What Is Blockchain? And The 3 Foreseeable Challenges
By Andreas Chuck on ALTCOIN MAGAZINE
Cryptocurrency has been a hot topic since the price of Bitcoin began to rocket in 2017, but we would take a step backward to probe into the blockchain technologies that are often associated with cryptocurrency.
Blockchain technologies are used to manage assets and data by keys and signatures in the specified ledger by duplicating across a network of computers, also known as nodes. In other words, the record of all data exchanges would be kept in a ledger and each data exchange or transaction needs to follow the agreed rules set out in the system for verification. Every verified transaction would be subsequently added to the ledger like a “block”, which involves a distributed system to verify each transaction such as a peer-to-peer network, this whole process is also known as distributed ledger technologies (“DLT”). Therefore, blockchain in its simplest form could be understood as a digital ledger that is decentralized and cannot be altered.
Researches revealed and confirmed that blockchain technology is emerging as a new and wide range of services globally especially in the financial industry. The concept behind is the utilization of DLT which could be divided into two modes namely private and public, also known as permissioned and unpermissioned ledgers. Permissioned ledger uses a consensus protocol to manage the state of blockchain and requires its participants to be subject to certain requirements, whilst unpermissioned one is typically controlled by no central authority and could involve groups of participants to manage the state of blockchain and the participants could be pseudonymous. This is different from the traditional paper form ledger consists of the credit and debit side which are for documentation and accounting purposes. DLT could be used as the underlying technologies to facilitate transactions validation or even smart contracts. Besides, blockchain technologies would not be limited by geographical issues and enable real-time reflection of data. Thereupon, this type of technology has been widely adopted for numbers of financial services not limited to cryptocurrency only.
For instance, Bank of America is working to automate the process of the letter of credit by using blockchain technologies. Ant Financial and Standard Chartered jointly launched a blockchain-based remittance service that allows real-time money transfer between Hong Kong and the Philippines. In brief, blockchain technologies provide the real-time immutable record of transactions whilst performing reconciliation and audits simultaneously and continuously. According to the Economist, it is estimated that with the benefits of DLT which could process and record an enormous amount of transactions in a less time-intensive manner, the use of blockchain technologies could save banks as much as US$20 billion annually by 2022. This could be seen that blockchain technologies could replace the need for intermediaries as well as transforming the current inefficient procedures to an effective system.
Blockchain technologies are beneficial to the management of a gigantic amount of data and real-time settlement and verification, yet it begins imposing concerns and challenges to regulators when it becomes a growing way of doing business globally. Blockchain technologies could not be regulated per se but the activities or products using blockchain technologies.
Given the application of blockchain technologies has been growing in the financial industry, regulators begin to focus on establishing related guidelines and regulations to oversee the blockchain. However, most of the regulations aim at regulating cryptocurrencies and initial coin offerings. Taking Hong Kong as an example, the Securities and Futures Commission (“SFC”) set up new regulations on a product using blockchain technologies, which is cryptocurrency. The new regime prohibits the public from trading cryptocurrencies via cryptocurrencies targeted funds or trading platforms but only allowing professional investors to do so. Although the SFC implement new regime to boost the investor protection against the cryptocurrency assets in view of the growing trend, there are no regulations regarding blockchain technologies currently and it appears to be challenging in regulating as blockchain has been expanding beyond the adoption in cryptocurrencies.
1. Codes Setting
One of the fundamental reasons that blockchain technologies are imposing regulatory challenges is the rules and codes setting of blockchain. Blockchains rely on the technical codes to ensure that errors would be returned and no activities would be permitted when the rules set out were not satisfied, for example, receiving certain keys or documents. Most importantly, technical codes for distributed ledger recording all the data or transactions are provided by participants, which means the use of permissioned or unpermissioned ledgers depends on the code setting but not a central governance authority. This comes to the problem of setting the underlying standards in designing codes because there is not a central authority responsible for the distributed ledger and even if there is a group of nodes setting out technical codes for the blockchain, the territoriality issue brings up the problem of which regulations should be applied. It is debatable on how the blockchain technologies could satisfy the regulation such as governance structure or technical audit since the distributed ledger usually involves cross-border data verification or storage. In addition, which jurisdiction’s regulation should be applied in case of the arrangement of codes in distributed ledgers is questionable. There is no agreed standard for the technical codes setting on blockchain and the cross-border issue hampers the enforcement on design blockchain codes, thus it imposes challenges in governing the functionality and state of the blockchain.
2. Right to be Forgotten
Another challenge is on data management in the distributed ledger under blockchain technologies. Lately, cyber-attacks such as WannaCry have been increasing in both acuteness and frequency, showing the significance of data protection. Blockchain technologies may appear to alleviate this problem as encryption could be used to protect data privacy in the network. In addition, once the data is stored in the distributed ledger, groups of data are built into blocks across the nodes making it impossible to change existing data without altering the numbers of chained blocks, providing another security on the data. However, it is the immutability nature of blockchain technologies brings up another challenge. The Personal Data (Privacy) Ordinance stipulates the rights of requesting the deletion of personal data when a person ceased to be data user. This is particularly similar to the “right to be forgotten” under the EU General Data Protection Regulation. These regulations are believed to be drafted on the basis of the use of a traditional centralized database, nonetheless, blockchain involves decentralized distributed ledgers by its nature. Thus the application of blockchain technologies appear to be difficult in controlling the data across thousands of nodes and the immutability of blockchain databases would be in conflict with the “right to be forgotten” under the Ordinance. In brief, the problem of erasing data in blockchain brings up the challenge in reconciling the “right to be forgotten”.
3. Liability
Blockchain technologies would also cause the issue of liability. As aforementioned, smart contracts could be created with the use of blockchain technologies where virtual assets stored in the distributed ledger system are automatically exchanged under the pre-set arrangement of technical codes. Nevertheless, with the instance of Decentralised Autonomous Organisation hacking case where hacker found the loophole of the distributed ledger system and was able to take away the money while fulfilling the contract terms, it shows that smart contracts could fail to perform when there is bug or error of the codes. Smart contracts may involve numbers of parties such as the contract creator who designs technical codes of the smart contract while there might also be other parties across the nodes who participate in validating the smart contract. In this case, it would be argued whether these involved parties should be liable for the failure of a smart contract under the current legal framework as smart contracts are basically computer codes. In a nutshell, it would be difficult to find an ultimate responsible person to be liable for the failure by virtue of the decentralized nature of blockchain.
In conclusion, blockchain technologies bring up various benefits in the financial industry and its application on products and services is growing rapidly. Nevertheless, this emergent technology brings up regulatory challenges in areas such as codes designing standard, data protection and legal liability.
