Special Economic Zones for Network States

TL;DR

Public-permissionless blockchains, like Ethereum, can be viewed as ‘Network States’ — decentralized communities that possess their own economic frameworks, native currencies, unique rules, and a shared cultural context. These networks are becoming an ever more compelling part of the emerging economic landscape, but still face significant regulatory challenges that keep them at arm’s length from the wider global economy.

Meanwhile, the traditional economy's approach — private-permissioned networks — often fail to replicate the benefits of public blockchains, leading to high failure rates in enterprise blockchain projects.

Clearly, the blockchain landscape is missing a crucial link to connect old and new economic systems.

In traditional economies, Special Economic Zones (SEZs) like Shenzhen and Dubai have successfully bridged different economic frameworks by enabling the best elements of multiple systems to thrive.

Similarly, Millicent One is a public-permissioned blockchain designed to combine the benefits of public blockchains with the necessary compliance structures that enable it to become the first Digital SEZ for Ethereum — a custom environment dedicated to facilitating ‘foreign investment’ from traditional financial services — expanding onchain economies for the benefit of all.

Public Blockchains As Network States

Public-permissionless blockchains represent a significant shift in trust, governance, and ownership in the digital world. These open networks foster value creation, collaboration, and frictionless economic activity, aligning around cultural emphasis on individual empowerment and collective innovation.

Sometimes conceptualized as ‘Network States,’ these blockchains form decentralized communities with their own economies, currencies, and governance systems, operating with a degree of sovereignty somewhat akin to digital nations with trillions of dollars of ‘GDP’ creation.

However, despite growing institutional interest and heightened political rhetoric, regulators in many jurisdictions are making it increasingly difficult for traditional financial institutions to participate on permissionless chains.

Global Regulators Are Pushing Back on Permissionless Chains

Just this past week, we’ve seen numerous publications from regulators on the subject illustrating these challenges:

• Basel Committee on Banking Supervision: Updated guidelines from the global standard setter for the regulation of banks categorizes stablecoins and traditional digital securities issued on permissionless blockchains as high-risk. This effectively blocks banks from significant tokenization initiatives on permissionless blockchains due to prohibitive costs.
• FINMA: The traditionally crypto-friendly Swiss regulator released guidance for stablecoin issuers requiring the identity of all stablecoin holders to be verified by either the issuing institution or by appropriate intermediaries.
• Qatar Central Bank: Outright banned the use of permissionless networks by regulated entities.

These restrictions stem largely from regulatory concerns about risk management and compliance on permissionless systems, including limited oversight on network operators, potential settlement finality issues, AML/CFT risks, and privacy concerns.

The advantages of public blockchains are evident. However, integrating the traditional global economy, powered by modern Nation States and multinational organizations, into permissionless Network States like Ethereum has proven challenging.

This has prompted traditional financial institutions to try replicating the benefits of Network States by co-opting the underlying technology to replicate existing structures onchain.

This has seldom worked out well.

Private Blockchains Rarely Work

Industry estimates suggest that 95% of enterprise blockchain projects fail.

Notable examples include the clearing and settlement platform built by Digital Asset for the Australian Stock Exchange (ASX) that failed to launch despite 7 years and $170 million of investment, and TradeLens, a DLT logistics platform developed by IBM and Maersk to streamline global trade that shut down due to low adoption rates and resistance from stakeholders to share data on a single, centralized platform.

So, if traditional economies can neither directly integrate into public-permissionless blockchains, nor replicate the benefits of those systems themselves, how can we bring the value of Network States to traditional economies and vice-versa?

The answer lies in something that has already been proven to work with great success: Special Economic Zones.

Special Economic Zones (SEZs)

SEZs are areas within a country designed to overcome bureaucratic hurdles, attract foreign investment, and stimulate growth. They offer numerous benefits including economic incentives, reduced tariffs, and streamlined regulations.

By providing a flexible yet stable environment, SEZs like Shenzhen in China and Dubai in the UAE drive significant economic development, power rapid innovation, successfully integrate local economies into global markets, and act as bridges between multiple stakeholders and economic systems that might otherwise be incompatible.

Public-Permissioned Blockchains as Digital SEZs

While meeting compliance guidelines on a permissionless chain is increasingly difficult, it is entirely possible to do so on a public chain, provided it has the right structure.

Enter public-permissioned blockchains.

These emerging designs offer a promising new path forward for individuals and institutions who want to benefit from the best properties of both traditional and decentralized finance.

Open, transparent, community-focused, and democratic — public-permissioned blockchain designs retain the best characteristics of public chains, adding a system of onchain checks and balances to foster a curated environment that balances innovation with regulation, much as SEZs do for traditional economies, providing the compliance and operational structure regulators demand while preserving the freedoms and privacy users deserve.

The First Wave of Digital SEZs

Millicent One is a public-permissioned Ethereum rollup designed to connect traditional and emerging economic networks.

Connected to the deep liquidity and user-base of the wider Ethereum ecosystem, Millicent One addresses the oil-and-water separation between traditional finance and decentralized finance by acting as a bridge between worlds.

By viewing permissions and decentralization as a spectrum rather than a binary, Millicent One is able to address regulatory guidelines through proactive structures that balance freedom and innovation with the required operational conditions.

Just as SEZs experiment with new governance models and financial instruments, adapting quickly to technological changes and market needs, Millicent One’s ‘Proof-of-Participation’ system provides positive incentives for stakeholder participation and a democratic governance system based on a two-tiered delegation system that creates a council-based variant of the ve(3,3) model used by projects like Aerodrome.

SEZs also offer economic incentives, like reduced taxes and access to exclusive markets, attracting participants with unique opportunities unavailable in the broader ecosystem.

Similarly, Millicent One offers gasless transactions and the ability to hypothecate tokenized real-world assets across a variety of composable DeFi applications in a compliant manner, using a low-friction, privacy-preserving approach leveraging reusable, user-owned identity credentials.

This unique system unlocks the potential for increased returns for investors, new distribution channels for asset issuers, increased demand for novel financial products, and enables the world’s biggest financial institutions to participate in Ethereum’s large and fast-growing onchain economy.

Another great example of an emerging Digital SEZ that connects two economic systems is Inshallah Network, an Ethereum Layer 2 with a custom validator network and staking solution that filters out interest & other haram transactions to create the foundation an Islamic DeFi ecosystem that enables millions of Muslims to access Shari'ah compliant ETH staking and DeFi applications for the first time.

Mitigating Regulatory Concerns on a Public Chain

With the ability to meet KYC/AML requirements, and a structure designed to mitigate the major causes for concern during risk-weighted assessments, public-permissioned blockchains, like Millicent One, offer a promising solution for integrating traditional and digital economies. Effectively acting as Digital SEZs, they can provide the necessary regulatory comfort for traditional financial institutions while preserving the innovation and decentralization central to successful blockchain networks.

Over the next few weeks, we’ll continue to dive deeper into the details of Millicent One, exploring its unique features, governance model, potential impact on economic integration, as well as use cases and benefits for everyone from DeFi degens to G-SIBs.

To be the first to know, visit millicent.io or join us on Twitter/X.

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