Fintech Tsunami: Blockchain as the Driver of the Fourth Industrial Revolution

David LEE Kuo Chuen, Singapore University of Social Sciences

Introduction
When the Internet was first created in the 1990s, no one expected it to have such a great impact.
Blockchain is in a similar position today. In the strictest sense, the term blockchain refers to appended
immutable blocks of information by a pre-determined consensus algorithm. Satoshi Nakamoto (2008)
circulated his white paper on it to a group of Cypherpunks.1 The community was then excited but no one
outside knew that it would be so influential. That paper described how a digital currency created by
cryptography called bitcoin (using blockchain technology) can transfer value without any central authority.

Although Nakamoto (2008), creator of bitcoin, did not use the word blockchain in his seminal publication,
there were a few sentences linked to blockchain).2 The concept of Cipher Block Chaining was first
mentioned by Ehrsam, Meyer, Smith and Tuchman (1976). Bitcoin features are very powerful, but their
implications are neither fully understood nor revealed yet. Nonetheless, blockchain, as one of its
underlying technologies, is now hailed to be the main game changer for the 4th industrial revolution.

The sections to follow in this chapter will discuss Bitcoin as the most popularly-known practical application
of blockchain, the role of blockchain in the new digital economy and the characteristics of a sustainable
blockchain company; and elaborate on the 4Ds, LASIC principles, Hinternet, and the deep business skills
and strategies needed to excel in the blockchain industry.

Bitcoin
After the first Bitcoin block was created in early 2009, the world experienced a revolution that few
understood. Indeed, without many knowing it, the invention of the resultant Bitcoin network – with a
capital B to differentiate it from the small b for the digital currency bitcoin it creates – begun a global shift
just like the Internet did (Lee 2015a and 2015b). Reaching a current market value of over USD40 billion in
2017, Bitcoin has lasted more than 9 years now.

The key reason no entity or person that tried to create a new currency system before was ever successful
is that they operated within the system. The Bitcoin network transformed businesses by defining a class
of business entities that either has no legal status, or is very difficult to enforce a closure when there is
one. Without a collective legal entity status, this particular class of entities now exists in a space that is
outside the jurisdiction of both fiat currencies and legal systems that we know of or operated in.

The reaction of most people when they first heard about bitcoin was almost certainly negative, or with a
sense of confusion. There was a misguided perception that bitcoin was used mainly for money laundering,
or as payments for drugs and pornography. But most also realized simultaneously that the mathematics,
cryptography, system design, and philosophy behind the network were created by a genius or geniuses
who understood the imperfections of the global economic and financial system. Naturally, it appealed to

Electronic copy available at: https://ssrn.com/abstract=2998093

those who were losing faith in the fiat system, and to those who believed that existing financial and
economic systems were biased and functioned to generate wealth exclusively for the wealthy.

The major social-economic contribution of bitcoin was the use of a decentralized filing system and peer-
to-peer network to redefine a world using only open-source software concurrently ran by many users
anywhere in the world. The second contribution of bitcoin was the elimination of the need for a
middleman for the verification of transactions or records. Previously, centralized activity would require
an intermediary to facilitate or verify transactions of goods and services, but this is not required if there
are many copies of a public register with timestamps. The third contribution was the removal of known
identities. With decentralisation, all you need is a public address and a private key to facilitate any
movement of values or digital assets using cryptography. There is no need for personal identity
information – a major headache for financial institutions that need to comply with Know Your Client
regulations.

