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Emma Pike
Hello and welcome my name's Emma Pike I am your host for today's hoot nanny and I'm delighted to be talking today with chief owl and legal eagle Mr. Lee Schneider who is the general counsel of avallabs and the co-founder of owl explains.

Emma Pike
And essentially Lee is going to introduce us all to the owl explains tree of web 3 wisdom and we're going to find out what that is all about hello li how are you.

Lee A. Schneider
I'm very well how are you doing Emma maybe I should be the legal owl instead of the legal eagle but ah, there actually is an eagle owl so we could use that? yes.

Emma Pike
Yeahro the Legal Eagle ol yeah yeah, yes, well good I'm well thanks and I'm very much looking forward to our our conversation. So um, shall we dive right in? yes.

Lee A. Schneider
Um, yes, please.

Emma Pike
Good So you have planted this tree and I understand that it has got some branches to guide policymakers thinking about blockchain and web 3 Um, but before we talk about the tree itself. Let me just kick off with a bit of a provocation. Some people say that blockchain is a solution. In search of a problem. What's your response.

Lee A. Schneider
Ah I think those people probably just don't know enough about blockchain and the internet and computer systems. Um, you know blockchains are actually really cool. Because they solve 3 longstanding problems in computer science problems that have been around since the 1960 s ah the first of those problems is how do you get a large number of computers to agree on a common dataset.

Lee A. Schneider
And most of the solutions that existed before blockchain were susceptible to hacks and fat finger mistakes or just simply the hardware stop stop working and and being unable to communicate blockchain solved that problem the second big problem was. How do you establish digital uniqueness. We human beings are very good at using our 5 senses to establish physical uniqueness. So when I pick up my ah red iphone I know it's a red iphone if I show it to you. You see a red iphone. We both. Understand it is physically unique and we use our 5 senses to do that. Maybe maybe we don't lick the Iphone but we use other of our 5 senses to establish its physical, uniqueness. Um but doing that in the digital world establishing. Digital uniqueness was ah was a big issue that computer scientists were busy tackling and then the third problem was once you establish digital uniqueness you need to establish ownership and make those digitally unique items transferable. Um, and so what happened was many brilliant computer scientists were working on those problems including by the way, the founder and Ceo Of Aval Labs Emmon Gunser

Lee A. Schneider
Ah, for many years since the 1960 s and then all of a sudden what happens in 2008 is an 8 page white paper by person or persons going by the name. satoshi nakamoto elegantly solves all 3 of those longstanding problems. Um, so 40 years of Computer Science History all of a sudden gets solved well at least 3 problems of computer science history get solved and so that was pretty momentous and um, what's happening now is that people are iterating on that solution. Um, bitcoin is sort of v one of blockchains first generation that doesn't mean it's not amazing. It just means that people are iterating on those solutions and finding new ways to use blockchains. So not a solution in search of a problem. A solution to 3 hard problems and now we'll see what human beings will build since they've solved those 3 hard problems.

Emma Pike
Okay, excellent. Thank you and so if you were to imagine the future Then what do you think that blockchain having solved these 3 very significant problems. Um, how is it going to make web 3 Kind of better than the the internet that we have at the moment.

Lee A. Schneider
Well, you know first I'll say any time you solve 3 hard problems. You're going to spend time figuring out what to do with those solutions and that's what's happening right now. At aval labs we believe in building a better internet and we see that with a lot of other blockchain projects. Um, the way you build a better internet now that you can establish digital uniqueness now that you can link computers to get a common data set together. Now that you can transfer ownership of digitally unique items. It really opens up all kinds of possibilities and we're seeing it across a wide variety of industries already and you know frankly, that's one of the main reasons we came up with the. Tree of web. 3 wisdom is most policymakers and regulators for a long time have been focused on cryptocurrencies and the very narrow set of what blockchains can do and what crypto assets can be. And so with our 5 principles of the tree. We really hope to expand people's view on what is really going on here and so that's how we came up with the five branches of the tree and then obviously.

