Blockchain: The Technology for a New and Better Internet?
Switzerland and the United States are leaders of innovation in technology. Blockchain, the technology best known for underlying most cryptocurrencies, has many other potential uses and is viewed by developers and investors as the technology that will create a new kind of Internet. Blockchain makes possible transactions that are faster, cheaper, and more secure than today. What are the challenges and opportunities of this new technology? How are Swiss and U.S. businesses and regulators responding?
What Is Blockchain?
A blockchain is an ever-growing list of sequentially linked transaction records that allows digital information to be distributed, but not copied. Each digital record is a block in the chain. (The “chain” being the database that stores the blocks.)
Blockchain is often equated with the crypytocurrency bitcoin, but the two are not the same. Transactions for bitcoin and most other cryptocurrencies are stored in databases on peer-to-peer, open-source, and public networks, which operate without a central authority or bank. Blockchain is the technology that maintains such a database. (For details on cryptocurrencies, see ASF’s briefing on Crypto Markets.)
Blockchain is a new way of transmitting funds or logging information.
Much More than Virtual Currencies—Virtually Unlimited Use for Blockchain
Despite living in the interconnected age of the Internet where business and personal transactions are said to happen with the touch of a button, the current banking system still imposes transaction fees, and international payment validation can take up to five business days. People who find such conditions unacceptable are embracing blockchain, envisioning a future of real-time payment processing and money transfers, including remittances—with banks out of the picture.
Similarly, blockchain could rival or even replace today’s equity-trading platforms, which also come with multiday wait times for investors selling stocks.
And, there are many other uses for blockchain on the horizon, such as:
Monitoring business supply chains,
Creating decentralized digital IDs, allowing people in impoverished regions to get access to financial services or start their own business, and creating identification for refugees,
Facilitating sharing or selling of unused data,
Allowing stricter copyright and royalties protections for digitally downloaded content,
Protecting property rights and promoting investment in developing countries (in Ghana, a platform called Bitland might be able to alleviate the country’s many property disputes by securely recording land sales),
Making digital voting secure,
Eliminating the paper trails for real estate, land, and car title transfers,
Acting as a backup for cloud storage,
Managing the so-called Internet of Things—devices connected wirelessly that can send and receive data,
Creating “smart contracts”—such as a giving a mechanic access to one’s car, or providing entrance to one’s house for service technicians,
Creating more secure and convenient storage of and access to medical records, with more privacy control for patients,
Allowing more reliable tracking of prescription drugs (the U.S. Food and Drug Administration has already announced a pilot program), or
Increasing food safety through more accurate and quicker tracing of food products.
In fall 2018, Walmart announced it would use blockchain technology to track the entirety of its leafy green produce. The super retailer sent a letter to its suppliers, informing them that they have until September 30, 2019, to use blockchain to track any leafy greens they sell to Walmart. This move came partly in response to E. coli found in romaine lettuce that affected around 200 people. Blockchain will allow the tracking of products back to individual farms “in seconds—not days,” as Walmart claimed in its letter.
Political Conflict or Technology Paradise? While such uses may seem largely uncontroversial, there are potential uses of blockchain that could be highly controversial, such as tracking weapons. A transparent and unchanging blockchain registry could allow law enforcement and the federal government to track private gun ownership—a development that would be hailed by gun control advocates but greeted by others with concerns about privacy and government overreach.
In Arizona, legislators introduced a bill to prevent blockchains from being used for tracking firearms. A member of the Missouri legislature has introduced a bill to make it illegal to use decentralized databases to hold data on owners of firearms.
Other supporters of gun freedom, however, such as the people behind the startup company Blocksafe, have embraced blockchain as the technology for creating “a safer world through weapons tracking and accountability…” Blocksafe “seeks to deliver a blockchain-centric solution for gun ownership” through the use of smart-gun technology.
Some blockchain enthusiasts, such as those at Medici Ventures (a subsidiary of Overstock.com), hope for no less than “to change the world by advancing blockchain technology.” As Medici president Jonathan Johnson states, Medici’s “mission is to use blockchain to democratize capital, eliminate the middleman, and re-humanize commerce.” Medici states that democratizing capital means “allow[ing] everyone, including the poorest members of society, to participate in local, national and global markets.” Johnson sees this goal as especially relevant in developing countries.
Blockchain in Switzerland
The Swiss stock exchange SIX has been at the forefront of the blockchain buzz—and plans to launch a trading platform using blockchain technology in the second half of 2019. The new SIX Digital Exchange (SDX) will ostensibly be able to complete a transaction in fractions of a second—unlike the existing platform, which can take days to complete a trade. While SDX and the current platform will initially operate in tandem, SIX expects SDX to dominate stock and bond dealing, if not replace the current system completely, in about 10 years.