Digital Economy and the 4Ds

The new digital economy introduces new thinking, particularly the 4Ds (Digitalisation, Disintermediation,
Democratisation, and Decentralisation). As incumbents struggle to hang on to what they have and are
comfortable with, mindset is more important than skillset. This display of inertia prompted many thought
leaders to be forceful in their public speeches, to get the change going. Perhaps the following quotes will
demonstrate the thoughts and attitudes towards innovation in a transforming economy:
1. “It is not the (offline) economy that is in trouble, it is your (offline) business that is in trouble.” – Jack
Ma’s speech (paraphrased from Chinese) to the business community warning that business change
may not be fast enough, against the rise of the Internet and Artificial Intelligence (AI). He sounded the
alarm about disappearance of physical stores and businesses with the introduction of e-commerce
years ago.
2. “Failure is an option here. If things are not failing, you are not innovating enough.” – Elon Musk of
Tesla, in response to the many who believe in processes rather than outcome in the new economy.
The fear of not being able to change has prompted him to conclude that processes are for people who
are incapable of changing the mindset of incumbents.
3. “This is your last chance. After this, there is no turning back. You take the blue pill – the story ends,
you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in
Wonderland, and I show you how deep the rabbit hole goes. Remember: all I'm offering is the truth.
Nothing more.” – Morpheus, the prophetic forerunner character in The Matrix movie, explaining to
saviour-to-be Neo that the Matrix is an illusory world. The two pills are popular culture symbols
representing the choice between embracing the sometimes-painful truth of reality (red pill) and the
blissful ignorance of illusion (blue pill).

Paradigm Switch in the Production Function

The fourth industrial revolution, evolved from digital innovation, has rewritten the entire production
function with emphasis on a different set of factors. In classical economics, the essential factors of

Electronic copy available at: https://ssrn.com/abstract=2998093

production are land, labour and capital. However, the arrival of digital devices, the Internet, and the ability
to harness data changed the landscape of the economy and business. The new economy cares more about
data, time, and capital-raising ability. Let’s examine these factors together.

In the supply chain of e-commerce and online business, land and geographical location are less important
since the computational power server they use occupies a small area and can be located far away in the
digital Cloud. Labour can be replaced by data technology that helps to serve customers better than before;
and if that is not enough, AI and robots can take of mundane and factory jobs.

Machinery and equipment that workers leverage to produce goods efficiently are capital in the old
economy. With the convergence of data technology, computing power, 3D printing, and other software
and hardware; and the long (7 or more) years before reaching profitability, the ability to raise funds
displaces the acquisition of physical equipment as the new essential for businesses. Good fundraisers,
using keen understanding of investment behaviour change, need to entice investments into businesses
with long profit drought in return for exponentially large gains.

There is little point in making distinctions among the ‘old economy’ primary or secondary factors of
production of land, labour, and capital; it is more important to focus on the ‘new economy’ essential
factors of data, time, and the ability to raise funds. This means that any new economy business that is not
investing enough in data technology, computing power, and ability to attract new funds will be irrelevant
in the future economy.

LASIC Principles
As the economy started moving towards a digital-base, with AI, Big Data, Internet of Things (IoT), 3D
printing, and blockchain, research studies were conducted to search for factors that are common to
successful companies. In their studies, Lee and Teo (2015) explore the characteristics of successful
companies such as Ant Financial, M-PESA and Fidor Bank. Ant Financial’s Alipay has close to 500 million
mobile users, and both M-PESA and Fidor Bank have grown substantially in a short time period.

All three companies exhibit the LASIC (Low Margin, Asset Light, Scalable, Innovative, and Compliance Easy)
characteristics (see Figure 1). Attracting critical mass with low margin and preventing competition from
others are essential for these online businesses. The companies that incur substantial capital expenditure
tend to have high depreciation cost. However, riding instead on existing infrastructure such as the Internet,
E-commerce platforms and telecom facilities allows them to operate with a light balance sheet. As a result,
these companies can scale without exponential costs and with existing technology expanded easily to
meet changing demand from adopters.

At the same time, their business models are innovative in searching for underserved and untapped
markets with disruptive, yet inclusive technology to address pain points of customers. Finally, most of
them operate in a compliance friendly environment with government support and are almost unregulated
in some areas of business.

Figure 1. LASIC Principles

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In discussing these models that conform to the LASIC principles, researchers point out that to build a
Hinternet, decentralisation is not a necessary condition. A Hinternet is a virtual or digital space with a
large population of sticky customers such as Alibaba’s e-commerce platform on the Internet. Alipay and
Grab have large LASIC Hinternets that ensure they can sell a wide range of products to the sticky
customers (Lee 2016; Lee & Dula 2016). Blockchain is not needed for building a Hinternet business, but
for sustained growth, the last D, i.e., decentralisation, is needed and thus may involve blockchain.

