On October 25, 2021, Silvio Micali was invited to speak at the Commissione Nazionale per le Societa e la Borsa event on regulating innovation in the financial system to power a resilient recovery. The event, which was held in conjunction with the G20 Summit in Italy, was focused on alignment between regulation, finance, innovation and sustainability. Below is the transcription of Silvio's remarks to the esteemed attendees.

Session II  Digital Innovation: Growth, Inclusion and Disruption

Chair: Paolo Ciocca (CONSOB Commissioner)

Ciocca: In your view, which concrete steps can we (business, regulators, research) take to move from utopia to reality, possibly in a short timeframe?

Micali: Thank you, Commissioner Ciocca, for this fundamental question. My answer may come as a surprise:

I firmly believe that we ARE way past Utopia. Reality is already HERE. The future is NOW.

But the media (except for the most professional media) are stuck in an old narrative. So, one thing we can and should do immediately is to correct outdated perceptions.

What are the most frequent misconceptions in most of the Media? Well:

1. All blockchains are the same
2. All blockchains are bad for the environment
3. Blockchains are a solution looking for a problem

These statements have one thing in common: they are ALL FALSE.

Then, what is the TRUTH?

TRUTH PART 1: There exist DIFFERENT types of blockchains.

First-generation blockchains could NOT simultaneously be secure, scalable and decentralized. This was unfortunate, because each of these three properties is crucial.

Second-generation blockchains, however, ARE secure, scalable and decentralized at the same time. As so they should be in order to be useful to the world.

TRUTH PART 2: There exist GREEN Blockchains. 

True: first-generation blockchains, which still operate today, consume as much electricity as a small country. But second-generation blockchains consume IN TOTAL the energy equivalent of 10 homes. Ten well-lit homes, perhaps. But only ten homes, nonetheless.

This is important to understand. The idea that blockchain progress necessarily comes at a cost for the environment is just the dystopia of the uninformed.

TRUTH PART 3: Second generation blockchains offer powerful solutions to real problems. 

Sure: first generation blockchains could just offer an immutable archive of static data. Thus, at best they could only provide “digital gold”. At worst, only speculation: the false promise of high returns on small investments.

BY CONTRAST, second-generation blockchains offer way more than an immutable and transparent database. They also secure all kinds of transactions.  For instance, they enable two parties to exchange assets directly. Without having to rely on costly intermediaries. In a SINGLE, INDIVISIBLE transaction. In just a few seconds. With total security. And at the cost of a fraction of a cent.

Such security and such time and cost efficiencies are crucial to small and medium enterprises and wherever economic development is needed. Because traditional mediators are too costly and do not have the time or the financial incentives to enroll ordinary people and help them in their ordinary transactions.

More wholistically, the truth is that second-generation blockchains are an instrument of real progress. 

For the first time in Finance, bilateral exchanges can be truly simultaneous, secure, and unmediated. Mediators that add value to the transaction will always be welcome, but when the only function of a mediator is to enable the transaction itself, then what is welcome is a secure and efficient technology that replaces that mediator!

To be sure, some countries are lucky enough to have already in place payment systems that are electronic and extremely fast. Yet such payments are still unilateral. Even when they are used to purchase digital good and services, expensive and slow architectures must be relied upon to guarantee that you will get what you are paying for. Payment vs. Delivery continues to be a major problem. Also when payments are super-fast. Only second-generation blockchains have finally solved this vexing and century-old problem. But not only that. 

Second-generation blockchains provide a sustainable, incorruptible platform on which air and water quality can be monitored by a multitude of independent actors, and thus with no cheating.

They provide a platform that is so efficient and so decentralized to really achieve financial inclusion.

They provide a technology enabling the Public Administration to become that “transparent house”, quella casa di vetro, which is the very goal of our esteemed host today: il Consiglio di Stato.

All of this is possible TODAY, not in some mythical future. Cost, performance, and sustainability are no longer barriers to mass adoption.  We must correct outdated narratives. And all of us, businesses, regulators, and researchers, must seek and be open to new information that is aligned with current reality.

