Blockchain: Moving Target or Trusted Trend?

By Susan Dworak, JD, and Teri Quimby, JD

Susan Dworak (sdworak@realidentities.com) is a legal compliance and identity expert based in Silicon Valley, California, USA. Teri Quimby (teri@teriquimby.com) is an attorney, speaker, author, consultant, and former state regulator in Lansing, Michigan, USA.

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August 3rd, 2020

Government often finds itself in the uncomfortable situation of applying old regulations to new ideas; it’s a regulator’s worst nightmare. Legal and regulatory umbrellas need to be flexible enough to expand with the passage of time, yet definitive enough to endure history in the making. For example, a decade ago the ideas of social media and apps were different than today. The idea of ordering a cup of coffee using an app, paying for it, and picking the product off the counter with your name on it—without talking to a single human being—seemed unimaginable. Enter disruptive blockchain-based solutions, which may initially sound like something from a sci-fi movie. While the idea of an immutable, irreversible distributed ledger technology may disrupt the way we do business in many sectors in society, it definitely does so with increased attention from and scrutiny by government officials. The key is to implement regulations based on enduring legal principles that can be applied in the future even as the underlying technology changes. We don’t know what future technology brings, so applicability should include some level of discretionary authority. Flexibility and agility provide authority even when the rate of technology disruption appears to make promulgation of a regulatory framework tantamount to hitting a moving target.

The ABCs of Blockchain

Blockchain is an online open ledger that can be used by multiple parties to record nearly any kind of transaction or to store data that cannot be changed. The ledger consists of a growing list (chain) of records (blocks) that are linked together (blockchain). Each block has a “cryptographic hash” of its contents and the hash of the previous block. The hash links the blocks together in a chain. Each block also has a permanent time stamp. In this way, any transaction or data stored in the block is secure and cannot be changed—it is immutable (Figure 1). The ledger is secure and resistant to modification—if contents of any block are altered after validation by the other parties to the transaction involved, the hash will not match. Since the data in the block is visible to all parties, it is a trivial calculation to verify the hash for any block in the chain.

Blockchain, therefore, is a process of securing data. The records are stored in a peer-to-peer network, such as a cell phone or computer (nodes). Since every member of the network has a copy of the data, rather than one single source, this is referred to as a distributed ledger technology. Because the parties to the network are mutually agreeing on each block of data, blockchain operates without the need for a traditional central authority such as a bank or government agency.

Figure 1: How transactions become immutable in a blockchain

Blockchain uses beyond bitcoin

For some, the idea of blockchain-based solutions may only elicit thoughts of the financial sector, such as cryptocurrency. Endless efficiencies and real-time transactions, however, will offer innovation in every direction: travel, by connecting travelers directly with service providers;[1] education, through identity management, academic credential verification, smart contracts, and cheaper data storage solutions;[2] alcoholic beverages, with tokenization of millions of dollars of controlled product;[3] utilities, with tech partnerships to explore security and energy exchange possibilities;[4] and real estate, modernizing transactions between buyers and sellers, and storing records of title transfers and liens. While many experts on technology compare the early vision of the internet, and the way we now know it, to the blockchain journey, Hunter Perry, a Forbes Real Estate Council member and technology expert, sums this view up succinctly: “Blockchain is poised to redefine how we make transactions in the same way that the internet has redefined how we communicate and share information.”[5] The private sector will innovate and find uses that are inconceivable at this time. Some uses, though, are better suited for this technology than others; pairing up the right matches should quickly advance blockchain development in those areas. The main detours will likely come from government regulation, even though the public sector can also benefit greatly.

While some governments have embraced this technology, understanding it and creating infrastructure for it can jeopardize its journey. Blockchain project budgets require more than line item status in negotiable appropriation bills. In an article on governance, the title makes this reference to blockchain: “The Next Big Technology to Transform Government.”[6] All levels of government seem to have a lot of paper, store a lot of paper, rely on third parties to verify what’s in all that paper, and may even have the same paper in different departments. Blockchain could improve government efficiency in many areas, such as licensing, land records, and identity verification. Change in government process can be slow under normal circumstances. After the entrance of COVID-19, though, everyone appears to be trying to adapt at the speed of light. There has never been a better time to explore technological advances than now, especially with so many governmental units discussing budget shortfalls.

Government use of this tech tool internally, if judiciously and properly applied, could save taxpayers money, result in less paper storage, and create more efficiency in regulating corporate compliance with real-time access and transparent trails. While “20/20” is usually associated with clear vision, the world pandemic shined a bright light on the lack of efficient compliance plans in some areas and the need for better best practices. The way we do business is changing; the way business is regulated must adapt. As more people—private industry and government employees alike—work at home or socially distance from each other, communication and business processes will move online. Technology solutions will require infrastructure improvements.

