Transcript

Angie Lau: The macro winds are blowing. Contraction, lack of liquidity, concern and fear of hard landings for economies around the world, from what we’re seeing in equity markets and inflationary pressures that are devaluing currencies around the world. 

How does this impact blockchain and Web3? Well, perhaps the real question should be how does Web3 play a role in determining the future of how we will be talking about the economy? 

Well, let’s dive into that and a whole lot more in this edition of Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast. I’m Forkast’s Editor-in-Chief, Angie Lau.

And today it is a real pleasure to explore the wider question of blockchain, crypto, digital assets and how technology is transforming our future despite crypto headwinds. The lack of enthusiasm from venture capitalists to retail consumers.

It’s a pleasure because I get to hang out with Alex Tapscott today. As we know, all of it is cyclical and Alex Tapscott has seen it from, I would say almost the very beginning, one of the OGs in this space, and his latest book, “Web3: Charting the Internet’s Next Economic and Cultural Frontier”, follows his bestselling book that he co-authored with his father, Don Tapscott, and is pretty much on every industry leader’s bookshelf, “Blockchain Revolution.” Of course, we’re talking about that big yellow book that sits right there, actually.

Alex, welcome to the show! I’m adding your latest one to the bookshelf here. Congratulations! I got to read your new book. I loved so many of the ideas. I’ve got these giant swaths of highlighted paragraphs for a lot of the innovative ideas. And I ‘m just glad that we’re able to sit down. A lot of people liked it. A lot of people loved it. As a matter of fact, a lot of great testimonials. It’s a pleasure to sit down with you.

Alex Tapscott: Angie, I really appreciate it. It’s always a pleasure to join you on the show. I love the introduction and the framing for this discussion about how new technologies are causing disruption not only to business but to culture, society and much more, and what that means for our future. 

I’m really excited to dig into it.

Lau: Let’s start there. The future at the moment feels very shortsighted, very myopic. A lot of people are just looking at the latest Federal Reserve announcements. They’re looking at the latest economic reports, the latest on Wall Street and how the stock market has done today. And then of course hearing all of the fear, uncertainty and doubt that surrounding crypto it doesn’t feel very long-sighted. But you and I live in this, I would say, a luxurious space where we get to think about the long term and we get to think about the impact. But it’s certainly challenged when you take a look at the headwinds right now.

Tapscott:  It’s important to take a step back and to frame this discussion. We’re in this really interesting moment right now where several new technologies are all emerging at the same time. 

In the past, we’ve seen how one single technology can transform the economic power grid and the old order of human affairs, whether it’s the Internet or TV, radio printing press, you name it. Right now, several of these technologies are all emerging at once. First among them, in my opinion, are blockchains. 

Blockchains are a new digital medium for value. There are ways to automate complex business processes and there are ways to create value and to do transactions peer-to-peer where previously that was simply not possible. That, more than anything, is the most fundamental revolution that’s happening. 

But there are others. The rise of AI is causing us to reimagine what we thought computers were possible, what they could do, and also what we thought people could.

That’s creating new opportunities, but also new challenges in several industries. We’re seeing the rise of extended reality, which will take our two-dimensional (2D) or 2.5-dimensional web and make it 3D or spatial. That creates all sorts of new challenges and opportunities. And then the final thing is the rise of smart devices, robotics, and the Internet of Things (IoT) — this idea that there will be trillions of connected devices forming the foundation for our smart infrastructure of the future. Web3 is ushering in a new web, but also a new internet and a new platform for this digital age. It’s going to be the intersection of these technologies where a lot of the rubber hits the road.

Lau: And here we are. Let’s talk about that, especially the financial opportunities. And yet we’ve seen the collapse of FTX. The bankruptcies of crypto lenders like Celsius and Voyager. People are increasingly skeptical of crypto. And now in Hong Kong, we’re seeing a multi-million dollar hack. We’ve also got these allegations of a fraudulent crypto exchange in Hong Kong — there are fresh concerns about that. How does the mood, and that sentiment impact what really is the promise of an incredible financial freedom and financial accessibility through blockchain?

Tapscott: Technology is cyclical, and even the most promising of technologies go through periods where people cast doubt on them and question whether or not they’re worth it. And we’ve seen that time and time again. I feel like I’m in a somewhat unique position because I am not alone, but unique in that I do spend a lot of time with a lot of builders and founders, but I also spend a lot of time with business, and with enterprises. Our institute, the Blockchain Research Institute, counts dozens of Fortune 500 companies as members. 

What surprised me the most in the last year is even since the FTX disaster, while the mood has become much more sour in the builder world — and I don’t want to speak for everyone because some people speak for themselves, but in general — I think the mood is not great out there. 