The Swiss government is also at the forefront of dealing with blockchain—welcoming the technology while recognizing a need for a legal framework. Rather than creating new laws, the government recommends amending existing laws to create a blockchain strategy. In December 2018, the Swiss Federal Council stated that Switzerland’s existing “legal framework is well suited to dealing with new technologies. Nevertheless, there is still a need for selective adjustments.” The strategy is intended to incorporate the decentralized blockchain structure into the Swiss business and financial sectors. Proposed changes to existing law for 2019 include:
Civil law—increasing legal certainty for transferring rights via digital registers,
Insolvency law—clarifying the segregation of crypto-based assets in cases of bankruptcy, and recognizing data as an asset,
Financial market law—creating a new authorization category for blockchain-based financial market infrastructures,
Banking law—reconciling bank insolvency law provisions with adjustments in general insolvency law, and
Anti-money-laundering law—making decentralized trading platforms subject to the Anti-Money Laundering Act.
Blockchain in the United States
As in Switzerland, there are no new federal laws in the U.S. for blockchain technology at this time—though, as Norbert Michel, director of the Center for Data Analysis at The Heritage Foundation, points out, transactions made via blockchain are subject to the same laws as transactions conducted without blockchain.
The private-sector Chamber of Digital Commerce, however, released a National Action Plan for Blockchain in February 2019. Subtitled “The need for a comprehensive, coordinated, pro-growth approach to developing blockchain technology in the United States,” the National Action Plan lays out “Guiding Principles for Government,” which include,
Government encouragement of private-sector development,
A light regulatory approach while the industry “establishes key innovations,”
Clear information for the industry about new policies and regulations pre-enforcement; new regulations that are flexible enough for future innovations; and cooperation among the federal government and state governments in order to prevent a “regulatory patchwork,”
Basing any new regulations on the use or activity, not on the type of technology (yet regulators should learn about the unique complexities of blockchain technology and digital tokens), and
A new office to coordinate a U.S. blockchain strategy across agencies.
There are also potential uses for blockchain when it comes to national security. One such use could be to make supply chain management for defense contracting more secure: Blockchain’s unalterable, easy-to-track, and difficult-to-forge transaction ledgers could make blockchains ideal for tracking faulty microchips or spyware installed in defense system components that are manufactured around the world. Blockchains would also be used for creating and managing---securely and efficiently—digital IDs for contractors and government employees.
Blockchain technology could also be an asset in cyber security and protecting critical infrastructure. As the Digital Chamber’s National Action Plan states: “Unlike the Internet, which was created without fundamental security mechanisms, blockchain is secure by design with cryptographic public key infrastructure at its core.” Furthermore, with blockchain, “simple passwords—which are the biggest weaknesses in current systems—are eliminated.” With blockchain, “there are no single points of failure or central systems to attack.”
But, as is the case with anything, there are risks and potential downsides, and even blockchain is not immune to human error, or to hackers. In 2016, a hacker was able to steal $55 million worth of the cryptocurrency ether, which is supported by blockchain. Today, more and more blockchains are getting hacked.
Does the biggest danger, however, lie in not having a strategy for how to approach the blockchain phenomenon? As two strategic consultants argue in Foreign Policy:
If the United States stalls too long, rival governments that invest heavily in blockchain research and development may co-opt the industry and set their own standards. Lichtenstein and Malta are early movers in establishing legal frameworks for blockchain…. While no one is concerned about Malta and Lichtenstein, it would be unhelpful if China, Russia, or other governments antagonistic to the United States determined the standards in this critical new technology.
How Secure Is Blockchain Technology?
Well, it depends. Some of the safety benefits of blockchain are listed above, and are touted regularly by blockchain enthusiasts. But, the very characteristics that imbue blockchain with new inherent safety aspects—the decentralization and relative freedom of access—have led to unexpected consequences:
Because anyone can read and write transactions, bitcoin transactions have fueled black market trading. Because the consensus protocol is energy consuming, the majority of users operate in countries with cheap electricity, leading to network centralization and the possibility of collusion, and making the network vulnerable to changes in policy on electricity subsidies.
Both of these unexpected consequences, in turn, have led to greater interest in private blockchains, which could give businesses more control. But private blockchains will likely have their own unexpected consequences—and so on.
Other consequences, such as blockchain hacking, should not have been unexpected:
Blockchains are particularly attractive to thieves because fraudulent transactions can’t be reversed as they often can be in the traditional financial system. Besides that, we’ve long known that just as blockchains have unique security features, they have unique vulnerabilities. Marketing slogans and headlines that called the technology “unhackable” were dead wrong.
One thing seems clear: The world has just scratched the surface of blockchain.
Blockchain Could Improve Gun Control—But Lawmakers Hate the Idea, Observer
Farm-to-Table: How Blockchain Tech Will Change the Way You Eat, Forbes
Do I Need Blockchain Technology? A Realistic Look at the Pros and Cons, Bitcoin Market Journal
How Secure Is Blockchain Really? MIT Technology Review
Blockchain: What It Is and How It Will Change Lives, Heritage Foundation panel discussion (1-hour video)
The United States Is in the Middle of a Global Blockchain Race—and Is Losing, NASDAQ guest article
A Guide to the World of Blockchain, The New York Times
Blockchain and U.S. State Governments: An Initial Assessment, Brookings Institution