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The Importance of Trust in a Digital Europe: Reflections on the Sharing Economy and Blockchains

  • Robin Teigland
  • Håkan Holmberg
  • Anna Felländer
Chapter

Abstract

For Teigland, Holmberg and Felländer, the sharing economy offers people new opportunities for value creation in the European Union. With the help of digital platforms, participants in the sharing economy may cut out traditional intermediaries resulting in a cheaper exchange of goods and services. However, a vacuum of responsibility arises in the wake of digitalization, eroding provisions of labor and consumer law. Creating trust in the digital environment is a huge challenge for the sharing economy. The Union can engage more intensively in the digitalization of European societies by promoting economic growth and enhancing the capacity for innovation. The authors consider it essential to develop a ‘digital presence’ to prevent the European perspective on democracy and freedom of expression losing out to global actors.

Keywords

Sharing Economy Blockchain Technology Smart Contracts Bitcoin Blockchain Network 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

In its 2020 Strategy, the European Union describes the importance of actively participating in the digital society. The global market for information and communication technologies (ICT) is rapidly growing beyond €2 trillion, yet only around 25 percent of this demand is fulfilled by European firms (European Commission, 2010). The EU must actively strengthen its role in the development and government of the internet so that the European perspective on issues such as democracy and freedom of expression continues to be ensured. However, in order to become a significant digital player, the EU must establish trust in the digital environment while at the same time it must successfully contend with emerging digital forces that are challenging not only established business models but also the underlying European social model. Basic assumptions regarding value creation and competitive situations along with current regulations are being challenged by globalization, individualization and industry transformations. When existing structures are questioned, new opportunities are also created for EU citizens. The EU has a clear desire to increase value creation opportunities for its citizens, and the question of how digitalization enables this is central to the EU.

In times of change, we tend to stick to the familiar. However, maintaining and protecting traditional industries against the transformative power of digitalization is likely to only slow down economic growth and make the creation of a digital EU difficult. This in turn would make the EU less relevant for its citizens. As with all technological paradigm shifts, old jobs are transformed or made obsolete while new jobs emerge. For example, recent studies in Sweden have predicted that 36–60 percent of the current jobs will be lost during the next 20 years as algorithms and robots are employed to perform an increasing number of tasks (Fölster, 2014). At the same time, new structures for value creation are developing and many of these fall under the umbrella of the ‘sharing economy’.

Transactions within five sectors of the sharing economy—housing, transport, household services, professional services and financial services generated a value of €28 billion in Europe in 2015. Looking forward, estimates have been made that the sharing economy can provide the EU economy with an annual increase between €160 billion and €572 billion. With the help of digitalization, the sharing economy enables the replacement of traditional intermediaries with digital platforms that enable a cheaper exchange of customized goods and services generally among strangers.

Digitalization’s low transaction costs enable more individuals than ever before to consume, produce and utilize existing resources more efficiently. Furthermore, untapped skills that today are far from entering the labor market can be identified and integrated in society. This elimination of intermediaries also results in the risks that were previously incurred by the intermediary to be transferred to the users of the platform. To mitigate these risks, ‘trust’ has been designated as the currency of the sharing economy as trust is the critical factor enabling the transactions of goods and services among strangers. What is trust and how can trust be digitized? One solution receiving increasing attention and investment is the digital technology, the blockchain. This technology is the underlying software for the cryptocurrency Bitcoin, and it has been estimated that around $1.5 billion had been invested globally in blockchain startups as of the end of 2016 (Frost & Sullivan, 2017). Furthermore, the total market capitalization value of Bitcoin and other cryptocurrencies is around $170 billion as of October 2017 with Bitcoin at $99 billion and Ether at $28 billion (https://coinmarketcap.com/).1 This indicates that it is not only startups and venture capitalists that care about the blockchain. This is not too surprising given the fact that the blockchain reduces the need for trust in individuals and institutions through increasing trust in system processes. In a centralized system, the intermediary ensures that process-based trust of the system is maintained. The blockchain allows groups to formalize their processes to reach consensus without a central middle hand. When groups can maintain process-based trust without a central middle hand, new opportunities are created for adapting consensus processes to the needs of different groups, which further enables the continued development of the services the sharing economy can offer.

This chapter focuses on trust and whether blockchain technology can act as a catalyst for the sharing economy in Europe and elsewhere through enabling an increased level of trust among platform users. A sharing economy based on strong trust can create jobs and economic growth in Europe. Below we discuss the development of the sharing economy within the EU before we provide an overview of how trust has so far been digitized. After that, we describe the blockchain and what opportunities it may offer in terms of digitized trust and economic growth. Our goal is to illustrate how the meeting between the blockchain and the sharing economy, two phenomena created by digitalization, forge the conditions for a future Europe.

What Is the Sharing Economy?

The sharing economy is a broad concept that lacks one distinct and common definition. It is sometimes used as a synonym for notions such as the ‘collaborative economy’ and the ‘on demand economy’. One commonly used definition of the sharing economy is that suggested by Sundararajan (2016) as a market where exchanges happen peer-to-peer in a decentralized network. The European Commission states in their agenda from 2016 a more comprehensive definition of the sharing economy, comprising three parts:

It aims […] for business models where the business is enabled by sharing platforms which creates an open marketplace for temporary use of goods or services, often provided by individuals. It comprises three different categories of actors: 1) service providers who for instance share their assets, resources or competences and can be individuals offering services on a temporary basis or service providers who make it a part of their business; 2) users of services; and 3) intermediaries who—through their digital sharing platform—consolidate suppliers and users, which enables transactions. The transactions usually do not mean that the good or the service changes its owner, and they can be executed either with or without a profit-making purpose. (European Commission, 2016a)

