May 5, 2017
3 Reasons Why the Blockchain Revolution Is (Finally) Becoming a Reality!
How blockchain and smart contracts have the potential to help the United Nations solve economic, social, cultural and humanitarian issues.
It is always worth visiting the UN headquarters in New York. I am in the fortunate position to participate in regular meetings of a working group that attempts to reduce regulatory and other obstacles experienced by small businesses in starting, financing and scaling their activities.
As a result, I get to see first-hand how the UN is adapting to the opportunities and challenges of the digital world. This is my story about what has been happening . . .
United Nations: Promoting Business
In 2013, the Commission of a special agency of the United Nations, UNCITRAL, requested that a working group start work aimed at reducing the obstacles and barriers encountered by “smaller” businesses throughout their life. I was invited to participate.
The basic idea was that the higher the barriers the more likely it is that new businesses will be forced to operate in the so-called informal economy. Clearly, the informal economy has a number of disadvantages, including a lack of credit, a lack of protection in the event of non-payment, and unsafe working conditions.
UNCITRAL agreed that consideration of the issues relating to the creation of an enabling regulatory environment for smaller businesses should focus on:
- simplifying business registration and operation
- offering an efficient system for resolving disputes
- providing access to financial services
- ensuring better access to credit.
In order to encourage businesses to enter the formal economy and help them maximize their economic potential, the working group aimed to identify workable, effective, and low-cost solutions.
So far, so good.
But in thinking about the possible solutions to these issues, the working group has mainly focused on traditional regulatory initiatives. The emphasis is almost exclusively on identifying the “best” legal framework and then providing assistance — or, in UN speak a “legislative guide” or “model law” — to governments and regulators.
There has been little or no discussion (yet) about how new technology — particularly blockchain technology and smart contracts — might offer an alternative, and oftentimes better, set of solutions to the problems facing a young entrepreneur or new business.
In other contexts, however, the UN recognizes the benefits of blockchain technology. Consider a recent UN initiative to use the “Ethereum blockchain” network and eye-scanning hardware to distribute coupons to thousands of people in refugee camps in Jordan.
Understanding how similar technologies might be used in a business context seems a good way to move debates on this issue forward. It is often suggested that blockchain technology and smart contracts offers simple, fast, secure and reliable solutions.
Blockchain Technology
In order to understand blockchain technology, it makes sense to first consider the Internet. It enabled a free, fast and global exchange of information and ideas.
The blockchain adds another dimension by making it possible to transfer and exchange value (and assets) without the involvement of intermediaries.
Also, blockchain technology can be used to store personal and other information in an accessible, but secure environment.
So, what is a blockchain?
A blockchain is a shared and distributed digital ledger or database that maintains a continuously growing list of “blocks”. A block could contain records of transactions regarding digital assets, but could also include facts and information. Once the record is verified and validated, a block is added to the chain with previous records in a linear and chronological order.
What makes the blockchain such a revolutionary technology is that the ledger or database is distributed to a countless number of participants (“nodes”) around the world in public peer-to-peer networks (similar to the Internet) or private (or permissioned) peer-to-peer networks (similar to an intranet).
These participants can be individuals or organizations (and even things). The only condition is that they have a smartphone or Internet connection.
Everybody with a smartphone can create a real digital ID and interact with other people in the blockchain network. Blockchain technology thus enables and facilitates access to finance, insurance services, stock markets, etc.
The “peer-to-peer” transactions are possible because the technology uses a “distributed consensus model” where the network “nodes” verify, validate and audit transactions before and after they are executed. This is often faster and safer than a traditional model in which transactions can only be executed through third-party intermediaries, such as a bank, judiciary or notary.
Network connectivity is also important, because it allows for multiple copies of the blockchain to be available across a distributed network. This makes it practically impossible to alter or erase information in the blockchain.
The use of cryptographic hashes makes tampering with blockchain records even more difficult, if not impossible. Cryptographic hashes comprise complex algorithms. Even a minuscule change to the blockchain will result in a different hash value, making manipulation instantly and readily detectable.
Digital signatures help establish the identity and authenticity of the parties involved in the transaction. These security measures make blockchain validation technologies more transparent and less prone to error and corruption than existing methods of verifying and validating transactions via third party intermediaries.