For example, during these days of social distancing, discussions develop over election integrity. Could blockchain-based solutions serve up a victory for voters? One company already created a system to record a vote using a one-time token placed into the chosen candidate’s blockchain account. Will something like this produce elections with better efficiency and more integrity?[7] Voting by going to polling places may be ancient history before long. Government use and regulation must adapt to the new normal, which includes more technology.

Regulatory compliance pros and cons

Shared access by public and private sectors to one permanent record is a benefit for compliance monitoring and auditing, as well as enforcement. With real-time accessibility to a permanent record, the document trail is transparent and traceable. If government can standardize regulatory record-keeping systems with everlasting ledger entries, then compliance questions can quickly be settled based on blockchain data. Governments, working together with innovative businesses, will be better positioned to get on the blockchain train by formulating clearly defined regulations and legal standards.

And, as with most issues these days, security and privacy issues must be addressed; the second anniversary of the General Data Protection Regulation is a reminder of the significance of these aspects. Blockchain gives us only a digital identity, and like any other digital identity, it cannot guarantee the security of personally identifiable information—or even physical identity of the person using the technology. Humans are still required to verify and confirm identity. So how do we secure private data and verifiably connect physical identity and digital identity? Businesses involved in blockchain identity must accept the risk of liability. If this responsibility is not shifted to businesses to confirm physical identity, the burden is placed on government agencies, and consequently, the cost is placed on taxpayers. Government is the authoritative issuer of identity; it will have a role to play. The peer-to-peer architecture built into blockchain means a change in authority, shifting control and decision-making away from governments, challenging compliance officials as they attempt to protect citizens from the risks and unintended consequences of new technologies while still encouraging innovation. Blockchain allows for collaboration and connectivity, but also for grand opportunity for fraud—trillions of dollars worldwide.

As an example, criminal activity, such as money laundering, casts a negative shadow on blockchain-based solutions, although exploitation will likely occur anywhere the will exists—not just in blockchain ledgers. Legal disputes need a resolution method, such as determining the clear ownership of data. Complex questions may have complex answers: Who has jurisdiction over the cyberspace between parties in multiple countries?

As it gains adoption for public transactions in government and private transactions in industry, distributed ledger technology will create a constant and recurring need for understanding and will present new challenges for government agencies to ensure compliance with new and existing legal structures. Communication and collaboration between the public and private sectors will help solve these complex problems involving laws and regulations. Governments worldwide have developed a range of regulations from the least restrictive in encouraging innovative uses for blockchain to more restrictive, such as banning the use of blockchain for certain regulated industries, thereby maintaining control over transactions and data.[8] Many uses for blockchain are possible, but it is not a panacea. One-size blockchain does not fit all cultures, problems, governmental structures, and legal systems.

Conclusion

Managing risks is a perpetual compliance concern. Effective compliance programs can help governments and businesses manage the risks of implementing innovative blockchain-based solutions long after 2020 is over. Open dialogue between government and private sector entities will help to achieve regulatory frameworks to support innovative and disruptive technologies like blockchain as trusted tech trends while advancing efficiencies with monitoring and auditing concerns.

Takeaways
  • Welcome blockchain technology, and embrace it as a potential solution; disruption means innovation, not chaos.
  • Educate yourself by attending online blockchain events and accessing resources; you can’t regulate or use what you don’t understand.
  • Create laws and regulations encouraging innovation while protecting against abuses.
  • Protect and build blockchain ecosystems by providing services, resources, and information shared between private sectors and government.
  • Increase monitoring and auditing compliance aspects with accountability of those using blockchain technology to prevent circumvention of compliance and regulations.

1 Joe Liebkind, “6 Companies Using Blockchain To Change Travel,” Investopedia, June 25, 2019, Link.
2 Tom Vander Ark, “20 Ways Blockchain Will Transform (Okay, May Improve) Education,” Forbes, August 20, 2018, Link.
3 Ben Jessel, “Why Wave Financial’s Kentucky Bourbon Blockchain Fund May Be A Sober Investment,” Forbes, April 27, 2020, Link.
4 David Thill, “Why you’re likely to keep hearing about utilities and blockchain in 2020,” Energy News Network, January 2, 2020, Link.
5 Hunter Perry, “Three Ways Blockchain Technology Will Revolutionize Real Estate in 2019,” Forbes Real Estate Council, November 15, 2018, Link.
6 Liz Farmer, “The Next Big Technology to Transform Government,” Governing, September 2017, Link.
7 Jack Tatar, “How Blockchain Technology Can Change How We Vote,” The Balance, April 22, 2020, Link.
8 Zachary Owen, “How Are Different Countries Approaching the Challenge of Regulating Cryptocurrencies?” BRINK, June 3, 2019, Link.

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