The sharing economy is not a completely new phenomenon since people always have shared their assets with others. However, during recent decades, some factors have accelerated the development of a more modern version of the sharing economy, such as internet penetration, IT improvements, easier payment systems and the financial crisis (Felländer, Ingram, & Teigland, 2015). The increase in internet usage together with increased usage of new technologies, such as social media, has enabled individual actors to organize themselves both more easily and faster. For example, public groups on social media organize car rides between Stockholm and Gothenburg on an individual basis. This means that the driver receives a portion of their fuel expenses reimbursed while the traveler enjoys a cheaper journey than through traditional commercial actors. Due to the high number of users on social media, the relatively small market for rides between Stockholm and Gothenburg is able to gather a high enough level of supply and demand to function. IT improvements have also led to the possibility of collecting data, which after statistical processing can be used for recommendation algorithms or dynamic pricing that enables supply and demand to determine the price for the good or service. New IT solutions and decreasing costs for digital tools have also resulted in lower costs for entrepreneurs and small- and medium-sized enterprises to initiate sharing economy startups. Many startups today often do not require more than a laptop and an internet connection in the initial stage.

Easier payment systems have also facilitated financial transactions. A functioning payment system is important, and thanks to improved payment systems, the previously negative attitude against online payment has decreased (Felländer et al., 2015). Users have accordingly been provided with a flexible way to pay for the services consumed in the sharing economy. Thereby, more applications are created since the developer does not have to take responsibility for payment but instead can use already existing solutions and therefore focus on developing their own product. Furthermore, the ability to receive income from alternative sources has also been a driving factor in the sharing economy. Being able to rent out one’s apartment during the day to startups in need of office space and teaching Spanish on web-based services during evenings are only two examples of how individuals can gain alternative sources of income thanks to the sharing economy.

Possibilities and Challenges for the Sharing Economy in the EU

Demographic and global changes will most likely demand that the populations of EU member states work both harder and longer but foremost smarter. In its 2020 strategy, the EU is focusing on smart growth where innovation and technology enable increased value creation in the Union.2 At the same time, more Europeans are gaining access to the internet, which increases the possibility to use the sharing economy’s services. In 2015, 81 percent of households within the EU-28 had internet, compared to 55 percent in 2007, according to Eurostat. Usage of mobile phones has also increased during the last couple of years and, in 2014, every other person in the EU had mobile internet. However, there are great differences between countries. In Luxembourg and the Netherlands, 98 percent of the population has access to the internet while in Bulgaria only 57 percent have access. Mobile connections also differ within the EU; in Denmark, Great Britain and Sweden, three out of four people have mobile internet while only one out of four has mobile internet in Bulgaria, Italy and Rumania, according to Eurostat.

A European sharing economy offers many benefits. The EU’s competitiveness and growth can be strengthened through new sharing economy business models and more flexible work forms. The sharing economy lowers thresholds to the labor market and could increase the matching of labor supply with demand. The development of the sharing economy is most advanced in the local service sector. New business opportunities as well as new types of cooperation between traditional actors and actors in the sharing economy are created. For consumers, the sharing economy leads to an increased supply, reduced costs and new, even individualized, services. In addition, it can result in a more sustainable community, thanks to a more efficient use of resources. However, while the EU states in its European Agenda for the sharing economy that 52 percent of the EU population in 2016 knew about the sharing economy’s services, only 17 percent had used these services at some time (European Commission, 2016a).

To guarantee user rights, both in the role as a consumer and a producer, actors within the sharing economy are attempting to create various self-regulating functions, often through the form of online rating systems, screenings and digital/physical interactions between the different actors participating in the transaction. However, the question is whether this self-regulation is sufficient to protect the users or if the EU and its member states must create supplementary regulations. The sharing economy has, for example, been criticized for flaws in the security consumers and providers are being offered. Transactions take place peer-to-peer, so, for example, how is a landlord supposed to trust that the guest will not destroy their home, and how is the guest supposed to trust that the description corresponds with the actual house or that the key even fits the lock?

Furthermore, a hotel has regulations regarding fire security that apartments do not necessarily have. Who shall be responsible for the safety in the digital transaction: the individual, the platform or the EU and its member states? Questions regarding responsibility and integrity are further complicated when sharing economy principles are combined with what is called ‘the internet of things’. Who is responsible for a car accident caused by a self-driving car shared by a group of people and controlled by artificial intelligence? Shall the responsibility be put on the group of people sharing the car, the person who programmed the car or the other cars involved in the accident? Integrity can be threatened since the more people share things, the greater is the risk of unauthorized persons gaining access to sensitive information, a risk that will only increase as more things are connected to the internet.

Regarding risk management, it is still unclear as of the beginning of 2018 as to whether it is the platforms or the users who are responsible for the transaction and the associated transfer of information. Most of the relevant regulations regarding contractual liability are regulated by the EU member states. When a platform should take over the responsibility of a transaction depends on multiple factors, among others its control over the user’s transactions. This opens up for increasing responsibility being given to the user. The new distribution of responsibility will not only affect the relationship between user and company but also between user and legislator. Today’s consumer laws, which have been created to protect the consumer at the expense of the company, no longer function in the sharing economy of peer-to-peer transactions. How these risks shall be addressed when the consumer undertakes more and more responsibility is to a great extent an open question.

Platform owners see themselves as the middle hand between supply and demand, not as an employer. This makes the lines between consumers and suppliers, employees and self-employers, and professional suppliers of services and private individuals being erased. Sharing economy activities therefore often end up in a gray zone outside national welfare systems. For example, salaries can be auctioned down to unreasonably low levels when there is high unemployment due to the lack of income insurance for the employees. At the same time, platforms make some limitations in their user agreements, and, in some cases, they even determine the price of the good or service being transacted. Management of the transactions is also handled by the platform since there are some requirements a service supplier must fulfill. For example, Uber, the internet-based service for orders and payment of taxi rides and carpools, has detailed instruction videos on how their drivers shall behave. Thereby, in some sharing economy services, middle hands can be considered more similar to an employer than only a matching service.