In the enterprise world, it’s the opposite. And that’s playing out in these announcements that we’re seeing now. In the past, when an enterprise announces something, it’s usually: we’re doing a proof of concept thing with blockchains and it’s a proprietary ledger or whatever. What we’re seeing is big businesses building actual services and applications on top of public blockchain infrastructures like Ethereum or Solana  to a lesser extent. So whether it’s PayPal launching a stablecoin or if it’s Visa saying it’s going to do trade settlement on the Solana network or whether it’s half a dozen gaming studios introducing NFT components to their games or even these big banks like Citibank and JPMorgan, they’re not building on Ethereum, not to my knowledge, but they’re building on private implementations of those networks to tokenize institutional assets in Citibank’s case or to deposit coins in JPMorgan’s case. So don’t let the crypto tail wag the dog too much. I think people become preoccupied with price. They forget to see that there’s actually all this innovation that’s still happening.

Lau: You’ve highlighted an important struggle in your book, one that we’re very familiar with we’re facing now, especially in the United States, and increasingly, I would say likely, the Asia Pacific. That’s applying old rules to new technology. 

There’s one example in your book that really resonated with me. You said that in the 19th century, when the first cars were hitting the road, governments enacted these things called red flag laws, that required cars to have a driver and also someone walking in front of the car waving a red flag. I had no idea that that was the regulatory answer to a horseless carriage, a car. And it kind of feels that way right now.

Tapscott: That’s a great example of when regulators or governments create rules without understanding the true meaning or impact of what a technology will be. And that’s another problem. The first problem is sometimes when new technology or new capabilities come along, you need to update the rules to reflect that. And then the other thing is you create the wrong rules. So you want to avoid both scenarios where you’re either applying existing rules when they’re inappropriate or where you’re creating new rules. 

These red flag laws basically required someone to walk in front of the car waving a red flag because the concern of people at the time was horses. It was cars that startled horses and cars, startled pedestrians. So we need to accommodate the old paradigm technology of mobility, which is a horse with the rules to govern the new paradigm. And I feel like that’s something as a metaphor that is quite rich and can apply to this industry as well. 

There’s also the issue of applying rules to something new when it doesn’t really look like the thing that came before. Both of those are legitimate concerns. The flip side to all of this is that the industry needs regulation in order to scale notwithstanding this whole belief in Silicon Valley, you move fast and break things. Well, actually, sometimes when you move fast and break things, people get hurt. And sometimes, bad things occur. 

So every frontier town needs a sheriff and every industry needs some rule of law in order for it to function. Now, what I love about blockchains is that because they are a single source of truth, we can guarantee things like the finality of payments and trust and privacy. We use technology, we don’t need laws or courts to enforce those terms. But for everything else, for this industry to scale, you do need some rules of the road. Now, we do have examples of this in history, during the internet age, governments realized that this technology was enormously valuable and that existing rules were insufficient.

Lau: You talk about Silicon Valley and tech Galapagos. Does that place still exist? And I’m not talking about Silicon Valley, the actual location, but the idea of it. Does that place exist in this world right now when it comes to blockchain and Web3 where you have this incredible blend of, regulatory and government on one side, enterprise, tech, money, talent on the other?

Tapscott: No, I don’t think it does. 

Silicon Valley isn’t unique or isn’t one of the areas where this is all happening. But what it means is that the conditions that existed in Silicon Valley led to a unique breed of species that couldn’t exist or didn’t grow anywhere else similar to the species in Galapagos. They were uniquely adapted to their conditions. What were those conditions in Silicon Valley’s case? A critical mass of talent, capital, venture capital, access to government R&D, universities that produced graduates, did deep technical research, an existing technology industry that had internal R&D and other capabilities. Those factors or those features 35 years ago were unique to Silicon Valley. 

Today, Silicon Valley is still a leader but it’s not unique. Today, technology tools, human talent and all of those other factors are more distributed than they ever have been. They’re not equally distributed, but they are more distributed now than they ever have been. In 1993, half of the world’s population had not made a phone call. And today, 70% of the world’s population has a smartphone connected to the internet. Not just an internet connection, not just a phone, a smartphone — a supercomputer.

It doesn’t mean that people in Africa and Southeast Asia and other parts of the world have as great a chance as someone who grew up in the Bay Area to go and make a career in technology, but they have a better chance now than they ever have been. I actually think that Web3 is a big part of this. Web3 is a new platform that allows people to move and store value, build wealth, and access opportunity in a way that wasn’t previously possible. If the spread of technology really makes the world flatter, as they say, then Web3 is going to be a steamroller.

Lau: And then the question is, do we even need banks? 

Hold on to that thought. Let’s take a quick break. When we come back, we’re going to find out if Alex thinks the end of banks is inevitable. Stay with us. 