Lee A. Schneider
Came up with a whole bunch of leaves for each of those branches and there's probably more than just the leaves that we came up with.

Emma Pike
Great. So um, so this tree has been planted in the soil which is rich with innovation. It's sprouted its trunk and it's got these 5 beautiful branches with as you say with some leaves some fruit. There's all sorts of things on them. Um, let's. Get into ah the five branches just briefly. So um, we'll get into them individually in a bit more depth in a second but can you just outline what the 5 branches are first of all.

Lee A. Schneider
Yeah, absolutely and and by the way just for your description of the tree we should say that many owls are nesting in the tree as well. It would not be a complete tree without some some owls there. Um, the 5 branches briefly are one understand the technology.

Emma Pike
Yeah.

Lee A. Schneider
2 beware of misconceptions 3 classify tokens sensibly 4 enact context-appropriate regulation and 5 think global.

Emma Pike
Great.

Lee A. Schneider
And the idea here is that all of those branches can work together to form good base for policy platforms.

Emma Pike
Great. So let's start with branch number one then which is understand the technology. Why is it important that people should understand the technology and how should they go about doing that.

Lee A. Schneider
Well I think I explain already The technology is revolutionary by solving 3 hard problems but we really also want to understand what those solutions to the 3 hard problems are allowing people to do on the internet. So. Previously asked me the question about what the some of the use cases are and ah we're seeing all different kinds of use cases from things like trading financial instruments to digital identity to tracking and tracing payments. And supply chain to gaming most people by the way think gaming is just for kids until they realize it's a $45000000000 a year industry in the Us and. Um, as a friend of mine likes to say there's a lot of big kids with a lot of money out there if it's that big an industry um to too many other applications we see insurance applications um and many other things being built. And so if you don't understand what the technology is capable of we think that policymakers and Regulators will just lump everything together and that's not what the technology is capable of that's not what people are using the technology for.

Lee A. Schneider
And we really want to make sure that we're not reregulating things that are already regulated just because they're occurring with a blockchain database or dataset as opposed to a more traditional database structure.

Emma Pike
Yeah, so I think that leads us really nicely into branch number 2 which is beware of misconceptions and so first of all, why do you think there are so many misconceptions around. Blockchain and crypto in the whole space.

Lee A. Schneider
I Think one of the main reasons is frankly that bitcoin started everything as a cryptocurrency it was designed to be a currency that existed on the internet and so everybody. Took that to mean that the only use case for blockchains were financial in nature financial instruments in nature So creating more currencies and yeah, maybe we can tokenize stocks and bonds and swaps and futures and other financial instruments. Um, and so I think that's that's the root of the miscond of one of the big misconceptions.

Emma Pike
Great and so but there are more aren't there so we probably don't have time to go into all of the misconceptions. But what are your kind of top 3 bug bears now is your opportunity to set the record straight.

Lee A. Schneider
Well I don't know if I'm setting the record straight but um, look as I said the first one is that blockchain is not just a fintech technology. It's not just for financial instruments and and trading financial instruments. It's really much broader. Than that. Um, another big one is that crypto assets and blockchain are not synonymous. It's true that blockchains facilitate crypto assets and and tokenization is the way that Blockchains Express Data. On their database. But really, you can facilitate all different kinds of things by tokenizing it and so when we look at things like digital identity. For example, we see something that is loosely a crypto asset because. It's digital identity on a blockchain and uses cryptography and is tokenized identity but it's nothing to do with the kinds of crypto assets that most people are thinking about or familiar with and um. Maybe the last one that I'll mention is that decentralization is not necessarily permissionless and public Blockchains. So You can have a decentralized set of computers.

Lee A. Schneider
That are nevertheless, all permissioned to create a blockchain that is permissioned and even private. Um, so we don't necessarily ah need to think of decentralization as sort of. Anybody can join and at any time as long as they have the software Now. There's lots of good reasons for public permissionless blockchains like that and I think I'm personally an advocate for those but there's also really good reasons to have more tailored blockchains. Where the validators are permissioned um for particular use cases.