If one chooses to see the middle hands as an employer, then there are several shortcomings for those supplying the goods or services to the platforms. For instance, these individuals do not have the same means with which to negotiate their rights as those within existing labor unions have. On the other hand, the relationship between service supplier and middle hand is not the same as an employer-employee relationship since a service supplier can offer their services on many platforms at the same time. For example, an individual can rent out their apartment as an office during the day while they drive their car providing transportation or running small errands for others before finishing the day cooking dinner for someone. Having these many jobs on the side makes the relationship between the employer and the employee even more complicated. Even immaterial rights are affected by the sharing economy. When goods and services are shared, so is information. This exchange of information not only includes collaboration but also the creation of new companies, which demands new requirements for the handling of immaterial rights. The software industry has increasingly started using licenses such as the Creative Commons license or the GNU General Public license that facilitates the handling of immaterial rights in an economy where information is increasingly seen as shared property.

Self-regulation within the sharing economy must also be studied in terms of what consequences might arise if the self-regulating function does not work. For example, at one end of the scale, if an ambulance service were to be based on a sharing economy model, trust in the traditional licensing of the ambulance service (e.g. equipment, education, etc.) would be replaced by trust in the platform by the peers. In this example, the suitability for being an actor in the sharing economy is low since the risk is high that the service may not be provided at a satisfactory level. At the other end of the scale, however, are services within the local service sector, such as lawn mowing services, which are more appropriate for self-regulation. Then there are numerous industries, such as the financial and hotel industries, with a medium to high risk that the service does not work appropriately, and, as a result, where clarity around insurance and a more traditional regulatory framework are needed.

Taxation within the sharing economy has also been a hot topic for debate. Who or what is taxable? How should taxation be performed on platforms that create their own currency or enable bartering, such as when someone is invited for dinner in exchange for the promise of two bottles of wine? Taxation is also interrelated to the question whether a service is professional or not. Within the EU it is not determined by legislation when an individual exactly shall be considered as a professional supplier in the sharing economy, that is, how does one separate professional services from services provided by individuals for individuals? Different criteria are used within EU member states, for example, how one defines the compensation for the service or a threshold value for how much income one can generate. The difficulties of control within the sharing economy and the separation of taxation on business, service or capital leads to yet another obstacle for effective taxation in Europe and elsewhere.

Within transportation, EU member states have tackled the legal framework around, for example, Uber in different ways (see Tables 1 and 2). The perception of maturity for self-regulation is likely to vary in different member states, and in time, simultaneously as different types of insurance solutions are introduced. The Swedish Taxi Inquiry is interesting in this context since it stated that taxi identification is necessary as a control function for the taxi business (SOU, 2016 , p. 86). At the same time, the investigation did not want to generalize the requirement of identification and concluded that the formulation of a legal framework must be decided from industry to industry. Estonia is one of the EU member states that has most actively facilitated the development of the sharing economy. Various actors within the sharing economy have been given support from the Estonian government. Estonia’s Prime Minister, Taavi Rõivas, argued in February 2016 that the business models that are prized within the sharing economy not only lead to increased competition but also are well suited for a sparsely populated country such as Estonia and create incentives for people to become entrepreneurs.
Table 1

Examples on how transport services are organized within the sharing economy

 

Centralized carpool

Decentralized carpool

Non-commercial carpool

Decentralized transport networks

Centralized transport networks

Example

Car2go, Drive-Now

Drivy, Gomore

Blablacar

UberBlack, Lyft, (UperPOP)

Taxi companies

Ownership

Platform and vehicles owned by same actor

Platform and vehicles owned by different actors

Platform and vehicles owned by different actors

Platform and vehicles owned by different actors

Platform and vehicles owned by same actor

Operators’ profit interest

Powered by profit

All actors have possibility to profit

Platform has a profit interest but not the owner of the goods/services

All actors have profit interests

Business is run with a profit interest

Platform control over relationship vehicle owners with consumers

High

Low

Low

High

High

Communications environment

Digital and physical

Digital and physical

Digital and physical

Digital

Physical (digital communication occurs)

Advantages

Integrated in local transport network: client acts as driver

Already existing fleet of vehicles is used and all actors can have profit interest

Eludes regulations when driver does not have profit interest

Already existing fleet of vehicles is used and all actors can have profit interest

Business is distinctly regulated

Disadvantages

Cost for fleet of vehicles must be carried by one central actor

Service ends up in gray area regarding current regulations

Lack of profit interest makes platform less attractive for drivers

High control of drivers and profit interest often leads to direct conflict with legislature

Legal framework complicates possibility to find drivers. Central actor must finance whole business

Source: SOU (2016, p. 86)

Table 2

Overview of current legal framework regarding transportation services in the sharing economy

 

Regulations directed toward the individual

Regulations directed toward the platform

Examples of tax regulations

– Manual declaration of business (Finland, 2018)

– Chargeable information is sent directly from platform to tax authority (proposal, Estonia, Lithuania)

– Electronic tax receipt (proposal, Estonia)

– Platform responsible for tax payments (proposal, Belgium)

– Platforms’ legal person must have a national registration number (Finland, 2018)

Examples of regulations intended to strengthen consumer safety

– Access to photo of driver and vehicle registration number before journey begins (proposal, Estonia)

– Background check and language test of driver (Finland, 2018)

– Registration of driver’s fingerprints (Austin, Texas)

– Platform responsible for background check and education of drivers (Lithuania)

