Emerging TechnologyBlockchainIf you want to understand Blockchain, try to understand Switzerland

If you want to understand Blockchain, try to understand Switzerland

In our latest guest post from Jeremy Epstein, he takes a high-level view of Switzerland’s decentralized governance model, which gives us a sneak peek into what blockchain-based governance may enable at global scale.

Ethereum is the world’s second most valuable cryptocurrency after Bitcoin, with a total market cap of $75 billion dollars. The currency’s founder, Vitalik Buterin, is 24 years old and his net worth is estimated at somewhere between $400 – $500 million dollars.

The reason why the market has ascribed so much value to Buterin’s brainchild is because it represents the potential birth of an entirely new economic paradigm. This new economic paradigm relies on blockchain, or more accurately distributed ledger, technology.

What makes Buterin’s invention so special is that it takes the fundamental innovation of Bitcoin – that you can immediately have total trust in another entity without a third-party vouching for that entity- and adds a powerful layer.

The “smart contracts” that Ethereum enables by virtue of its status as “Turing-complete” means that two entities can conduct business with each other with no prior relationship and with near zero friction in establishing a trusted relationship.

It is a lot to get your head around. The good news, however, is that there is a shortcut to understanding the power of Buterin’s invention by studying something much more familiar: Switzerland.

Crypto Between the Mountains

Whether by accident, with 100% intention, or some combination of the two, Buterin’s choice to base the Ethereum Foundation in the canton of Zug, Switzerland gives us a clue about the future his invention is enabling.

Zug is now known as ‘Crypto Valley’ largely thanks to what has happened with Ethereum. Its formation, however, was catalyzed by a number of local crypto-visionaries, like Johann Gevers, Vasily Suvorov, Søren Fog and many others who saw in blockchains much more than a business opportunity.

They recognized that the technology represented an opportunity for Switzerland to export more than watches, chocolate and banking services. Their mission? Help the rest of the world understand that one of the critical components of Switzerland’s wealth, safety and quality of life is its decentralized operating system. For them, blockchain technology means that Switzerland’s ideals and experience with a “citizen-first” democracy, can be exported and implemented at global scale, while maintaining a deep respect for local preferences.

Trust Through Decentralization

Switzerland is the most decentralized country in the world. It is made up of 26 cantons and half-cantons (akin to states in the US) that retain a huge amount of power to determine their own affairs, with Swiss citizens also asked to vote on relevant national matters several times a year in what is the world’s largest display of Direct Democracy in action.

As in many countries, Swiss taxes are defined and implemented at municipal, state (canton) and federal levels – but unlike most countries, the proportion of total taxes levied at the cantonal level take the lion’s share, thus allowing cantons to effectively compete amongst themselves to attract economic development via a combination of incentives far more efficiently than what its equivalents in other countries can structure.

For example, the canton of Zug has a top tax rate of 10%. Unbelievably to some, this makes it only the 5th lowest in the country.

Because the Swiss put a priority on balancing the budget, which they do every year thanks to a constitutional amendment, and low inflation (.8% in 2017), they can afford to keep taxes low. This creates a strong incentive for investment

But that is just the obvious part of the story. In addition to being decentralized as a government, what the Swiss do particularly well as a society is incentivize the right behaviors and disincentive the wrong behaviors.  They put a high premium on contributing to the network (“adding value” as business people might say) and “Eigenverantwortung,” a German word which means “responsibility for yourself.”

This is exactly what the blockchain enthusiasts and innovators talk about with “asset programmability,” “mechanism design” and “self-sovereign” identity.  The world these tech leaders envision is one where the network, based on fair voting by members of the community (itself a huge topic of what constitutes ‘fair’), does exactly that. In a blockchain-based governance system, the protocol incentivizes the right behavior and punishes the wrong behavior. It’s just that the system of enforcement is the computer network, not the government or the police.

But the Swiss have this down to a science.

Swiss Social Governance Protocols

In Switzerland, if you are going to throw something away from your home, you need to use a special trash bag. Failure to use the special bags results in a steep fine.  The standard trash bag that most Americans buy for their home costs about $0.30 each. In Switzerland, the same bag costs roughly $1.50. It is not hard to imagine how this one rule might change your consumption habits.

Speeding is another example. Go 3 km/h (1.5mph) over the speed limit and it’s an automatic fine that starts at $40 CHF and goes up rapidly. It’s not unheard of to get a $250 fine for ‘crossing a light that had been red for 0.5 seconds’.

Unemployment also has structured incentives. Switzerland’s unemployment rate has averaged around 3.3% for the past 10 years and one of the reasons for that is that unemployment insurance goes for two years, maximum. If you are not a Swiss citizen and you do not have a job after your time is up, you will eventually need to leave the country.

There are also plenty of “community-enforced” informal protocols. Ask anyone who has been “tsked” for jaywalking. It’s not uncommon to see people waiting at “do not walk” signs at 11pm with no car in sight. A New Yorker would walk across and say something like, “what’s wrong with you, man?”