Decentralisation builds a higher barrier so that monopoly and oligopoly market structures will not take
shape easily. A Hinternet that has grown too large in size may create systematic risk and thus attract
regulation to break it up. With decentralisation, regulation may play a smaller part but the purpose of the
democratisation of information, technology, and services is achieved. Price discovery in a decentralized
environment is an important issue but beyond the scope of this paper.

Satoshism
The timing of the release of the Nakamoto (2008) paper coincided with the global financial crisis. While
the actual identity of Satoshi Nakamoto is not known, Satoshism that embraces decentralized sharing of
immutable data, P2P consensus algorithm, and anonymous access has many followers. The main reasons
stem from the imperfection of the existing financial architecture:
1. Lack of Transparency. Transaction details and fees were opaque, with high costs for cross border
transactions.
2. Lack of Resilience. Fears of potential lack of business continuity by single points of attack, and the
perceived lack of protection of historical record.
3. Lack of Distribution of Wealth. Lack of decentralized and super-divisible money – the smallest unit of
bitcoin is 10^-8 BTC or 1 Satoshi but theoretically, higher precision is possible – that catered to the

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 bottom of the pyramid. There was also a lack of suitable technology to distribute wealth and assets
more evenly over time with more than 70% of the people being excluded from the financial and
economic system.
4. Lack of Individual Control of Privacy. Lack of control over encrypted personal data.

The philosophy of Satoshi is however not without its weaknesses. First, a decentralized network is less
efficient than a centralized one. In terms of transaction per second and latency, a centralized network can
be organized more efficiently. With Proof of Work that is not only computationally expensive, it is also
environmentally unfriendly. With blockchain, storage of data is an issue and each individual block size is
a point of contention. Storing multiple copies is far from being space efficient.

Second, there is a lack of privacy because the public ledger records all transactions. And third, there is a
lack of further guidance from Satoshi as he has faded into the background with the community testing the
boundaries of his creation. The issue of first mover advantage in ownership (No Expiry Date of Ownership)
is an issue for those who believe in intergeneration equity. Bitcoin technology can be hijacked to rule
society rather than serve it by convincing the majority of the users to focus on profit motives and self-
interest rather than the community’s interests.

Blockchain Essentials
A good blockchain should possess the following qualities:
1. LASIC principles
2. Resilience
3. Transparency of transactions
4. Personal control of privacy
5. Enabler for 4Ds
6. Enabler for collaboration of untrusted parties globally
7. Enabler for asset ownership sharing globally

Despite the hype about blockchain since 2015, it is just a new form of database, the special kind that
allows shared ownership across organisational boundaries. There are two types of blockchains: Private
and Public. The differences between them are tabulated in the Figure 2 below. Both types are similar in
design, but worlds apart in use cases (Lee & Ding 2017; Lai & Lee 2017). Whereas in contrast, the
differences between Private Blockchains and Databases (see Figure 3) are similar in use cases, but worlds
apart in design.

Blockchain is a form of distributed ledger with specific distinguishing features that other distributed
ledgers may not have. In particular, the decision to have a blockchain is usually engendered by a certain
degree of distrust among nodes users. Another critical push-factor is the requirement for transparency
for the entire or part of the ledgers. Finally, blockchains are useful if there is a need to ensure that past
records are almost permanent with every node, or made available to every node. Without the need for
improvement of trust and transparency, it may well be more efficient to use a distributed or centralized
ledger.

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Figure 2. Comparing Private and Public Blockchains
Conditions Private Blockchain Public Blockchain
Centralization Semi-decentralized Decentralized
/Purpose Business-to-business Peer-to-Peer
Authentication Authenticated Not-authenticated
Permissions Permissioned Permission-less
Advantages • Support legal entities • Support anonymity
• Higher performance • Higher immutability
• Better scalability • Trustless environment

Figure 3. Comparing Private Blockchains and Databases

Conditions Private Blockchain Traditional Database
Ownership Designed for shared ownership Not designed for shared
ownership
Performance Slower Faster
Scalability Easier and cheaper Harder and expensive
Immutability Append-only Editable

There is a class of very powerful blockchains that records and transfers tokens with value. This special
feature allows blockchain to create tokens in the form of transferable “currency” or “stake”, just like
national currencies and shares in the fiat currency world.