Examples of income ceiling

– Great Britain allows tax reduction of 2000 GBP with exception of Uber

– Business exempted from VAT and tax rate of 10 percent until €5000 (proposal, Belgium)

– Non-professional income from sharing economy businesses taxed with 10 percent until €10,000 (proposal, Italy)

 

Examples of registration requirements

– Both vehicle and driver must be registered (Finland, 2018)

– Unlimited amount of driver’s licenses at company level (Finland, 2018)

– Digital platforms must be registered with tax authorities (proposal, Belgium)

Examples of other forms of limitations

– Driver must be insured until USD one million (Massachusetts, USA)

– Pre-order requirements of travel (New York, USA)

– Forbidden to pick up passengers at airport (Massachusetts, USA)

– Forbidden to raise prices during instances of temporary increases in demand (Massachusetts, USA)

– Transparency on how prices are calculated (proposal, Estonia; Finland, 2018)

Examples of different actions meant to simplify sharing economic activity

– Individuals with income beneath €5000 do not have to register for VAT taxes (proposal, Belgium)

– Taxi insurance not necessary (Massachusetts, USA)

– No limitations on platform for pricing (Finland, 2018)

Source: SOU (2016, p. 86)

The sharing economy is based on the fact that people can accomplish a significantly higher number of transactions than before. A transaction cost can be explained through the information, administration and follow-up needed for a transaction to be conducted. Many platforms actively work with multiple information services for its users to reduce transaction costs. For instance, Swedish Blocket gives people living in Gothenburg who are interested in purchasing a sofa access to qualitative information instead of having to look for a second-hand advertisement or go to a flea market. Other platforms use reviews and grading to enhance information for the user of the services offered, all in order to reduce the cost for the user to find the necessary information for the transaction.

Sharing economy platforms also work on lowering the transaction administration costs. For example, Uber automated the payment process and removed the need of the customer to manually inform the driver of his position or destination, simultaneously as it provided the customer with direct information on the estimated time of arrival. A technical solution that reduced the number of steps in the transaction with decreased administrative costs is the result. To make sure that all parties hold their promises is an expensive and ceremonious process. Sometimes the parties have entered an agreement without really understanding what is required by them, which further complicates the follow-up. Follow-up is expensive, particularly in complex transactions. The platforms also try to simplify the follow-ups with the help of technical innovation. Finally, platforms are also trying to press transaction costs by creating trust around the transaction moment.

Trust in a Digital Environment

Trust is one of the most complex concepts and has been researched extensively across disciplines. Luhmann (1979) describes in his book, Trust and Power, that trust is a collective attribute that emerges as different parties interact while Bicchieri and colleagues develop the concept of trust at the individual level and define it as ‘a disposition to engage in social exchanges that involve uncertainty and vulnerability, but that are also potentially rewarding’ (Bicchieri, Duffy, & Tolle, 2004, p. 286).

Trust can be seen as a measure of confidence or belief that the other party will refrain from opportunistic behavior and behave in an expected manner (Williamson, 1993), thereby fulfilling the trusting party’s expectations without exploiting its vulnerabilities (Pavlou & Gefen, 2002). Trust enables relationships that one can neither completely predict nor control (Luhmann, 1979), and without trust, uncertainty would lead to paralysis among people and their society.

With the rise of digitalization, individuals are now able to interact and engage in online social exchanges regardless of distance and any previous relationships. For example, digitalization has enabled virtual teams and organizations, crowdsourcing, e-commerce and, more recently, the topic of this chapter—the sharing economy. However, these online exchanges are generally characterized by a high degree of transaction complexity and uncertainties, giving rise to the need for trust as an enabler (see e.g. Friedman, Kahn, & Ho, 2000; Jarvenpaa, Tractinsky, & Saarinen, 1999; Ratnasingham, 1998).

A considerable amount of research has been conducted on trust in e-commerce transactions, in many ways a forerunner to the sharing economy. The lack of trust in web providers has been found to be one of the main reasons individuals do not conduct online transactions (Hoffman, Novak, & Peralta, 1999) while perceived risk negatively influences an individual’s intention to purchase (Jarvenpaa et al., 1999). For one-time transactions, the existence of trust between parties has been found to be particularly important (Gefen & Straub, 2004) with antecedents to trust being the individual’s disposition to trust, that is, a general propensity to trust other parties that can influence an individual’s initial belief (Jarvenpaa et al., 1999) and familiarity with the website (Gefen, 2000). Even aspects such as nationality influence digital trust. A study of EU’s consumers found that while 61 percent of consumers feel safe when purchasing online from a retailer within their country, only 38 percent feel safe when they purchase from a retailer from another EU country than their own (Eurobarometer, 2014).

The research on e-commerce has further revealed that the concept of trust is multidimensional. For example, auction sites such as eBay and third-party aggregators such as Amazon marketplace have led researchers to distinguish between trust in the individual sellers and buyers and trust in the third-party platforms and intermediaries. One of the more interesting findings of research by Hong and Cho (2011) is that consumer behavior in an online marketplace is largely determined by their trust in the well-established, trustworthy intermediary and not by their trust in the individual sellers doing business in the marketplace, that is, trust in the platforms and intermediaries is more important for users than trust in the individual sellers on these platforms. Researchers suggest that this is because intermediaries govern the entire transaction process through a set of rules and structures—communication between buyers and sellers and financial transactions (Hong & Cho, 2011; Pavlou & Gefen, 2002).