In short, blockchain technology creates an independent and transparent platform for establishing truth and building trust.
Intermediaries, bureaucracy and old-fashioned procedures are replaced by the 4 Cs: code, connectivity, crowd and collaboration. The technology increases openness and speed, while at the same time significantly reducing costs.
But perhaps the most significant feature of blockchain is that it is so adaptable. There are multiple possible applications relevant in a business context.
Most obviously, blockchain can be used to provide new methods of processing digital transactions. But blockchain can also be used for crypto-currencies, records management (e.g., real estate, corporate or medical records), “e-voting” and identity management (IAM).
It is for this reason that blockchain technology has been mentioned as one of the most significant disruptive technological innovations since the Internet.
+ Smart Contracts
But blockchain gets particularly interesting when combined with so-called “smart contracts”.
A smart contract is a computer program code or protocol that automates the verification, execution and enforcement of certain terms and conditions of a “contractual” arrangement.
Nick Szabo, the computer scientist and lawyer who first introduced the term in 1994, envisioned a smart contract as an important part of, for instance, a car loan. If the borrower misses a payment (tracked via a blockchain-like technology), the contract would not allow the use and operation of the car (“enforced” via networked technologies, rather than a “repo man”).
Clearly, such smart contracts will become more prevalent in the growing world of the Internet of Things. As more devices are connected to each other, the more “smart contracts” will be used to execute and enforce “legal transactions”.
= Hype?
Yet, many still consider blockchain-based technology and smart contracts to be hype. The hype has been fueled by numerous tech firms, particularly in the area of cryptocurrency, such as Bitcoin. Such firms have often over-promised and under-delivered, feeding skepticism.
Moreover, challenges do remain. One is cybersecurity; supporters of blockchain claim that it is secure by design, but the technology hasn’t been adopted widely enough yet for it to be seriously tested. Several hacking attacks against digital currencies in recent years underscore such security concerns.
Moreover, the use of cryptocurrencies, by criminal organizations has “damaged” the credibility of the underlying technology.
And then there are the costs of shifting to the new technology, which is continually evolving, and which are also high.
Not to mention the many technical challenges involved in integrating blockchain databases with existing systems. Recall the car loan contract example mentioned above and the need for a sophisticated and reliable interface between the ledger recording repayments and the car software systems that, under certain circumstances (non-payment) will shutdown the vehicle.
Finally, there is a great deal of regulatory uncertainty surrounding blockchain and smart contracts, especially in the financial-services industry. Legal frameworks globally will have to change to adapt to the growing use of this type of new technology.
It’s a New Digital Reality!
Nevertheless, there are signs that we are close to a tipping point regarding the adoption of blockchain and its impact. There is a widespread proliferation of blockchain applications and initiatives that are offering something more than just talk.
Recall the UN’s initiative in Jordan.
We could also refer to Ethereum’s success. Ethereum is a decentralized public network that runs smart contracts. Its market value increased from zero to more than 6 billion US dollars in less than two years.
To give you an idea about the network’s opportunities, a subsidiary of Germany’s energy giant RWE recently announced that it will automate its electronic vehicles charging stations through Ethereum.
But there are several convincing arguments that suggest blockchain and smart contracts are set to re-shape our reality in the near future. Here are three reasons why I believe it should be included in the UN’s discussions on starting, operating and scaling business:
1. Solving Societal Challenges (& Creating New Business Models)
Blockchain has the capacity to solve multiple societal challenges and — in doing so — to facilitate new opportunities for disruptive business models.
Consider the following:
· Health and Wellbeing — Blockchain technology will transform healthcare, giving the patient more control in the healthcare ecosystem by increasing the security, privacy, and inter-operability of health data.
· Agriculture and Food Security — Consumers increasingly favor “clean” food. Yet, it is usually difficult to verify the integrity of products. A distributed ledger replacing the current supply chain would provide transparency. Fair price-setting and fast payments systems would also be facilitated.