Ciocca: Let’s now move to scam artists and sharks.  We know that there is no free lunch here too, so innovation opportunities do come with challenges and risks.  In your experience, which are the main current and prospective obstacles to a speedy deployment of inclusive financial innovation on a global scale?  How can regulation, international and business cooperation support in addressing these hurdles?

Micali: I very much thank you Commissioner Ciocca for this question too. It is indeed urgent for regulators to intervene in blockchain matters and to do so correctly.   To begin with, we must acknowledge that this is not an easy task. Correctly regulating the blockchain requires grappling with two major issues.  

FIRST ISSUE: Some blockchains out there are bad. They promise financial inclusion, but they either fail to deliver on their promise or, worse, harm those who trusted them. This is a problem, because bad blockchains cannot be punished. Whereas the crypto wallets of individual criminals can be traced through forensic work, as platforms, bad blockchains do not have a physical address. Do not have a phone number. They are everywhere and nowhere. There are no offices to seal shut. The platforms themselves cannot be shut down.  If bad blockchains were to dominate the market of digital ledger technology, it would be a collective nightmare.

SECOND ISSUE: Blockchain technology is already EXTREMELY popular and is here to stay. The demand for this technology, in so many domains, cannot be suppressed. In the world there is a natural demand for transactions that do not need costly intermediation. For inclusive finance. For speedy, reliable, and transparent administration. With this kind of demand, the blockchain cannot be ruled out of existence. Nature abhors a vacuum. And in the absence of correct regulation, the risk is that bad blockchains will rush in to fill this vacuum and provide ineffective or harmful solutions to the ever-greater demand for this powerful technology

Then, how to act?

Because punishing bad blockchains is impossible and because the appeal of blockchain technology is irresistible, let me suggest that what the regulators should and can do is to allow good blockchain projects to fulfill the world’s demand. And to do so as quickly as possible. With regulatory uncertainty, good blockchain projects will, by and large, refrain from entering the arena, and with outdated regulation, good blockchains will compete at a disadvantage with bad blockchains that simply ignore all rules. So the danger is that this crucial and needed space will be filled by bad blockchains, which cannot be dislodged.

So: Can we distinguish which blockchains are good and which are bad? Which foster financial inclusion, and which do not? I think we can. Let me suggest four simple tests that go a long way in this direction.  

FIRST TEST: Scalability. Financial inclusion, by definition, needs scalability. So, a simple but very useful question is: How many transactions per second are possible in this blockchain? If the answer is, say, 16 TPS, then there CANNOT be any financial inclusion. There are billions of us and with this transaction rate you are lucky if you transact once a year. Such a blockchain can only support speculation and does NOT pass this test!

SECOND TEST: The Cost of Basic Smart Contracts. The quintessential basic smart contract is a bilateral exchange: I have an asset that you want and you have another asset (e.g., money) that I want, and we wish to swap them. Thus, What is the cost of a bilateral exchange of assets in this blockchain? If the answer is “50 cents or more”, then this blockchain cannot deliver financial inclusion! Because exchanging assets is the most fundamental form of trade indeed the heart of commerce itself and because 50 cents are an exorbitant amount when your salary is $50/month, or when the assets to be exchanged are worth $10.

THIRD TEST: Environmental Sustainability. Blockchains, like any other product, require energy to be produced and energy to operate. So, how much power does this blockchain consume? If the answer is   “a LOT of energy”,   then there is no hope for financial inclusion. And worse. Because the less privileged are the first to suffer from the degradation of the environment. A blockchain that is bad for the environment is a bad blockchain. Period.