Emma Pike
Yeah, so just going back to what you were saying a moment ago about all manner of different things can be tokenized and that's a nice kind of introduction really into branch number 3 Which I believe is your personal favorite which is all about classifying tokens sensibly So Why is this one so close to your your heart.

Lee A. Schneider
Um, yes, well I because it taps into the biggest misconception that people have you know people think that blockchains are just about cryptocurrencies or. Tokenizing financial instruments and my sensible token classification which I wrote in um, a couple of years ago it's been through several iterations and you can find it on the owl explains website now and in various other places. Um, really tries to delve into what tokenization is all about and how it can be applied to physical assets how it can be applied to services like concert tickets or legal services. How tokenization can be applied to intangible assets. Um, and by the way when people say intangible assets when lawyers say that you know we we don't really think about what intangible assets are so kind of intangible assets are anything that human beings dream up. Um, like stock is an intangible asset intellectual property rights are an intangible asset. These are examples of intangible assets because they are um properties that humans give to things as opposed to.

Lee A. Schneider
Properties that exist in the physical world. Um, and then I also talk in the sensible token classification system about native dlt tokens that is to say tokens that are inextricably linked to the blockchain that they're built on. Um, and that's an area where I think actually something new has been created. Um and so that's an area where I spend a lot of time talking with policymakers and regulators about what the regulation might look like ah Mika in the ah european union. Is an example of a regulatory regime that tries to hone in on the financial accounting standards board. The fasb recently put out an exposure draft that focuses on those types of native dlt tokens. So we're seeing that being adopted in ah a bunch of different jurisdictions and a bunch of different ways and then the last area that I talk about in the sensible token classification system is stable coins and sort of distinguishing them and trying to define them in a way that makes sense from ah submit that. That makes makes it understandable as to what is trying to be achieved and how it's trying to be achieved.

Emma Pike
So I think you've identified 5 different categories of ah of tokens just right? there. So what is the danger if regulators and policy makers treat all of those 5 categories exactly the same and let's say they treat them all as financial instruments. What's the danger.

Lee A. Schneider
Well, the danger is that we'll end up with lots of absurd results. So For example, right now if you ah collect cards magic the gathering cards or baseball cards or whatever your favorite card collection is. When you have the physical card that is subject to fairly light regulation. Um, if we started treating them as financial instruments all of a sudden. It would be subject to very heavy regulation and simply the fact that. You put trading cards or collectible cards on a blockchain doesn't change their essential nature. Um, and so ah, you know we don't want to reregulate something just because it's on a blockchain. We want to spend time understanding what the essential nature of the thing is.

Emma Pike
Yeah, absolutely and there is as you say no point regulating a whole bunch of things that have actually already been regulated. Um, yeah.

Lee A. Schneider
Or or or not Regulated. You know some of these things are are not regulated or or very lightly regulated when I was growing Up. We had these things called Pet rocks that you could buy. And it was literally a rock that came in a small box on a bed of fake grass and people bought them as collectibles. Um, and there was little or no regulation around that and if people want to collect. Pet Rocks Then by all means they should collect pet Rocks. We don't need to heavily regulate the collecting of pet rocks.

Emma Pike
Yeah, because and this brings us ah neatly into branch number 4 which is all about context so pet rocks and collecting pet rocks is not a particularly risky endeavor and therefore probably doesn't warrant regulation. So Ah so branch Four is all about. Context is that sort of the same as saying that policymakers should regulate the use of a technology rather than the technology itself.

Lee A. Schneider
Yeah,, that's right, you know? So if you think about the token classification there. We're talking about the nature of the Asset. What is the asset or item that's involved. When we talk about Contexts Specific Regulation. We're talking about the nature of an activity. What is the activity or use case to to your point. Ah that that the technology is put to or that the asset or item is put to. And so again when we look at how blockchain implementations are done smart Contract. Implementations are done and other things utilizing blockchains are being done. It's the context that we want to ah the context or the activity. That we want to think about regulating rather than regulating the technology as a technology itself now there may be some situations where we want to regulate particular Technologies A particular way I'm not trying to say that this is. Immutable law of nature. Um, but typically we look at the way a technology is being used the activity that it's being used for um when we're deciding how to regulate.

