Blockchain, the technology behind Bitcoin, is expected to take our digital environment to the next level. While the risks involved are growing in parallel with its development, regulatory responses are not a priority for lawmakers.
Described as one of the “greatest technological breakthroughs since the Internet”, Blockchain technology will significantly change the way we share and do businesses, as it cuts the need for intermediaries.
Blockchain is a decentralised public ledger (or list) that keeps a record of all transactions that take place across a peer-to-peer network. Users provide their computers to verify the transactions in real time, therefore cuting the need for a central third party to certify the transfer across the Internet. In other words, it is a true system of peers, without a broker who is ‘first among equals’.
While the first generation of the Internet enabled us to communicate information only, the second generation, based on Blockchain technology, allows users to communicate value and money in a peer-to-peer way, author and consultant Don Tapscott told EURACTIV in a recent interview.
This means that banks, credit card companies, social networks sites, or even governments in some cases would no longer enjoy the central role that they play oday.
The opportunities are huge, according to half a dozen experts and policymakers consulted by EURACTIV.
The most obvious are in the financial sector. Speaking to EURACTIV, Daniel Tannebaum and Drew Luca, of PwC, said Blockchain had the potential to transform “anything you can transfer”. Eventually, this means all the third parties needed to validate a transaction could disappear.
One of the first applications of Blockchain is the development of so-called crypto-currency, of which Bitcoin is the best-known example. Its disruptive potential goes beyond being a payment method, as it could also affect credit card transactions, bank-to-bank money transfers, or bond and shares management.
In order to prepare themselves for the announced revolution, some banks and credit card companies are starting to explore the potential with small projects. For instance, Visa is looking into the possibilities of using Blockchain as an alternative to conventional remittance processing.
Wide range of applications
But the potential of Blockchain goes way beyond the realm of finance, since it allows monitoring and authenticating complex processes with multiple parties involved in near-real time.
For instance, companies in the automotive or aerospace sectors could use Blockchain to track individual machinery parts and monitor their use or maintenance. Authorities could also use it for highly sensitive activities such as managing gold custody, Tennebaum explained.
Blockchain could also redefine customer contracts, according to Elli Androulaki, a scientist working for IBM. For example, when buying a refrigerator, a consumer would set up a Blockchain contract simultaneously with the provider, the customer service and the technicians. In case of a problem, the customer would issue a ticket that will automatically be part of the ledger, kicking off an automated process.
European Commission officials also mention applications such as notary services, or the verifiable execution of multi-party agreements such as voting systems, the conditional execution of contracts, and smart buildings.
Some of these futuristic applications are already here. Honduras, one of the poorest countries in America, will use Blockchain technology to build a land title record system.
However, even the most enthusiastic supporters of Blockchain warn about the risks involved.
The first alarm bells were heard ringing in the financial sector. The high volatility of Bitcoin and the use of the crypto-currency for illegal activities cast a shadow over Blockchain technology as a whole.
A “prominent risk”, IBM’s Androulaki pointed out, is the fact that in some Blockchain-based communities all users can embed code to the ledger. These could potentially contain a virus that would affect all the peers. Accountability therefore becomes an issue.
In light of this, the need of audits appear to be necessary as the transactions need to be trustworthy. But the experts warned about the risk of overregulation, since too much rulemaking could kill the development of this promising technology.
Daniel Tannebaum and Drew Luca pointed out that the risk incurred with the technology will likely develop faster than regulation, as has been the case with other tools in the past. But they added that the huge potential of Blockchain does not necessarily mean that the risks involved are greater.
Tannebaum insisted there is not yet regulation in the space due to the level of existing regulations.
No regulation in sight
Until now, policymakers have watched from the sidelines. There are new laws in the pipeline to deal with Blockchain technology in Europe and the US. “Before addressing the question from a regulatory point of view, we should map the potential problems and risks that are related to it,” said Estonian MEP Kaja Kallas (Eesti Reformierakond).
Her main concern is the cybersecurity aspect. With more people and objects are connected online with the Internet of Things, “bigger risks exist if that system is compromised”, she pointed out
As the number of people and companies using Blockchain increases, Kallas said policymakers will need to answer a series of key questions: how to secure the system, how to tax the transactions and how to manage the growing size of the Blockchain.
The European Commission currently has no legislative initiative in sight. In fact, the EU executive not only welcomes innovative services in the financial sector, it is also investing in research and innovation related to Blockchain technology. One of the financing instruments is an open call related to Blockchain for social goods under the Collective Awareness Platforms programme.
A Commission spokesperson said that blockchain-based technology holds significant potential for innovation, including social innovation. For example, they can be inspected and data-mined for insights on which type of economic or social activities do or do not happen in practice and with what results. As such, they can become very effective environments for controlled studies on the relative effectiveness of alternative institutions or policy interventions.
Arvind Krishna, senior vice president and director of IBM Research pointed out that despite the revolution brought by the Internet, cloud computing and related technologies, the basic mechanics of how people and organizations forge agreements and execute them have not been updated for the 21st century. "We’re pushing old procedures through new pipes," he said. Against the immense number of intermediaries and layers involved in any modern transaction, Blockchain "could help bring to business processes the openness and hyper efficiency we have come to expect in the Internet Era." But "in order to fulfill its full potential, it must based on open technology standards to assure the compatibility and interoperability of systems," he concluded.
The difficulties that Blockchain technology is encountering are due to its complexity and lack of knowledge among the general public. In the case of the crypto-currency, the most developed application, its growth over the next year is expected to be solid but not spectacular, the PwC study said. The frequency of use is expected to remain low.
The authors of this study, Daniel Tannebaum and Drew Luca, said that issues such as fraud, fluctuations in value and acceptance among vendors are “realistic” concerns and represent “significant hurdles” to be addressed before crypto-currency are widely accepted.