ARYZE spoke with Pēteris Zilgalvis, Head of Unit for Digital Innovation and Blockchain at the European Commission. He shared how to stimulate technology through regulations, recommendations or guidelines, and when to step in or let the market develop freely.
Pēteris Zilgalvis is the Head of Unit for Digital Innovation and Blockchain at the European Commission where he has followed technologies like blockchain and AI since 2012. Together with his unit, Zilgalvis constantly looks for ways to support the tech industry. Up to now, he mentions that there have not been any regulatory initiatives other than the extending of AML to crypto assets. However, today, with tokenization showing high potential and acting as a very pro-innovation intervention, the tech industry experiences lack of legal clarity. This led Zilgalvis and his team to the conclusion that it would be helpful to explore how they can stimulate the market in Europe.
Their approach is rather hands-off, as they critically look whether regulation should be implemented in the first place. Through initiatives like evidence gatherings and public consultation, the unit for Digital Innovation and Blockchain forms an understanding of the needs in the market. Sometimes they see the need for supportive regulation, at other times, they choose a soft law instead by providing recommendations, guidelines, and bringing the community together.
Blockchain as a philosophy
Although technologies such as 5G, AI, and blockchain look very promising, the department within the European Commission stays technology-neutral. They do promote tech solutions, but they don’t regulate or endorse any technologies specifically. So also for blockchain, where Zilgalvis clearly sees the potential, but does not attach the value solely to the technology as it is known today.
The technology is interesting but in a way is a philosophy: Multi-level governance, decentralization, democratic self-determination of the individual. It enables things that centralized gatekeeping models do not value. That’s why I think a lot of us are enthusiastic about it, but also regarding technology neutrality, if some new way of setting up software could provide something similar or better, this is also progress. We shouldn’t lock that into one technology for ever and imagine that.
With such a new and early-stage technology as blockchain, the question to ask is when to intervene. The opinions within the industry vary from one extreme to the other; some people demand for legal clarity and immediate frameworks. Others don’t want any regulation at all and prefer to let innovation happen.
The consumer will decide themselves, but the answer has to be: We should intervene when the market has developed enough and when we know enough. In this, of course, you have the stereotypical ignorant regulator, who doesn’t know what blockchain or AI is. But even when the regulator knows quite a bit, it’s good to let the market develop.
Zilgalvis mentions the example of Bitlicense in New York, where people rushed into regulations very quickly which wasn’t actually supportive of the development of crypto and blockchain at that time. Even when legislators understand the technology and there is a plausible reason to legislate, Zilgalvis believes there has to be healthy hesitation.
When you step in, you should have a pro-innovation focus, like we do. So you come in and actually help.
Digital Assets & Smart contracts
Still, there are cases of course, where it is needed to create regulations relatively early, so that the market can develop better. One example Zilgalvis mentions is digital assets, where he sees that it’s different enough that both the innovation landscape, the consumer, and the investor will be helped by having a new framework specific to this.
Whether there is a similar need for solutions like smart contracts, still remains a question. Currently, the Unit for Digital Innovation and Blockchain is consulting the industry to see where certain needs exist. Within this process, they look at what the need is from the side of the economy, so that it can function effectively. They take in consideration the consumers and citizens, which Zilgalvis mentions as occasionally being two different things. Then, they also look from the side of public services, who have a mandate to offer quality to citizens, be transparent, and use public funds responsibly.
Zilgalvis believes potential regulation for smart contracts in the form of pure code is likely to only touch upon a very niche market. He mentions how he does not expect legal needs for smart contracts to be intelligible when only in the form of code to take off massively as not everyone will know how to code in the near future. If both parties of the contract will need to code the agreements themselves in a language like Solidity, this will remain a market for computer savvy experts.
However, if smart contracts are to go to the hundreds of millions of people, Zilgalvis says this has to be something people can simply do with actual language, like a button on a decentralised app, for instance. I this case, the use of (easy to use) smart contracts could take off by ordinary consumers.
If I am buying my subscription to the Economist I want to push the button which has the smart contract start. Or I want to get a daily delivery of vegetables and when they arrive on time, my account will send out the money. It has to be simple this way – it has to be understandable.
I’m not sure if you have to make specific legal requirements for understandability specifically, because if there will be cases where people don’t understand it, this could be covered by the court of law under ordinary consumer law.
In any case, we will see what the public consultation indicates and the final decision will be taken by the public leadership (the Commissioners).
Technology stacks to solve societal challenges
The potential of adoption on a bigger scale is definitely there. Zilgalvis expects technology stacks to have the most impact, where IoT, AI, 5G, and blockchain would be put together for different use cases. He mentions the solutions this could offer within our current society:
I think blockchain is very interesting for a lot of the challenges we’re facing in our societies, because we have things like climate change, racism, etc. where one individual, country or company can’t solve it by themselves. By definition these issues require co-operation, exchange of data, transaction and perhaps enforced trust.
To bring technology forward in the European market, the European Commission runs different initiatives where companies and developers can participate in building the European Blockchain Services Infrastructure. Through this, blockchain solutions can be made better, scalable, greener, and privacy-friendly. Another initiative that could be beneficial for young companies in the space is the Start-Up Europe Network, which offers support for start-ups and opportunities to help build a new, more just, and sustainable economy.