This trust in the intermediary platform is a form of institutional trust, which may be the most important mode of trust in business environments that lack familiarity (Pavlou & Gefen, 2002). Institutional trust can be built through structural assurances, which can provide guarantees or safety nets, for example, escrow services, credit card guarantees, legal recourses and regulations (Pavlou & Gefen, 2002; Shapiro, 1987). Turning to the sharing economy, researchers argue that building and sustaining trust in online sharing economy transactions is more complex than in traditional forms of e-commerce due to a number of factors (Hawlitschek, Teubner, & Weinhardt, 2016; Möhlmann, 2016). Among them is the fact that a large number of transactions tend to be one-off transactions among private individuals who are merely coordinated through an intermediary platform, thereby increasing the number of parties involved in all transactions (Hawlitschek et al., 2016; Möhlmann, 2016). Second, even though the matching occurs online, the transaction can occur offline in physical environments, often leading to a social component that cannot be governed by the platform since the transaction parties interact directly, for example, the renting of a room (Möhlmann, 2016). Third, in many cases the object being transacted differs, that is, merely accessed, used and returned and not purchased—a shift from owning to accessing shared goods, leading to the transaction being associated more with services than goods (Bardhi & Eckhardt, 2012; Möhlmann, 2016) and to potentially more interactions between the parties.

Due to these complexities, trust has even been labeled the sharing economy’s ‘currency’ (Botsman, 2012). Hawlitschek et al. (2016) have outlined a conceptual model that differentiates between three substantial variants of trust: trust toward peers (interpersonal), trust toward the platform (institutional trust) and trust toward the product/service underlying the transaction.

Many platform providers in the sharing economy today have developed extensive systems designed to build interpersonal trust, institutional trust and product trust. For example, both suppliers and users are able to review and rate one another and their products (e.g. Airbnb renters and owners) while some platforms enable suppliers and users to gain different status levels (e.g. Airbnb superhost status), as well as to verify themselves through either uploading personal IDs or connecting their identities to social network accounts such as Facebook or LinkedIn. Structural assurances in the forms of escrow services, guarantees and insurance are also quite prevalent, as well as various measures to ensure privacy protection, transaction security and transaction integrity, which have proven valuable in building trust online (Wu, Hu, & Wu, 2010). These structural assurances can serve to strengthen interpersonal trust due to trust transference, that is, when a supplier does not provide any structural assurances but is associated with a platform that builds trust through structural assurances, then trust in the platform is transferred to the supplier (Stewart, 2003).

Despite these extensive measures, limitations to trust-building, such as information reliability, have been found in online environments. For example, users may artificially inflate the trustworthiness of others when writing reviews or giving ratings because they may be friends or because they may not be willing to write negative comments in fear of retribution due to the public nature of the platform (Lauterbach, Truong, Shah, & Adamic, 2009). This need for trust in the sharing economy has led to a search for new technological solutions. One such technology is the blockchain, which is the underlying software behind the controversial cryptocurrency Bitcoin.

The absence of physical interaction during a transaction makes the ability to build trust between strangers more difficult. The number of potential individuals involved in sharing economy transactions as well as the individuals’ limited experience with the various sharing economy platforms further makes the process of building institutional trust difficult. The blockchain holds promise to resolve this situation as it goes beyond the three forms of trust discussed here: interpersonal, institutional and product to system-based trust in which individuals put their trust in the strict formalized and transparent processes used to gain consensus in the underlying system.

Can Blockchain Technology Increase Digital Trust?

In October 2008, an individual or group of individuals under the pseudonym of Satoshi Nakamoto published a white paper on the internet that presented for the first time the idea behind a fully functioning blockchain (Nakamoto, 2008). The paper describes a network of computers wherein every computer has an identical copy of the network’s transaction history, that is, a distributed ledger. In order to perform a transaction, a user informs all computers in the network about the pending transaction. The computers verify that the user is the rightful owner of the assets that are to be transacted and, if verified, all copies of the network’s transaction history are then updated to include the newly accepted transaction. The true innovation of Nakamoto’s paper lies in its solution to how a network of independent computers can reach consensus with respect to its transaction history. Users of the network let their computers compete in solving a very difficult cryptography problem. The first user to solve the problem enforces their version of the transaction history onto the remaining members of the network. A user’s possibility to change the transaction history is, therefore, proportional to the amount of computer power that the user controls. However, computer power is not free and in order to compensate users for their work and expenses in reaching consensus, most blockchains are equipped with a digital currency that is used to reward those who solve the cryptography problem.

A shared transaction history also offers the possibility to implement smart contracts on the blockchain, a concept developed by Szabo (1997). Smart contracts offer networks a digital formalization of more complex relationships as opposed to simple monetary transactions. The contract is a set of instructions that enable a blockchain to execute certain actions based on conditions specified in the contract. The fact that the contracts are written in code means that, in theory, they can have the same functionality as other software applications. The fact that a contract has been verified by a blockchain means that the network has reached consensus concerning the state of the contract. For example, in our traditional system if a car is rented out, a contract is written. If needed, this contract can be evaluated in a court of law. In this case, a judge performs the process of reaching consensus on behalf of society. Whenever a medication is prescribed, a doctor performs a consensus process of who is eligible for which medicine. Blockchains offer a reliable way to reach consensus, which creates trust within a community and in its digital environment, which is a major reason why blockchains are considered to be such a promising technology. However, the term ‘contract’ can be misleading, and it has been pointed out that smart contracts primarily aim at enforcing contract rules while not settling contract breaches (Werbach & Cornell, 2017).

In a blockchain network, all nodes have access to all information. This architecture enables nodes to come and go without affecting the system. Also, in order to eliminate the network, all nodes have to be eliminated. However, the fact that all nodes have access to all information enforces the need to encrypt sensitive user information. There are concerns about privacy protection in blockchain networks. For example, in the context of Bitcoin, analyzing the transaction history has been shown to offer possibilities of identification (Fleder, Kester, & Sudeep, 2014). The possibility to identify users turns blockchain-stored data into personal data and, as such, falls within the scope of the general data protection regulation (GDPR) (European Parliament & the Council, 2016). This could cause several problems since the GDPR enables users to demand that their data be deleted. This, in turn, would bring into question the immutability of a blockchain’s transaction history. Furthermore, the immutability of the transaction history has not yet received a legal interpretation. This creates uncertainty concerning blockchain-regulated ownership. The possibility to edit the transaction history is often connected to the amount of computer power that the user is able to offer the blockchain network.