FOURTH TEST: Consensus. Consensus is the fundamental process by which new blocks of transactions are chosen and added to the chain. So, let’s ask: Can anyone participate in the consensus protocol of this blockchain? If the answer is: “sure, as long as they buy a couple of supercomputers” then there cannot be any financial inclusion either. Because most of us cannot afford buying super computers. If the answer is “Sorry: we already have a club of, say, 10, 20, or 100 agents who are in charge of choosing future blocks on behalf of all of us,” then, again, no financial inclusion. In fact, such an elitist club has the full power to exclude whomever they want from transacting.

FIFTH TEST: Continuity of Service. Let’s put it simply: How often is this blockchain down? If the answer is “for a few hours every month”, then the chain is inappropriate for financial inclusion. Truly decentralized services do not frequently stop working. Speculation can easily skip a day, but essential financial services must operate without interruption.

SIXTH TEST: Upgradability. Can this blockchain be upgraded? Has it ever been updated? If the answer is “No, never, we are proud that the chain will continue to operate in the same way it has always operated”, then, walk away. When new and safe technology becomes available, a blockchain must be able to incorporate it seamlessly, without interruption of service and in an automatic, decentralized manner. Only so can a blockchain continue to satisfy the needs of its community, today and tomorrow.

SEVENTH TEST: Decentralized Interoperability. We should never trust any blockchain, or any infrastructure for that matter, which would not allow us, when necessary, to transfer our assets and our information elsewhere. So: Can this blockchain easily transfer assets and information to another blockchain? Can it do so in a decentralized fashion? Unfortunately, most approaches to blockchain interoperability today are centralized, naïve, and dangerous. They envisage a few ‘trustees’ who would tell with absolutely authority, and hopefully with absolutely honesty, what is transferred from one blockchain to another. Introducing such centralization is very dangerous, because corrupting or hacking a few trustees is very easy. Moreover, imposing a proportionate fine upon a trustee who, maliciously or not, has made a mistake would be an empty threat. The value transacted across blockchains would be enormous, and no trustee would have the ability to pay fines commensurate to the damage done. Decentralization is the real source of security. Interoperability between two blockchains should be achieved directly by the two blockchains involved, without the intervention of anyone else. It is only a question of technology, and such technology is already mature. Let’s not settle for anything less.

In conclusion: What specific steps should regulators, in particular, and more generally governments, businesses, technologists, and citizens at large, take? In my opinion, two steps: education and experimentation.

STEP 1: EDUCATION, because we should understand and clarify to the general public which technical properties blockchains should have in order to be truly useful to civil society. This step goes a long way towards preventing that individuals, businesses, institutions, and governments, honestly intending to participate in Decentralized Finance, Transparent Administration, etc., find themselves stuck in an inferior blockchain whose technology can only deliver centralization, if not risky speculation.

STEP 2: EXPERIMENTATION, hopefully through sandboxes. Because sandboxes are essential to allow the regulator to understand first-hand not only the potential, but also the limits of blockchain technology. Sandboxes are essential for enabling the regulator to keep pace with a new technology that keeps evolving at super speed. The blockchain cannot be regulated with just the rules of the last two decades, let alone those of the last century.

Only through education and experimentation can we achieve CORRECT REGULATION. Permitting responsible blockchain technologies to help all of us move forward in a safe way. And fostering that financial inclusion and that international collaboration that are at the very heart of the G20’s mission.

About Silvio Micali

Silvio Micali has received his Laurea in Mathematics from the University of Rome, and his PhD in Computer Science from the University of California at Berkeley. Since 1983, he has been on the faculty of the Electrical Engineering and Computer Science Department at MIT.  

Silvio’s research interests are cryptography, zero knowledge, pseudo random generation, Byzantine agreement, secure protocols, mechanism design, and distributed ledgers.  

Silvio is the recipient of the Turing Award (in computer science), the Gödel Prize (in theoretical computer science), and the RSA prize (in cryptography).  He is a member of the National Academy of Sciences, the National Academy of Engineering, of the American Academy of Arts and Sciences, and of the Academia dei Lincei.  

Silvio is the founder of Algorand, a new foundational blockchain, developed on totally new principles to be decentralized, scalable, and secure.