Rules like these abound in Switzerland and following the rules is encouraged and expected. The governance process for Switzerland makes it clear. “If you follow the rules, we will all benefit in terms of wealth creation, value, safety, and security.”

Sound familiar? It should. After all, this is the grand promise of blockchain-based protocols.

The Swiss Work Permit Is the Decentralized System’s Token

Like the founders of decentralized, blockchain-based protocols, the Swiss long-ago realized that the value of the network (in this case, the country of Switzerland) is dependent upon everyone who is able to make meaningful contributions. To participate in a decentralized network, you need a token. In Switzerland, you need citizenship or a work-permit.  Think of the Swiss passport or Work Permit as the “membership token.” As of 2011, 37.2% of the total resident population of Switzerland is made up of people of non-Swiss background.

Once you have a “token,” you now have a “stake” in the network that is Switzerland and it is your obligation to find a way to meaningfully increase the value of the network overall. It is the role of the government, akin to the protocol developers, to make the system as user-friendly as possible.

Many examples abound, but to bring it home, look no further than the Swiss Rail system. Switzerland has not only the world’s most dense railway network, but it is also a world leader in kilometres traveled per person.

What’s more, the Swiss Rail system holds itself to a 3-minute mark to measure ontime arrivals, typically registering a rate of somewhere between 87% and 89%. Judged on the five-minute criterion, the country leads all of Europe as 96.8% of Swiss trains would have been punctual in 2014, compared with 96.7% in Austria and 94.5% in Germany.

What all of this means is people can move around like pieces of value in this decentralized network with minimal friction, a key benefit to removing intermediaries. One might say that the Swiss value “fast transaction and confirmation times.”

What the Swiss have proven is that by decentralizing decision down to individuals and fostering an environment where the government serves the people’s interests over its own, it is possible to create a multicultural, diverse environment for economic growth and mutual defense.

Understanding the Value of Decentralization

In some ways, this is the exact promise and hope of the innovators of the crypto-universe like Melonport and Etherisc, who have chosen to base their operations in Crypto Valley. They are taking advantage of the growing ecosystem of crypto service providers like MME (the premier firm for legal, tax and compliance matters), Lakeside Partners (the premier incubator of blockchain start-ups), and Swisscom Blockchain AG (the premier enterprise enabler of blockchain-based innovation), who have an innate understanding of the value of decentralized entities and thus are uniquely positioned to help them succeed.

All of this is further enabled by the cantonal governments who know that economic growth driven by innovation is the key to future wealth. After all, Switzerland knows a thing or two about wealth creation and preservation.

The key to much of Switzerland’s wealth in the last century was the the Banking Law of 1934, a strict set of rules that forbade anyone from revealing the name of the owners of a bank account. This provided the ultimate in privacy and security, much like some of the privacy coins like Zcash are focused on creating in a decentralized world.

Originally, the laws were helpful to Jews fleeing Nazi Germany and others fleeing oppressive regimes elsewhere as a way to store and protect wealth. After the war, it became problematic, as people could not prove their identity and reclaim their assets. Nevertheless, the bank privacy laws brought money and gold to Switzerland. Much like Xapo uses decommissioned nuclear bunkers in the Swiss Alps to store people’s Bitcoin, Switzerland as a country used their mountains to store people’s gold.

However, in the 1990s, the US applied tremendous pressure to the Swiss to remove these rules and through the Foreign Account Tax Compliance Act (FATCA). Beginning in 2014, U.S. taxpayers holding financial assets outside the United States become required to report those assets to the IRS.

Pressured after the US Department of Justice went after 15 Swiss banks accused of helping tens of thousands of well-heeled Americans to dodge paying tax, the Swiss government retracted its bank privacy laws. The end result is that lot of the money and value left the country to other, more friendly locales, with Singapore being the primary destination.

Now, certain leaders within Switzerland recognize the crypto revolution as a potential export engine of epic proportions. For them, Crypto Valley is not a place, it is an idea that should serve as the model for any place that wants to live free, responsibly, securely, and with prosperity. And they are more than glad to help.

Their support of crypto technology extends to the Federal level, with a new Blockchain Task Force initiative/commission focused on accelerating adoption under way. Top officials are jumping on board as well, speaking out about how critical blockchain is for the country at events like the World Economic Forum in Davos and at the Crypto Finance Conference in St. Moritz, where their Minister of Economy claimed that they wish to go beyond Crypto Valley to become “Crypto Nation”.

Not Perfect, But a Great Model

Switzerland is not perfect by any stretch. They have their challenges like others, even with immigration. Furthermore, the benefit they have gleaned from not having fought another country in a war since 1815, and huge geographic barriers in the form of the Alps help preserve the country’s neutral autonomy.

At the same time, it cannot be argued that they have built of one of the world’s safest, most stable, most prosperous, high functioning societies where people pursue their own interests, but work towards the common good.

This is the ideal that Vitalik sees possible at a global scale.

Spending some time to understand how the Swiss do what they do can help you get a better glimpse of what the crypto-innovator class is trying to build….just without the people in the middle.

 


What does this all mean for marketing?

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You can also check out our other blockchain content here.

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