There are three overarching types of blockchain protocols that have been developed to achieve consensus: ‘proof-of-work’, ‘proof-of-stake’ and ‘proof-of-authority’. Consensus protocols that are based on computer power are called proof-of-work protocols. The possibility to edit the transaction history can also be connected to a user’s exposure toward the network’s digital currency, and these protocols are called proof-of-stake protocols (BitFury Group, 2015). Proof-of-stake protocols create a more cost-efficient consensus mechanism. However, it is easier to manipulate the consensus process either by bribing or by simply being a large stakeholder (Bentov, Gabizon, & Mizrahi, 2016). The third consensus protocol is proof-of-authority, where a predetermined number of members are in charge of forming network consensus. These networks are called ‘private blockchains’ and are considered easier to regulate due to the limited number of users that can edit the transaction history. A common way to compensate nodes that perform the work necessary to reach consensus are transaction fees as well as the creation of a newly minted currency. Bitcoin has a predetermined number of coins, which makes Bitcoin a deflationary network. However, there are also inflationary networks as well as blockchain networks without a cryptocurrency.

The architecture of a blockchain is of importance to the EU since it affects both economic and regulatory activity. Is it possible to regulate a completely open and distributed blockchain? Furthermore, how will the economic activity be affected by a deflationary compensation mechanism? Closed blockchains are considered easier to regulate; however, they could also jeopardize democratic values as well as trust. Bitcoin is the oldest blockchain and has an open architecture, wherein a user’s possibility to edit the transaction history is weighted with respect to computer power. Ethereum is also an open blockchain and has a similar architecture to Bitcoin. However, Ethereum implements a more advanced programming language than Bitcoin, which makes it more suitable for smart contracts. There are several blockchains that are already being developed and Table 3 provides an overview of some larger blockchain initiatives.
Table 3

Overview of different blockchain actors based on platform access and transactions processed by the platform

 

Who do I trust to maintain a truthful record?

Central authority

Group of known actors

Group of some known actors

No one

What kind of relations are regulated by the platform?

Ownership of on-platform assets

Central Bank, Commercial Bank

R3CEV

Ripple

Bitcoin

Ownership of off-platform assets

Custodian Bank

Hyperledger

Ripple

Colored Coins, Counterparty

Obligations and rights arising from agreement

Clearing House

Eris

Ripple

Ethereum

Source: Richard Gendal Brown, R3CEV

Blockchains and the EU

At only nine years old, blockchains are a young phenomenon but are being rapidly developed, often in sectors that are central to the EU. For example, the technology could potentially improve healthcare systems due to its use of encrypted communication. Blockchains could also be used to improve auditing as well as increase financial participation within societies due to low entry barriers (European Parliament, 2016; UK Government Office for Science, 2015). Transparency in public decision processes can be improved and, as a consequence, increase citizen trust in public institutions. Smart contracts are thought to improve the protection of critical infrastructure against cyberattacks. Also, reaching the ‘5 × 5’ goal of reducing global transaction costs to under 5 percent within five years is expected to be improved through the blockchain technology. The large gap between expected and actual sales tax revenues within the EU could also potentially decrease with improved economic control (European Parliament, 2016). One of the biggest challenges in reaching the EU 2020 goal of further innovation is to improve as well as simplify regulations relating to patent and copyright laws (European Parliament & the Council, 2013). At the same time, blockchain-based companies are offering customers the possibility to upload files on the blockchain in order to get a time-stamped proof of ownership. This time-stamped document can be used in future disputes concerning immaterial ownership. Furthermore, organizations are offered a complete and unified transaction history, resulting in new opportunities for improved auditing and accounting. For example, the ‘Big Four’ professional consulting firms Deloitte, EY, PwC and KPMG are all early adopters of the technology (NEWSBTC, 2017). Blockchain technology is even used to improve digital identification by companies like Cambridge Blockchain LLC, which is developing an identity software with several leading global financial institutions (Medium, 2017). The possibility to implement a European document of identification would further strengthen the European digital market. This single document could potentially replace many of the passwords that people use today and could potentially increase digital security within the EU.

There are several blockchain companies actively seeking to further develop the sharing economy. For example, some companies are developing solutions for the distributed storage of files, where ordinary persons can rent out available disk space, offering a storage solution that is often cheaper than their traditional equivalence. The distributed architecture offers completely new ways of value creation for European citizens while also offering consumers an alternative to established producers. There are several examples of blockchain companies trying to increase trust in the sharing economy. For example, one blockchain-based company is working to solve the problem of insurance companies that are not insuring third-party players in the sharing economy and another is developing digital locks controlled by a blockchain with the goal of becoming the future infrastructure of the sharing economy. Blockchains could also connect different services with each other, thereby making trust gained in one platform accessible in another platform.

Allianz, one of Europe’s largest insurance companies, has already started to use smart contracts to improve their settlement processes. However, when smart contracts are implemented in more complex situations, the EU will have to deal with the ever increasing complexity problem. The increased digital trust that blockchains are believed to generate can quickly disappear when smart contracts become more and more dependent on organizations and experts outside the control of the blockchain. This complexity problem is considered to be one of the biggest challenges that blockchains face today and is further highlighted by the smart contract’s lack of remediation. For example, Werbach and Cornell (2017) point out that present legal systems will probably see an increase in the demand for remediation due to an increased use of smart contracts. This will require the EU to develop a deeper understanding as to how blockchain technology is used and what functionality it fulfills.