We are back. Word on the block. And you are joining me, Angie Lau with Alex Tapscott and your brand new book here. 

And we’re talking about just these concepts of the current myopic challenges of the current landscape, the current economy, but then also the implications of what Web3 really has the potential to do. So the question is if we are going to see value spread around the world, in the darkest corners of the world with people who didn’t have this access once before, and that blockchain and Web3 allow anyone anywhere in the world to be able to participate in a financial transaction. What does this mean for banks?

Tapscott: Does it mean the end of banks or does it mean the transformation of banks? Where we’re going to end up is in a world where banks are smaller, more innovative, more nimble and less important. Basically, they’re not going.

And when it comes to blockchains, this is a medium for value that removes the need for an intermediary from transactions. Now, there are lots of ways in which technology disintermediates middlemen, but there are also opportunities for intermediation or what I would call an application of new technologies for existing companies. 

Stablecoins are a really good example of this. Stablecoins are assets that have found a clear product-market fit. They’re a digital dollar, a way to move U.S. dollars around the world, peer-to-peer instantly. Actually moving money around the world is kind of difficult if you want to do it instantly and peer-to-peer is especially difficult.

Lau: And expensive.

Tapscott: And expensive. So this is a thing that people think is very useful. It’s an area that banks could potentially enter and do really well. That’s why you see JP Morgan, they’re never going to be able to innovate in the way that a startup can in stablecoins because they’re the most regulated financial institution in the world because they’re in every single market doing every single thing, but they can still tokenize deposits and apply this technology — and Citibank we talked about earlier. So there are lots of ways for existing financial firms to re-intermediate themselves. I just think that the prize is going to shrink. And so as a result, they’re going to become smaller and more nimble.

Lau: But the point is that people who are unbanked by traditional finance infrastructure, of which we both have experience in, are now able to participate. And so as we see inflation rising, people are looking for alternative ways of preserving wealth. And then we’re also really seeing adoption in countries like India, Nigeria, the Philippines that really led this year’s Chainalysis grassroots crypto adoption index. I know this is one of the themes that you explore in your book: global prosperity. How is that unlocked by Web3 and how can the proverbial unbanked no longer care about being banked because they’re banking themselves?

Tapscott: Every person in the world wants, whether they know it or not, a U.S. dollar bank account. If and after they’ve got their U.S. dollar bank account, what they really want is a U.S. dollar investment account. They want a way to take this asset and be able to build wealth and diversify themselves. Whether they know that or not, or use those terms or not, that is the foundation of wealth creation: the ability to own capital assets. In places like Canada and the United States, the data says that two-thirds or 70% of people have some ownership of capital assets. But in other parts of the world, the numbers are starkly different. 

I think about stablecoins and self-custody of assets a lot because, for a lot of consumers, the fact that you can be your own bank and store your own value is actually not appealing at all. It’s the opposite. It sounds like a lot of work and maybe a little scary, but for a lot of people in the world who are used to the local currency being hyperinflationary or the government being corrupt or the banks being insolvent or unstable, that’s not an inconvenience. It’s like a superpower. It’s this thing that makes this asset class so powerful. 

For a lot of people, young people, it’s neither an inconvenience nor a superpower. It’s just part of being a digitally native person where you’re used to buying digital goods in virtual worlds and the sofa for owning your own digital assets NFTs, your identity, financial goods, money, whatever. It doesn’t really seem like all that far afield. 

Therein lies one of the big struggles for leaders of the old paradigm, for existing firms who are maybe really well run and make a lot of money today. Clay Christensen, who’s a very successful business author who’s written a couple of books, including “The Innovator’s Dilemma,” described this problem, that for an existing company, oftentimes new technologies are in certain key ways inferior to the old technology. And existing customers, especially your best customers, typically don’t want to use it. And so the rational thing to do is to ignore new technology and double down on what you’re doing because it’s what your existing customers are asking for. 

But that’s the paradox because if you do that, then eventually the new technology and the new market will grow and supersedes the old one. When that happens, then you’re left on the back foot. 

If you’re an existing firm, a lot of the biggest customers of big banks think self-custody of crypto assets is kind of interesting but not core to what they’re doing. But for a lot of other people, especially people coming up in the world, it’s actually a big benefit. So figuring out how to thread that needle is another challenge that business leaders today have to face.

Lau: When we come back, I want to ask you if artificial intelligence can reach its true potential with Web3 and how these two technologies converge with Web3 and AI, a partnership. All right. When we come back, we’re going to ask Alex all about it. 

