the parts of the world where practices continue to use century old methods to track and treat patients.

The healthcare industry has notorious privacy, fraud and security challenges. As of 2018, 37 data breaches occurred among healthcare institutions. One involved Long Island-based Cohen, Bergman, Klepper, Romano MDs mis-configuring its online database, exposing the personally identifiable information of about 42,000 patients.  Trade in anonymous medical data is allowed in the U.S., a $28 billion dollar industry. Prescription records, blood tests, doctor notes, hospital visits and insurance records get monetized. The healthcare information provided so far represents years of records for hundreds of millions of people.

The usage of mobile health apps and wearables is ever-growing with more than 55% of smart phone users upload health-related information on their phone. Health-related data is a valuable asset for both individuals and data-driven healthcare stakeholders.  However, today’s healthcare landscape does not offer the consumers who provided the data a method of capturing value for its usage. Businesses capitalize on rights to personal medical data without benefiting the consumers generating this data.  Moreover, current system lacks the means to interconnect existing data and unlock its full potential for the benefit of all market players, losing an estimated $300 billion a year in data unavailability for marketing due to integration issues. Furthermore, siloed medical systems prevent needed records from getting to the people whom need it when they need it most.

The rise of various applications has not yet delivered on the promise of digital technology empowering individuals and resulting in better healthcare and a more connected health related market.

Does physical movement and healthy diet have economic value?

A New York startup, Gainfy, a brainchild of Victoria Saucier, a partner of Ignite 500 investment firm, has proposed innovative solutions powered by AI and blockchain technologies to address the challenges discussed in this article and enable the healthcare system to reward the people behind the data and deliver efficiency, privacy, and data security.

“The key barrier for many people to make healthier life choices and be physically active is not a lack of motivation, but rather a human tendency to ignore things without instant gratification, causing people to struggle with weight, unhealthy diet habits and lack of physical activity. Moreover, people tend to underestimate the costs (problems) that obesity will ha

ve on them in the future and overestimate the costs (hardship) of leading a healthier life at present. As a result, people underinvest in their present self and have to pay for this in the future.”

Victoria sees use of direct financial incentives, gamification strategy and protection provided by blockchain technology as most critical tools to help consumers stay healthy, save money on medical cost and monetize their data.  Gainfy employs blockchain technology and rewards users with its GainCash proprietary tokens for walking, exercising or opting for healthier diet choices. The users can earn more by setting and completing their daily FIT goals (Frequency, Intensity, Tenacity). The tokens can then be spent to buy products, services and experiences at partnered local retail stores and online vendors.  “It’s basically like a frequent flyer points for staying healthy. We want people be healthy, be motivated, track, own and monetize their data” she said.  Every Gainfy participant possesses secure identity credentials, providing unparalleled personal data protection, control, and incentivized rewards with digital payments.

As I have previously written about convergence theory, this is a great use case for the intersection of blockchain, AI, and IoT.  Gainfy’s ability to build a data ecosystem providing incentivized way to stay healthy and providing data ownership rights to its end consumer is an industry game-changer.  Gainfy has the potential to not only disrupt the underlying flawed processes in the healthcare industry but will also improve the quality of life for millions of people all over the world.

Article was first published on Forbes.com