The Call for Blockchain Standards is Premature and Alarmist

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17 April 2016

William Mougayar is a Toronto-based entrepreneur, investor and advisor to Consensus 2016, CoinDesk’s flagship conference. He is also the author of the upcoming book, The Business Blockchain.

Here, Mougayar argues that pushes for standards in the blockchain industry are premature, and that time should be given for the industry to reach consensus on key ideas.

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Let’s start by stating the obvious – Warnings about the need for blockchain standards are premature and alarmist.

It’s too early to claim that a lack of standards is hurting blockchain technology adoption, or to call for standards bodies like the International Standards Organization (ISO) to get involved and define what they should be. (Though, there are already groups doing this).

The topic of blockchain standards is complicated, and it extends beyond just seeing it as an interoperability challenge. This is because blockchain standards can be divided into three interrelated vectors, comprised of technical, business and legal considerations.

If you perceive the blockchain as a technology, then you will implement it as a technology. If you see it as a business change enabler, then you will think about business processes. If you discern the legal implications, you will be emboldened by its new governance characteristics.

An enterprise blockchain (or distributed ledger) implementation will equally touch the technical, business and process-related areas and legal and regulatory sides. Therefore, standards should be looked at in a similar way, along these three complementary dimensions.

There is an old adage: The good thing about standards is there are so many of them to choose from. In the blockchain world, it’s still early days, so let us not drown yet in an alphabet soup of them.

Historical approach

Standards typically arrive in two ways.

De-facto standards can emerge by virtue of market adoption, or industry standards can be developed and agreed upon by a standards committee, or a consortium group. Standards carry with them a number of benefits, including some network effects, easier interoperability, shared implementation knowledge, lower costs and less overall risk.

However, before embarking on new standards, we should first see if we can implement existing ones, especially from a business process and regulatory point of view.

In the financial services industry, for example, current standards exist as part of mandatory regulations: the Banking Secrecy Act (BSA), the Dodd-Frank Act and the Commodities Exchange Act (CEA).

Specific to trading and transactions, we have the International Swaps and Derivatives Association (ISDA), the International Bank Account Number (IBAN), Commodity Futures Trading Commission (CFTC) rulings and European Market Infrastructure Regulation (EMIR) for the standardization of OTC contracts; just to name a few.

Secondly, we should consider updating standards that already exist, such as the ISDA Regulation 1.31 for recordkeeping rules, or proposing a modified-ISDA to better integrate with end-to-end transactions that are run on a decentralized clearing network.

After exhausting the first two alternatives, we can start to create or agree on new standards that are peculiar to blockchain and distributed ledger implementations.

Warning signs

Going one step further, there is a many-to-many relationship between technical, business and legal standards.

A given technical standard could be implemented several different ways and taken into different directions. And a business process or regulatory ruling standard could also be complied with via five different technologies.

But here is a warning about standards. Standards must be open, not proprietary, and allow anyone to participate. You do not generally compete on standards. They tend to level the playing field, and allow companies to compete on their own terms, once they have implemented these standards.

A slight competitive edge could be gained from the speed of your implementation, and certainly more benefits would ensue if you innovate beyond these standards. The blockchain presents similar opportunities and caveats as any other standards: They will be necessary, but not sufficient.

Technology innovation will always outpace regulatory and standards bodies who want to freeze-frame it in order to put their stamp on it. But if you try to frame a moving picture too early, the resulting optic will be distorted and you will want to replace it soon after.

Blockchain standards will be discussed during an upcoming workshop at Consensus 2016 involving Barclays chief blockchain strategist Simon Taylor and Ethereum chief scientist Vitalik Buterin.

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