Digital Asset Ownership

The most powerful feature of blockchain is to allow for shared ownership of assets or rights. There has
been a great interest in Initial Coin Offerings (ICO), sometimes known as Initial CryptoToken Offerings (see
Figure 4) and basically an Initial Token Sales (ITS). ICO may sound like IPO (Initial Public Offering), but it
has a totally different structure and almost no legal recourse.

Figure 4. ICO Status Statistics3

ICOs Status Number
Past 139
Ongoing 15
Upcoming 57
Total 211

The Top 10 ITSs (see Figure 5) are successful in that they have raised a substantial amount of proceeds in
the form of Cryptocurrency in exchange for the Tokens being sold. For an ITS to be successful, the founders
or project must have an Online Identity, with a good Standing in the Community (, issue a technical and
other Whitepapers, publish its Technology and Source Codes, conduct a Pre-Sales with clear
Reward/Incentives Structure, transparent with its Use of Proceeds and Valuation, Outline the Governance
Structure, and engage prominent Advisors and Governors.

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Figure 5. Top 10 ITS (as at 15 April 2017)3
Name Amount (USD)
ETHEREUM 18,439,086
COSMOS 16,800,000
WAVES 16,436,095
QTUM 15,664,829
GOLEM 8,600,000
FIRSTBLOOD 6,267,767
LISK 6,150,000
DIGIXDAO 5,500,000
AUGUR 5,133,000
Total 98,990,778

DAO 150,000,000
Total 248,990,778

Unlike shareholding in an IPO, an ITS must specify role of the tokens being sold. In general, there are three
possible roles: user, commodity and debt (Brener 2016). These roles can be summarised as follows:
1. User Tokens (App Coins or Protocol Tokens): access services provided by the distributed network.
2. Commodity Tokens: finance development of the network.
3. Debt Tokens: 'short term loan' to the network, in exchange for interest payments on the amount.

The Token software can create user; commodity; debt; user and commodity combination; or user,
commodity, and debt combination tokens. However, unlike shares, these tokens may 1) have no voting
rights, 2) have not cash-flow distribution, 3) have no legal rights and recourse, 4) have no group decisions
rights, 5) have no shares and debts, 6) have no avenues to remove the management, and 7) be building
user base, investor base or both. We can summarise token rights as Payments, Access, Profit for Fees,
Contribution, Block Creation, and Governance. More than half of the tokens issued have payments and
access rights (discussed in Lee 2017 and Chwierut 2017).

Hybrid Legal or Crypto Structure

Under the Howey four-pronged test of US Security Regulation, an instrument is a security if it 1) involves
an investment of money or other tangible or definable consideration used in, 2) a common enterprise
with, 3) a reasonable expectation of profits to be, and 4) derived primarily from the entrepreneurial or
managerial efforts of others. If a token falls under the definition of security, then security laws and
regulation will apply. So, there are good reasons to approach ITS with care so that there is no violation of
law and regulation. Another US legal question is to determine if a Blockchain is a transfer agent. If it is, a
license is required under the law SEC (1946).

In countries where tokens are not securities, there are four models that have been used to launch an ITS:

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1. Award of Contract. A legal entity (e.g., Pte Ltd) awarded a contract by a client (blockchain) to write the
code for the blockchain, and subsequently have an ICO of the resulting blockchain with tokens.
2. Commodity Sales. A foundation (e.g., Swiss GmbH-LLC) initiates a sale of a commodity (fuel/token)
required to run the blockchain on an open source platform.
3. CODE. Centralized Organized (CO) legal entity spends the tokens collected from the Decentralized
Entity (DE) blockchain ICO and the CO also collects the revenue generated, for example, after the
project of building an app.
4. Plain Vanilla Token Allocation. Tokens are first mined by allocators and allocated via a computer
algorithm that does not specify any specific public addresses to receive funds.

Is ITS & DAO Structure all Bad?