While blockchain technology enables increased economic activity as well as a more efficient bureaucracy, the technology also offers new opportunities for money laundering and other forms of criminal activities such as financing terrorism. This has encouraged the Financial Action Task Force (FATF) of the G7 group to recommend that all EU member states put the same regulatory demands on currency exchanges that deal with digital currencies as they do on those that deal with fiat currencies (FATF, 2015). The European Commission also recommends that virtual currencies be included in existing directives concerning money laundering and the financing of terrorism. Those that control access to digital currencies should be considered responsible and be treated as existing financial institutions (European Commission, 2016b). However, the European Banking Authority points out that including digital currency exchanges in the present regulatory framework forces those exchanges to obtain separate permission for each country where their services are offered (European Banking Authority, 2016). This would lead to large administrative costs since digital currency exchanges are global actors. The European Parliament has noted in resolution 2016/2017 (INI) that too harsh a regulation could jeopardize the development of blockchain technology. At the same time, regulation could quickly become necessary since the technology is implemented in critical infrastructure.

The EU sees several opportunities with blockchain technology. But how active are the different member states and what role should the EU play in this process? The UK and The Netherlands are the two countries that invest the most in blockchain technology (Hilerman, 2016). Both countries have a well-developed financial sector, which could explain their prominent position. Since 2008, Estonia has been storing medical records with the help of blockchain technology with over a million citizens now able to store their medical history on a blockchain. This is considered to increase patient safety as well as reduce medical fraud (Aru, 2016; Palmer, 2016). Estonia has also shown interest in launching their own digital currency called estcoin (Korjus, 2017). Poland has a national digitalization plan that describes a willingness to improve financial security through blockchain technology (Kastelein, 2016). The German-based company, BlockCharge, is working on a blockchain-based solution for electricity distribution in the context of electric cars (Tual, 2016). Sweden has explored the possibility of using blockchain technology in registering land ownership in a collaboration between the Swedish government and the companies Chromaway and Kairos Future (Kempe, 2017). Bitcoin is highly volatile and the price can often change between the time of order and the time of purchase, and Safello, another Swedish company, is an example of a financial service that enables their customers to lock the Bitcoin price at the time of ordering in order to reduce the effect of Bitcoin’s volatility. However, if a user decides to use Safello, they need to verify their identity before they can purchase Bitcoins. This demand of identification is in line with the regulatory framework proposed by the European Commission (European Commission, 2016a). However, legal demands in a digital context are often hard to enforce and there are already various services, such as mixing services and tumbler that offer users the possibility to not connect their identity with a specific financial transaction.

Finally, outside of the EU, Russia has banned several cryptocurrency websites in an attempt to make it more difficult for normal users to use cryptocurrencies (Raza, 2016; Silver, 2017). China has banned Initial Coin Offerings (ICO), which are a form of fund-raising often used by blockchain startups (Acheson, 2017), and the US Securities and Exchange Commission has ruled that, regardless of the form of currency being used and regardless of a firm’s stateless status, if the product is offered to American investors, it is bound to US security laws (U.S. Securities & Exchange Commission, 2017). On the other hand, the Singapore Monetary Authority has stated that they will not regulate cryptocurrencies (Amin, 2017). Blockchain technology is a global phenomenon and when the EU develops its position with respect to blockchain technology, it is also developing its position within a global digital society.

A Future Digital Partnership for the EU

The European sharing economy can help create new jobs in several different ways. Blockchain technology enables the development of a sharing economy with increased levels of trust and security, a key factor in order to create new jobs. A consequence of the sharing economy is that risk is moved from the traditional middleman to the user. This means that the more users a platform has, the more perceived trust it is able to generate. Blockchains also enable networks to use formal consensus processes instead of traditional middlemen. When the blockchain is used as the underlying infrastructure for cryptocurrencies, traditional banks are being replaced by a machinery of trust. This same technology can be used in other areas. However, in order to create new business opportunities within all areas of the sharing economy, blockchain technology needs to be further developed as well as implemented.

By monitoring technical development, the EU can adjust regulatory frameworks in order to enable economic growth. The EU has already created an initiative called the European Observatory on Blockchain Technologies in order to better understand the new technology (European Commission, 2017). The EU has even started to develop a Financial Transparency Gateway that, through blockchain technology, seeks to offer reliable financial information about companies within the Union (Higgins, 2017). Implementing blockchain technology could lead to increased trust in EU institutions and, at the same time, improve digital integrity given its prevalent use of encrypted data. Access to anonymous systems does, however, create new opportunities for tax evasion and other criminal activities. It also becomes harder to protect workers and consumer rights within the sharing economy if more and more information is being encrypted. To ensure that new technology is developed in a way that serves European citizen, the EU needs to become a user, a financier and a developer of the technology. The creation of a single digital market with new opportunities for value creation is a necessity if European societies want to benefit from the process of digitalization. The sharing economy and blockchain technology are being developed as a response to the lack of integrity, trust and low transaction costs—all problems of the digital economy. EU officials seem to share this view, which creates opportunities for the EU to enter into new digital alliances.

To simply apply existing regulations on emerging digital phenomena jeopardizes the creation of a single digital market. The integration of the sharing economy into the European regulatory framework needs to be achieved through cooperation. The EU and its member states need to understand how regulatory frameworks can both help and destroy these new phenomena. However, those who develop services based on sharing economy strategies as well as blockchain technologies need to understand the responsibility that the EU has in relation to its citizens, and they must help the EU to ensure this responsibility within a digital context. Actively developing a new digital society requires member states to make joint decisions on how they want to see the technology evolve. For example, a decision must be made if the EU wants to establish a global standard for the technology. A uniform standard would facilitate the communication between organizations and authorities. However, a premature standardization could lead to the implementation of suboptimal technologies and monopolistic situations could arise. The EU should also decide whether the Union should encourage open instead of proprietary source code and if this will guide how research and development funds are distributed. The European Parliament has already expressed its willingness to support projects based on open source code as this is considered to promote both democratic and economic values. Open source support becomes a distribution policy tool when access to information is becoming increasingly valuable.