· Safe, Clean and Efficient Energy Supplies — We are facing an aggressive growth in distributed energy resources. Think rooftop solar and electric vehicles. Governments, utilities, and other stakeholders need new ways to better regulate and manage the electricity grid. Blockchain has the potential to offer a reliable, low-cost solution for financial or operational transactions to be recorded and validated across the distributed network with no central point of authority.
In each case, a societal problem is solved more effectively via the use of blockchain technology and smart contracts.
2. Emerging Regulatory Competition
Significantly, various jurisdictions are making moves to integrate blockchain-based technologies into their business law framework. There is a growing recognition that regulatory innovation can give countries a competitive edge, making it more attractive to business and investors.
For instance, Delaware, a state at the East Coast of the United States, is considering the use of blockchain as a means to create and manage corporate records.
Though the process is in the early stages, a group within the Delaware State Bar Association’s Corporation Law Section has released a proposed legislation that would establish a legal basis for using the technology for this purpose. Specifically, it would amend the state’s General Corporation Law to allow for blockchain use.
The Delaware Blockchain Initiative is backed in part by smart contract startup Symbiont, and they are pushing for a bill in which Delaware-based firms may begin to use electronic databases for the creation and maintenance of corporate records, including the corporation’s stock ledger.
A second example is in Arizona where smart contracts and blockchain based signatures have been given full legal status. They are considered, in law, to be the same as any ordinary contract or signature. Moreover, a record or contract that is secured through blockchain technology is considered to be in an electronic form and to be an electronic record. Finally, a contract relating to a transaction may not be denied legal effect, validity or enforceability solely because that contract contains a smart contract term.
Such legislation applies current contract law to blockchain based contracts, creating certainty and making it clear that any blockchain based agreement is fully enforceable in a court of law.
The law goes further to state that blockchain based data amounts to ownership, importing current property rights to the emerging field and removing any legal ambiguity as to what may amount to theft.
The list goes on. Yet, there are two more noteworthy examples.
In March, the Smart Dubai kick-off was announced in the United Arab Emirates, a citywide effort to implement blockchain.
What is interesting in the context of UNCITRAL’s project is Dubai’s Department of Economic Development’s efforts to shift the entire business registration and licensing services to blockchain. Since the data would be available to other authorities and institutions, duplication of data would be avoided, easing and accelerating the process of starting and operating a business.
To this end, Smart Dubai is working with IBM (as its blockchain lead strategic partner) and Consensys, a custom-software development consultancy (as its blockchain adviser).
Another country that is leading the “blockchain race” is Estonia. The government has implemented blockchain and smart contract services to allow digital authentication processes for businesses (and citizens). Also, the Tallinn Stock Exchange offers a blockchain-based e-voting platform to shareholders.
3. Opportunities for Leapfrogging
Emerging countries have a huge incentive to jump on the blockchain bandwagon. Most obviously, it gives them the opportunity to leapfrog various stages in the development process.
For instance, Fintech leverages technology to improve the quality of, and access to, financial services for individuals in markets that have traditionally been excluded from such opportunities.
Driving this change is the global proliferation in smartphones. Smartphone penetration is expanding quickly around the world with 6.8 billion users expected by 2022. A number of startups are leveraging that reach and providing access to credit in markets in Africa, South America and South-East Asia.
The range of blockchain-based services is similarly expanding. Examples include providing an easier way to maintain land rights data which can then serve as collateral for accessing credit or verifying identities which is often a challenging and prohibitive requirement for accessing both financial and non-financial services.
What’s Next?
So, what needs to be done to prepare for this new world. For a start, national and international regulators — and that includes UN working groups — need to engage with these technologies and their implications, and not ignore them or simply dismiss them all as hype.
In doing so, it is important to realize that the emerging digital reality requires new forms of cooperation between different groups of “experts”.
Multidisciplinary teams comprising coders, engineers, designers, lawyers and entrepreneurs working together “cheek to jowl” will be necessary in order to bring these technologies to market in an effective and timely way.
Intense, open collaboration involving multiple points of view needs to replace the more formal and segregated style of twentieth century regulatory design.
It would undoubtedly be beneficial if a “Hackathon” culture could be brought into UN Headquarters.
Recognizing the need for this cultural shift would be an important first step in engaging with the new digital world that is emerging around disruptive new technologies.