Emma Pike
Yep, and we have to look at this globally of course bringing us neatly into branch number 5 which is think global um, tell us a bit more about that one.

Lee A. Schneider
Yeah, so for this one really the idea is how can global regulators agree on some basic principles different jurisdictions are going to make different decisions about regulation. For reasons that are um, unique to their populace to the people who live in those jurisdictions. Um, we're not trying to take that away but we do think that because blockchains are part of the internet because the. Everything that happens on blockchain is sort of automatically global in nature if that's what everybody intends that regulators need to sort of come up with some first principles that they that they. Apply in all jurisdictions and we have a couple of examples of those first principles we like market integrity if trading is going on right? There's another example of the context making sense. Um, we like antifraud as a principle. We like disclosure we like privacy. We like operational risk or operational management as as key principles and so having some of those baseline principles that all or most jurisdictions agree on.

Lee A. Schneider
We think are very important so that global regulators can coordinate and collaborate.

Emma Pike
Yeah, absolutely so ah, global coordination is obviously really important. It's easier to say than it is to do um, can you give us some examples of of organizations or or people who are beginning at least to to do this.

Lee A. Schneider
No doubt.

Lee A. Schneider
We see it in a bunch of ways you know? For example, the bank for international settlements has done a lot of work on blockchain they have ah regular reports that come out by the way not all of which I agree with but nevertheless they're working their way through things. And we've seen some really interesting things come out of the bank for international settlements I know that ayasco the international organization of securities and commodities regulators um talks all the time about Blockchain and and the applications. To the types of financial instruments that its that its member regulators regulate. Um, we've also seen frankly the european union take ah a big step forward with Mika and really trying to be a global leader in. The the type of regulation that we talked about in both branches 3 and 4 right classifying tokens and regulating based on the activity or the context. Um other jurisdictions have done that as well. You know we see. Japan actually was the first to have comprehensive crypto asset regulation back in 2016 and we've seen jurisdictions like Singapore and Gibraltar and others come up with comprehensive regulation. Um, and and.

Lee A. Schneider
Many of the principles that we talk about in the think global branch are ones that are incorporated into those regulatory regimes So seeing serious global regulators taking steps to regulate. Based on the ideas in um, the tree and ah is is showing the kind of leadership that we're hoping for.

Emma Pike
Great. Um, so that brings us to the end of the 5 branches and thank you for all of those brilliant insights. What happens now with the tree. How do you plan for it to blossom this spring.

Lee A. Schneider
Well, we hope it continues to grow. We are having a series of our hoot nannies of these podcasts on ah the tree we've got 1 coming up with a commissioner from the Cftc. We have another one coming up with a group ah of leaders of different blockchain and crypto asset related trade associations. We have some ah members of the european commission are going to join us as well. So. Popularize it through a series of hoot nanies. We will also popularize it at the avalanche summit coming up may 3 through 5 in Barcelona. Um, and if you haven't got your tickets then rush to avalanche summit dot com and get your tickets. Um, and. We're also planning to write a bunch of notes and articles about different aspects of the tree so that we can continue to get the message out there.

Emma Pike
So it sounds like there's going to be many many wise owls perched on the the various branches of the the tree of web 3 wisdom. So.

Lee A. Schneider
Absolutely And that's the whole idea behind Owl explains right? We don't think we're the only wise people we want the the tree to be a home for lots of of wisdom and so we're trying to get a whole bunch of those people to collaborate with us.

Emma Pike
Yeah, great. Well I think that we are now out of time that brings us to the end of this session. So um, to all the wise owls out there. Thank you very much for listening and join us next time. When owl explains it's going to be chatting to a policymaker Cftc commissioner mersinger to get her perspective on the tree of wisdom and ah its important five branches. So until then have a great day.

Lee A. Schneider
Um, okay, we came in under half an hour. Well done.