In a private blockchain, only a predetermined number of nodes are able to edit the history. Private blockchains offer increased integrity and simplified regulation as well as reduced energy consumption. At the same time, private blockchains reduce ordinary citizens’ ability to participate. This makes it more difficult to create digital environments characterized by both trust and democracy. Public blockchains will contribute to the EU’s economic and democratic visions and they should therefore be supported. The negative description that the sharing economy sometimes receives in the media (e.g. how drivers and companies try to escape taxes as well as how the platforms take advantage of their users) should be nuanced with descriptions that focus on how actors in the sharing economy contribute to growth and sustainable development as well as the inclusion of weak social groups, all of which are intermediate goals in the EU 2020 strategy (European Parliament & the Council, 2013). As Bitcoin and blockchain technology start to produce lasting positive results with respect to economic development, the description of these phenomena should change to focus less on illegal trade and money laundering and more on robust digital systems as well as increased trust in the digital environment. This would, in turn, facilitate further development of these technologies. Success stories of individuals and companies from the sharing economy and the blockchain sector should be told in order to inspire others to explore these areas.

Furthermore, there is no systematic measure of the value that is created within the sharing economy, which further complicates the communication of sharing economic effects. Uniform approaches for measuring sharing economic activity should be developed, especially when it often adds to or completely overtakes current economic activity. Meanwhile, measurement is often complicated by the fact that many activities lack a monetary value, such as couchsurfing, while other activities cannot be measured by changes in GDP, such as renting a room on Airbnb.

The ongoing transformation highlights the labor market’s urgent need to offer fast retraining and re-education when jobs disappear due to digitalization, automation and blockchain implementation. At the same time, higher education must prepare to respond to this need, and the governments of the EU member states should actively advocate the use of platforms offering Massive Open Online Courses (MOOCs). Courses in future subjects such as blockchain technology should be given priority. In parallel, new certification programs and platforms should be designed to enable individuals to verify the completion of MOOCs. This would increase mobility within the European labor force as well as increase the possibilities of finding internet-based work. Finally, since the sharing economy is a global phenomenon, workers in the EU will have increased chances of finding online jobs with overseas companies.

The sharing economy has the potential to increase economic growth when individuals can sell their time, products and services on a global market. Traditional forms of employment are challenged when individuals can earn an income through several sources such as renting out rooms, offering catering services or selling services through digital platforms. Most current regulations that target the labor market are based on the perception that individuals either are employers or employees—something that is not optimal in a sharing economy. Regulation must be reviewed so that it does not prevent people from participating in the sharing economy. For example, many English sole proprietors are subjected to a penalty tax based on a rule that originates from the early twentieth century that was originally intended to encourage people to leave home to take on factory work. EU member states should encourage citizens to explore opportunities for value creation while facilitating organizations that make this value creation possible in a safe environment.

Blockchain technologies are able to reduce the importance of nationality in the relationship between consumers and companies. The need to rely on a specific company has disappeared and it is now enough to trust the blockchain. As a consequence, entry barriers to business opportunities and trade are reduced, which not only strengthens the EU’s internal digital market but also, we might even say, European democracy. EU member states must work for parsimonious regulations with respect to the sharing economy and blockchain technology. For example, transport services within the sharing economy show that European regulations differ considerably, with some countries increasing the regulatory burden while others are reducing it. Various regulations within the EU can lead to further imbalances in growth and labor market characteristics. Also, the ability to handle the continued digitalization and automation of society are adversely affected. We have developed the following recommendations for the EU based on our research:
  1. 1.

    Expand the EU Blockchain Observatory and Forum into a lab where different blockchain networks and applications can be tested and developed while learning from each other, with a specific focus on sharing economy applications. For example, examine whether a standardized blockchain should be implemented within the EU or if different industries should develop their own. Enabling trial and error in the development phase is of great importance in order to detect risks associated with the technology.

     
  2. 2.

    Develop EU regulations enabling flexible control structures in order to not risk the robustness and reliability of blockchain technology nor hamper the sharing economy.

     
  3. 3.

    Open a dialogue with the US and other non-European countries on regulatory issues.

     
  4. 4.

    Strengthen the confidence in blockchain technology within the EU through a broad and in-depth analysis of the possibilities of blockchain technology as well as its challenges, for example, the possibility to improve welfare systems with increased institutional trust as a result, with a particular focus on the sharing economy.

     
  5. 5.

    Provide all EU citizens access to high-speed internet; this can be one of Europe’s most important democratic issues and is necessary for the EU’s single digital market to become a reality.

     
  6. 6.

    Explore the opportunities to implement sharing economy principles and technologies in the field of energy efficiency.

     

Footnotes

  1. 1.

    The number of blockchain initiatives by major institutions has increased from 22 in the third quarter of 2015 to 34 in the fourth quarter of 2015 to 25 in the first quarter of 2016. Today there are more than 80 financial and other institutions in the R3CEV consortium to develop the Corda blockchain for the financial market and more than 150 organizations supporting the development of Hyperledger.

  2. 2.

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Copyright information

© The Author(s) 2019

Authors and Affiliations

  • Robin Teigland
    • 1
  • Håkan Holmberg
    • 2
  • Anna Felländer
    • 3
  1. 1.Stockholm School of EconomicsStockholmSweden
  2. 2.UppsalaSweden
  3. 3.StockholmSweden

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