The potential to utilize blockchain technology to facilitate fast, secure financial transactions, for example its proposed application to COVID-19-related stimulus payments, has been increasingly in the news.[1] So what exactly is a blockchain, and how might it turn up as a business-use option? By way of a basic overview, a “blockchain” is the result of digital transactions that are encrypted and stored in “blocks,” connected by the fact that each block contains identifying information (or the “hash digest”) from the previous block.[2] According to blockchain’s pseudonymous creator “Satoshi Nakamoto,”[3] the digital ledger “timestamps transactions by hashing them into an ongoing chain of hash-based proof of work, forming a record that cannot be changed without redoing the proof of work.”[4]Once it is verified by a “miner” who solves a complex mathematical problem to connect a new transaction to the chain in exchange for compensation in cryptocurrency, the transaction is immediately visible to all blockchain users on the relevant network.[5] Miners can be individual cryptocurrency users, but they are more often people or groups who have specialized computer equipment and have made a business of mining cyber coins.[6]When miners solve a problem, the publication of the solution is the “proof of the work” performed. The problems are adjusted and made increasingly complicated to keep the network secure.[7]As alternatives to this Proof of Work model, additional systems have been developed for the verification of transactions on blockchain networks that followed Nakamoto’s Bitcoin network, including a Proof of Stake model focused on miners with a stake in the outcome,[8] a Round Robin consensus model, a Proof of Authority/Proof of Identity model, and a Proof of Elapsed Time model.[9]
Although the transaction is visible to all with access to the blockchain, no personal or identifying information is included, only an alphanumeric public “key” that is unique to the individual making the transaction.[10] A blockchain can be “permissionless,” which means that any individual may participate, or “permissioned,” which means only certain users may publish blocks.[11]Each blockchain user will store a copy of the entire blockchain, which is updated automatically when there is a change. One of the significant benefits to users of this technology, then, is that its record is nearly impossible to alter without detection.[12]
Another perceived benefit of blockchain technology is the decentralized, distributed ownership of the transactional ledgers. Centrally owned and controlled records might be subject to loss, destruction, or fraud. The blockchain ledger system, on the other hand, updates the same distributed ledger information across all of the nodes of a peer-to-peer network. Loss or destruction of the data is infinitely more difficult with the availability of abundant and dispersed back-up copies.[13]
Additionally, because the network nodes are backed up and distributed, a blockchain ledger provides no central attack location, making the data resistant to hackers. That said, blockchain platforms have been hacked with heavy losses over the years; almost $300 million worth of cryptocurrency was stolen from exchanges in 2019 alone,[14]after cumulative blockchain-backed exchanges had lost an estimated $1.5 billion between 2009 and 2018.[15] The lack of centralization does not allow for an organized response to an attack, which increases vulnerability in the face of a hack. Of course, since the underlying data in a permissionless blockchain is visible to the public, the incentive to hack into a permissionless blockchain network to access information is minimized.[16] It generally is the information about the true identity of parties to a given transaction that would be of most interest to outside observers, including law enforcement officials.
With the introduction of the cybercurrency Bitcoin and the concept of its blockchain platform, the environment for completing and recording online transactions was transformed. Since 2009, more than 5,100 cryptocurrencies have been established on a blockchain,[17] and a range of processes have leveraged blockchain technology for quasi-financial and non-financial transactions, including self-executing “smart” contracts and supply chain management.
[1] The use of blockchain technology for stimulus payments has been touted as “the equivalent of the ‘Super Bowl’ of blockchain use cases for the private sector.” J Brett, ‘11 Members Of Congress Urge Treasury Secretary Mnuchin To Use Blockchain For COVID-19 Stimulus Payments,’ (forbes.com, May 2, 2020) <https://www.forbes.com/sites/jasonbrett/2020/05/02/congress-urges-treasury-secretary-mnuchin-to-use-blockchain-for-covid-19-stimulus-payments/#573d79f471db>
[2] R Houben and A Snyers, ‘Crypto-assets: Key developments, regulatory concerns and responses,’ European Parliament’s Policy Department for Economic, Scientific and Quality of Life Policies. PE 648.779 – April 2020, 8, 11, 25. Blockchains have been described more concisely as “distributed digital ledgers of cryptographically signed transactions that are grouped into blocks.” D Yaga, P Mell, N Roby, K Scarfone, ‘Blockchain Technology Overview’ (2018) National Institute of Standards and Technology Interagency or Internal Report (IR) 8202 < https://doi.org/10.6028/NIST.IR.8202 >.
[3] S Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ (2008) < https://bitcoin.org/bitcoin.pdf>. See also https://satoshi.nakamotoinstitute.org/.
[4] Ibid.
[5] D Yaga, P Mell, N Roby, K Scarfone (n 2) 19.
[6] See e.g. R Houben and A Snyers, ‘Cryptocurrencies and blockchain legal context and implications for financial crime, money laundering and tax evasion.’ European Parliament’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance. PE 619.024 – July 2018.
[7] Ibid.
[8] D Yaga, P Mell, N Roby, K Scarfone (n 2) 21.
[9] Ibid at 23-24.
[10] Ibid at 1.
[11] L Lesavre, P Varin, P Mell, and M Davidson ‘A Taxonomic Approach to Understanding Emerging Blockchain Identity Management Systems’ (2020) National Institute of Standards and Technology Cybersecurity White Paper < https://doi.org/10.6028/NIST.CSWP.01142020 > p.5.
[12] “Once data is recorded in a blockchain, that data is usually there forever, even when there is a mistake.” D Yaga, P Mell, N Roby, K Scarfone (n 2) 46.
[13] D Yaga, P Mell, N Roby, K Scarfone (n 2) 13-14.
[14] ‘A Comprehensive List of Cryptocurrency Exchange Hacks,’ (SelfKey Network 13 February 2020) <https://selfkey.org/list-of-cryptocurrency-exchange-hacks/>.
[15] E Larcheveque, ‘2018: A Record-Breaking Year for Crypto Exchange Hacks,’ (Coindesk 29 December 2018)<https://www.coindesk.com/2018-a-record-breaking-year-for-crypto-exchange-hacks>.
[16] D Yaga, P Mell, N Roby, K Scarfone (n 2) 15.
[17] R Houben and A Snyers (n 1)..