A Study on Governance for Decentralized Finance Systems Using Blockchain Technologies Keio Research Institute at SFC May 22nd, 2020 Table of Contents BACKGROUND AND PURPOSE OF THE STUDY ..................................................................... 2 BACKGROUND OF THE STUDY ........................................................................................................ 2 SUMMARY OF THE STUDY .............................................................................................................. 3 1. RESEARCH AND ANALYSIS OF MULTI-STAKEHOLDER GOVERNANCE ON THE INTERNET (IMSG) ........................................................................................................................ 6 1.1. THE INTERNET, THE COMMUNITY, AND THE PROCESS OF ITS GOVERNANCE ........................... 6 1.2. COMMUNITIES AND THEIR CHALLENGES FROM AN INTERNET GOVERNANCE PERSPECTIVE .... 22 1.2.1. ICANN ................................................................................................................... 22 1.2.2. IGF ........................................................................................................................ 53 1.2.3. Internet Society ..................................................................................................... 58 1.2.4. IETF ...................................................................................................................... 62 1.2.5. W3C ...................................................................................................................... 71 1.3. THE ROLE PLAYED BY THE IMSG ..................................................................................... 78 1.4. MODEL OF INTERNET MULTI-STAKEHOLDER GOVERNANCE ................................................ 80 2. MULTI-STAKEHOLDER GOVERNANCE ........................................................................... 83 2.1. EXAMPLE ARCHITECTURE OF MULTI-STAKEHOLDER GOVERNANCE .................................... 83 2.2. GOVERNANCE OF DECENTRALIZED FINANCIAL SYSTEM .................................................... 87 2.2.1. Use cases ............................................................................................................. 87 2.2.2. Designing Communities to Establish Decentralized Financial Governance ........ 99 3. CONDUCTING MULTI-STAKEHOLDER MEETINGS ...................................................... 129 3.1. MEETING DESIGN AND PREPARATION ............................................................................. 129 3.2. MEETING RESULTS ........................................................................................................ 132 3.3. SUMMARY OF BGIN'S CURRENT STATUS ........................................................................ 136 4. CONCLUSION ................................................................................................................... 137 1 Background and purpose of the study Background of the study In recent years, the progress of FinTech has been transforming the financial industry and markets, and blockchain technology, in particular, has the potential to significantly change the future shape of finance through the transformation of the structure of financial transactions. For example, Joichi Ito, who serves as former MIT Media Lab Director, pointed out1 that although blockchain technology is still in its infancy, with proper verification of the technology, industrialization would advance, and it would eventually play a role in social infrastructure. In order to link the progress of technology to the improvement of user convenience, it is necessary to leverage the pioneering trials and initiatives related to blockchain technology and to respond appropriately when new technology is used in the financial sector, from the perspective of stability of the financial system, protection of users, and Anti-Money Laundering, and Counter-Terrorist Financing. In fact, the crypto asset "Libra" announced by Facebook is a potential threat to the stability of the existing financial system, and the fact that governments have expressed concern and caution about it suggests the need for such efforts. Since 2017, JFSA has been collaborating and working with financial authorities and private sector researchers in various countries to promote research and studies on the potential use and issues of blockchain technology, as well as holding “Blockchain Roundtables2,3.” In these circumstances, Keio University, which reports this research result, participated in the study and held discussions with researchers and developers in other countries and it revealed that when decentralization, autonomy, anonymization, and globalization are used in financial systems ("decentralized financial systems"), the traditional approach of regulating primarily financial institutions might make it more difficult to achieve the objectives of financial 1 https://media.dglab.com/2017/10/02-interview-02/ 2 Yuta Takanashi, et., al. “Call for Multi-Stakeholder Communication to Establish a Governance Mechanism for the Emerging Blockchain-Based Financial Ecosystem, Part 1 of 2.” Stanford Journal of Blockchain Law & Policy. Online: https://stanford- jblp.pubpub.org/pub/multistakeholder-comm-governance (Accessed June 28, 2020) 3 Yuta Takanashi, et., al. “Call for Multi-Stakeholder Communication to Establish a Governance Mechanism for the Emerging Blockchain-Based Financial Ecosystem, Part 2 of 2.” Stanford Journal of Blockchain Law & Policy. Online: https://stanford- jblp.pubpub.org/pub/multistakeholder-comm-governance2 (Accessed June 28, 2020) 2 regulation. Concerning these issues, the roundtables to date have pointed out the need for a multifaceted response to the various social issues that arise as the use of technology progresses, going beyond current laws and regulations, to capitalize on the progress of technology for further financial and economic development in the future. Specifically, at a high-level seminar at the G20 Finance Ministers and Central Bank Governors Meeting in Fukuoka in June 2019, the importance of participation from the various stakeholders (e.g., engineers, businesses, users and academia, etc.) in the decentralized financial system and multi-stakeholder governance ("MSG") was emphasized. It was adopted in the conference's communiqué with the support of other countries. It was also adopted in a communiqué at the 14th G20 Summit held in Osaka in the same month. Based on that background, the purpose of this project is set to deepen the understanding of MSG, which is considered to be necessary to link technological development to sound financial and economic development, and to explore the direction of future efforts that will be necessary. As a result, this project also contributes to the establishment of a conference body applying MSG that will stabilize a decentralized financial system. Parts of this report are based on a paper on a workshop4 that one of the authors attended as part of the activities associated with this report5. Summary of the study The results of this project are summarized below. （１） Research and Studies A comparison between decentralized financial systems and the Internet is often made as an example of how requirements such as decentralization, autonomy, anonymization, and globalization have made it difficult to achieve regulatory objectives. On the other hand, such requirements are also a fundamental feature of blockchain technology, so it is vital to have a better understanding of decentralized financial systems. In particular, as previously stated, 4 Workshop on Coordination of Decentralized Finance (CoDeFi) (2020), In association with Financial Cryptography 2020, Online https://fc20.ifca.ai/codefi/ (Accessed August 10, 2020) 5 Suzuki S. (2020) Multistakeholder Governance for the Internet. In: Bernhard M. et al. (eds) Financial Cryptography and Data Security. FC 2020. Lecture Notes in Computer Science, vol 12063. Springer, Cham. https://doi.org/10.1007/978-3-030-54455-3_17 3 there is an international consensus through opportunities such as the G20 that, in order to realize the sophistication of a decentralized financial system, it is essential for the parties involved to understand the MSG, which is a mechanism to achieve consensus building and system-wide governance. For this reason, the study began by briefly summarizing the role that MSG has played in the development of the Internet. Specifically, the study analyzed 1) interviews with the parties involved in the formation of the MSG from the beginning, 2) involvement in institutions currently operating under the MSG (e.g., ICANN6, IETF7, etc.) and the practice of examining decentralized financial systems in such institutions, and 3) evaluation of the MSG by government agencies and related institutions (e.g., the Organization for Economic Co- operation and Development (OECD), Financial Stability Board (FSB)) operating under mechanisms different from those of the MSG and examining the possibility of cooperation. In particular, we investigated the contribution of MSG to the resolution of social issues brought about by the development of technology, including the Internet, from the perspective of survey analysis. Specifically, this includes technical issues in the development of the Internet (e.g., domain name dispute resolution, countermeasures for IP address8 operation and exhaustion), and efforts to stabilize basic Internet operating technologies (e.g., DNS). Based on our understanding of such examples (successes and failures) of