Edan Yago is CEO of Epiphyte and a founding board member of the Digital Asset Transfer Authority (DATA). Epiphyte develops systems that bridge the gap between traditional financial networks and cryptofinancial networks.

The views expressed in the article below are Yago’s own, and do not necessarily reflect those of DATA.

Last week was a turning point for bitcoin and distributed cryptographic networks.

It started with the Inside Bitcoins conference in New York, where it became clear that the bitcoin world is truly starting to live up to its promise of creating the most secure financial system in human history.

Up until now, most of the services that we have developed around the bitcoin ecosystem have been centralised services mimicking the those of traditional finance.

The result has been an industry that has lost its users hundreds of millions of dollars in a cocktail of scams, hacks, incompetence and whatever Mt. Gox was. But, the clear message from Inside Bitcoins is that we, as a community, have decided to stop drinking this dangerous frappe.

More secure services

A new generation of services is being launched that is taking advantage of the unique properties of block chain technology to provide user-friendly security that scales. The clearest sign of this is the launch of services taking advantage of multi-signature wallets to secure transactions. Cryptocorp, Bitgo and Greenaddress have all created wallets that will help secure user coins without taking ownership of them.

Bitrated are creating a multi-signature escrow with crowd sourced dispute arbitration and trust rating. The major exchanges are quietly looking at options for both improved public auditing and multi-signature-controlled holdings of user funds.

Several stealth mode companies are working on building massively scalable peer-to-peer trading platforms, distributed on both crypto- and fiat currency sides of the trade.

Additionally, a number of interesting new services are using the block chain to build non-financial services. Maidsafe, for example, have built a secure data storage and communications platform that will reward people for providing hard-disk space and bandwidth with what has been described as ‘proof-of-storage.’

The week continued with the first Annual DATA Conference in Washington, DC. DATA is an organization of the leading digital currency companies and of which I am a board member. Its mission is to help the digital asset industry create a set of best practices to protect users and educate regulators and the public. The conference brought together leading voices from Congress, regulatory agencies, academia and the industry.

Math as law

A major theme of the conference can be summed up with an exchange in which a regulator explained the need for regulation, saying (with some self-referencing irony): “We are from the government and we are here to help.” A member of DATA responded that “We are from the block chain and we are here to help”.

There are two types of technologies that can be used to regulate services and provide consumer protection. The old technology is legislative, a set of bureaucracy-based protocols for insuring trust and good behavior.

The new technology is exemplified by the block chain, software-based protocols for achieving the same thing. Are we ready yet to completely replace traditional governance with software and maths? Of course not.

However, there was recognition from all sides, including representatives of regulatory agencies, that distributed technologies offer a new set of options for dealing with age-old societal problems of incompetence and crime.

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What’s great is that many regulators came to participate at the DATA conference because they grasp this opportunity. More than anyone, they have seen firsthand how hard their job is using their current tool set.

Their best intentions are often stymied by inefficiencies and unintended consequences. Their actions are often criticized because they find it hard to build consensus for rules that are made in a necessarily closed source fashion: proprietary and hierarchical.

One example that they brought up is know your customer rules. In the current system, the only way for a criminal investigator to obtain the information they need is by requiring all financial services to keep extensive identification records and to provide these to government. Encryption and web-of-trust technologies provide an alternative, in which private information can be safe-guarded, while trust is still maintained.

The key thing regulators emphasized was that blunt tools inevitably lead to overreach. More targeted tools can lead to more nuanced solutions.

Less centralized authority

One of the reasons I became involved in founding DATA is that I believe that the ‘regulation debate’ in bitcoin circles has been overly simplistic and polarized. Most of the conversation has revolved around the (ancient) question of “how much regulation do we need?” Lots? A little? None? Do we need new regulation for the block chain? Does the existing regulation apply to bitcoin?

Hidden in this debate is the fact that the block chain itself is a new form of regulation. One based on software principles instead of legal and bureaucratic ones. This means we now have a new option – an escape from the tired old debate of how much central authority we need.

Instead of having to decide between more authority or less authority, we have a third option: less centralized authority, more distributed authority. The best place to showcase this opportunity is the bitcoin space. We can protect users and society as a whole by building smart systems like the ones starting to emerge.

New finance, new society

We have a historic opportunity, to build a new type of society, at once less restrictive, more open and safer for everyone. If over the next few years we do a good job of this, we will revolutionize finance. Finance will stand a shining example for all other facets of human society, which today are organized by traditional methods of government.

Our users are watching, the regulators are watching, the world is watching. Our opportunity is to innovate and improve at the level of the very protocols that safeguard our communities. We can augment the traditional tools of government with a new layer: government of the block chain, by the block chain, for the people.

Disclaimer: This article should not be viewed as an endorsement of any of the companies mentioned. Please do your own extensive research before considering investing any funds in these products.

Software protection and concept of security images via Shutterstock