Welcome back to Word on the Block. What we’re actually seeing as well in the real world is that a lot of venture capitalists are pulling funds from crypto. We’re seeing this kind of liquidity pull going out of this industry in Web3 and investing in artificial intelligence. Alibaba’s Ant Group divested about US$100 million crypto fund to AI. But you cover AI in your book and you see an intersection here where both can reach potentials far beyond what we see right now. 

How do you see the intersection of these technologies merging and really creating something new here?

Tapscott: At a micro level, the move away from crypto assets and token-based business models to purely AI projects is occurring. My view is that basically, the two are going to converge. It doesn’t mean they’re going to become the same thing, but most use cases in the future will combine them. I actually think that blockchains are really foundational to fulfilling the promise of AI. I actually think that in blockchain solutions lies the solution to this problem. 

We already know from the NFT world that when a cultural asset is created, the creator can get paid instantly through the sale of an NFT. But we can also program digital goods to pay residual rights, to pay royalties in the future. Now, some creators in the Web3 world chose not to do that because they wanted their assets to sell quicker right away. But we have the tools to track how an asset, how a cultural asset like IP or visual asset actually travels through the economy. 

We do need courts and new rules and maybe new collective bargaining agreements to enforce the terms of these arrangements. But we can also use technology tools where if a cultural asset or IP is used in a large language model, there should be a way to track its usage and to ensure that payment happens automatically and that it goes to the creator, and then that payment can occur over and over again if it’s used over and over again. If it proves to be valuable, that would be a way to potentially solve the cultural issue, the moral issue of ensuring that creators get paid, but it could also unleash the AI models because it could mean more people are volunteering data and information into those models as a way to get compensated in the future. So it could strengthen the AI side as well as ensure the creators get paid fairly. That’s just one example.

Lau:  What’s next in your view? We see these Web2 giants like Meta (formerly known as Facebook), and we’ve got Microsoft capitalizing on the metaverse opportunity, taking digital control of our assets while charging hefty fees. Do you think that’s why we haven’t seen a dominating presence from Web3? Why aren’t we seeing big Web3 players emerge and are we seeing a clash coming? What’s next for this industry?

Tapscott: In a way, Web3 is on a collision course with Web2. We shouldn’t overstate how big it is, or what kind of a task it has in front of us to dislodge these powerful giants. Time and again, we’ve seen how the cycles of innovation have created destruction and led to new winners. And you could make the case that Bitcoin and Ethereum, for example, or a stablecoin itself, are things that have reached a certain size and scale where they’re near that level. But in general, it’s true at the application level, we haven’t even begun to scratch the surface. 

Part of this has to do with implementation challenges, so there are plenty of challenges. One is that the technology is still new, so it still needs time to scale. The Ethereum network, as an example, became a victim of its own success where because it was attracting so much new development activity and new users, the fees on the network to maintain the ledger, to process transactions actually went up. So what we need is new scaling solutions, which, by the way, we’ve seen time and again in other technologies. 

The other thing is that a lot of Web2 companies make it hard for Web3 business models to work. The operating system universe of Google and Apple collectively control almost 100% and they levy taxes on developers, but they also forbid, in many instances, applications where people can move value peer-to-peer. The reason is not necessarily because they have some moral opposition to tokens or digital goods. It’s because their business model relies on extracting a 30% fee from all transactions. If they’re happening peer-to-peer, then they can’t keep track of them. 

In a way, this is where Web3 is pushing up against the very nature of the model itself. And so that begs the question: do we need a whole new infrastructure, decentralized clouds that don’t make developers less reliant on new operating systems that make people less reliant on iOS? Like all these other questions, these are big questions and we actually get into all of them in the book in great detail. 

But you have to ask yourself, are these reasons that Web3 will not succeed or will fail to reach its potential, or the implementation challenges to overcome? In each instance, there is an implementation challenge and they’re probably going to be overcome. We’re not tilting at windmills here. This isn’t Don Quixote taking on some hopeless task. We’re in the earlier innings of these technologies, but as they scale and converge, they are going to become an unstoppable force.

Lau: Well, this is an unstoppable book. There is no doubt. If you want to understand the powers that are at play here, certainly those who hopefully get the pleasure of reading your book and picking it up after this conversation.

Tapscott: You have your signed copy?

Lau: I’m waiting for my signed copy.

Tapscott: It took too long. This is what it looks like.

Lau: Love it!

“Web3: Charting the Internet’s Next Economic and Cultural Frontier.” I stick that into the Amazon URL and go get yourself a copy.

Alex, a pleasure as always. Really, thank you so much for sharing a lot of those concepts with us and so much more. I really appreciate you joining the show.

Tapscott: Pleasure, as always. Thank you, Angie.

Lau: And thank you everyone for joining us on this latest episode of Word on the Block. I’m Editor-in-Chief, Angie Lau. Until the next time.