Lior Zysman (2017) argued that ITS has perhaps brought many benefits to the community:
1. Flows of funds are recorded real-time on an open blockchain.
2. The new JOBS Act Title 3, which opens investment in startups to individuals, requires startups to
publish financials once a year; in contrast, blockchain accounting guarantees their investors financial
reporting all year long. The Act also requires businesses to publish a business plan once a year. In
contrast, some ITSs are powered by transparent open-source codes that any machine on a distributed
network can run.
3. Funds that the ITS directs are also published on the blockchain, and the by-laws themselves that
determine the relationship between the ICO participants are embedded in the code.
4. The execution of those bylaws and ITSs accounting do not depend on familiar figures, like the CEO or
an auditor, although the status of humans on the edges of the network or curators has never been
debated in case law and might be replaced using formal verification methods.

Zysman contends that, perhaps for the first time in corporate history, investor expectations – a big
concern for lawmakers and regulators – are being directly met by the ITS code. Communication is key in
selling the token, transparency is essential with no over-promising of product goals or return on
investment. It is best to emphasize that these are experiments and to ensure there is awareness of the
fiduciary duties.

There are many ICO Scams! So, buyers beware. ICOs rank high in terms of Risk and Complexity
Classification, indicating there is a high uncertainty of outcome. As such, these tokens are not suitable for
widows and orphans, speculators, traditional fund managers, and sophisticated investors. Given that it is
an experiment and suited for a learning portfolio that may have zero rate of return, the participants should
be from the community of blockchain, mentors, and angel investors.

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Concluding Remarks

Blockchain is not needed in many use cases where database will do. For sustainability and network effect,
blockchain must scale to serve the underserved. It will scale faster if it is open, engages AI, Big Data, and
IoT.

We need to watch and plug into China, which has mastered the skills of scaling, financial inclusion, and
user experience. The business strategies of combining economies of scales and economies of scope in
Fintech will spill over to blockchain in China with emphasis on financial inclusion and green finance. China
will dominate the blockchain industry because of its size and capital expenditure on research and
development.

Unlike company shares that give voting rights and a share of the profits, Crypto Tokens are just an
entitlement to rights. These are rights to facilitate P2P payments, rights to access and use a network,
rights to share the profits from a crypto cash-flow business model, rights to contribute to a network for
charity or other activities, rights to create a new blockchain or a block of data, and the right to participate
in governance activities. ITS/ICO is a new way to raise global funds in a crypto economy. ITS’s or ICOs are
for those interested in the technology and its associated experiments. An online identity with community
spirit, a good understanding of fiduciary duties, transparent communication, under-promise in technology
goals, no promise of ROI, and assisting communities to serve the underserved are key success factors.

It should be emphasized that the most powerful feature of blockchain is the sharing of asset ownership,
which takes place in a centralized environment that lacks full trust and is in need of democratisation of
information, technology, services, as well as micro ownership. Blockchain will be the driver of the fourth
industrial revolution as it enhances not only the productivity of the system, but harnesses the talents of
an open and inclusive community. There is no lack of capital nor a lack of good technology. But, no amount
of capital or technology can do what blockchain does: enhancing collaboration and enabling distrust
parties working efficiently together in a decentralized and innovative environment. Those powerful
crowdsourcing and harnessing features make blockchain the main driver for the fourth industrial
revolution.

Notes
1. See https://en.wikipedia.org/wiki/Cypherpunk.
A Cypherpunk is any activist advocating widespread use of strong cryptography and privacy-enhancing
technologies as a route to social and political change.
2. See http://ethereum.stackexchange.com/questions/4454/who-coined-the-term-block-chain/4455.
a. On Page 3. “As later blocks are chained after it, the work to change the block would include redoing
all the blocks after it.”
b. On Page 7. "This prevents the sender from preparing a chain of blocks ahead of time by working on
it continuously until he is lucky enough to get far enough ahead, then executing the transaction at
"that moment.

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3. Data extracted from:
https://cyber.fund/radar
http://Icocountdown.com
https://www.ico-list.com
http://iof.hexun.com/2016-07-25/185142280.html
https://en.wikipedia.org/wiki/List_of_highest_funded_crowdfunding_projects
http://icorating.com
https://tokenmarket.net/ico-calendar
https://coinmarketcap.com/assets/maidsafecoin/#charts
http://digitalmoneytimes.com/equinoxcoin-turns-into-a-scam-after-bittrex-ico-despite-coinssource-
rating/
https://safenetwork.wiki/en/FAQ

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