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Blockchain Hydra Monster!

The Blockchain is the invisible technology that is revolutionizing the future of the world economy. Big Corporations are racing to build Blockchain platforms for harnessing the digital transformation across industries and businesses. The Blockchain is a digitized, decentralized, distributed, and incorruptible public ledger of all economic transactions or digital assets that are recorded in chronological order within a worldwide network called “Peer-to-Peer (P2P) of distributed “nodes” or computers.

In a nutshell, the key advantages of a blockchain are Transparency, Authentication, and Auditing which eliminates the existence of the “Intermediaries”. This paradigm shift has led major financial institutions and tech giants to drive innovations using blockchain technology for developing various use-cases that can be adopted by several other industries. There have been prototypes that are being tested for its viability and adaptability in the regulated economy.

Despite these advantages, the blockchain technology has its major drawback, and I would like to highlight the most significant concerns which I foresee if this technology were to become the future of all the business operations. 

Firstly, the ‘digital assets’ are still a non-regulated mode of the transaction even if it is built on the blockchain platform. The ever-growing size of the blockchain is considered a challenge for it is causing issues around storage and synchronization. This phenomenal growth of the cryptocurrencies over the last few years are mind-blowing and are un-regulated. Today the Governments are backing out of it. Countries like China, Japan, Russia, Korea and Israel have shut-down the cryptocurrency exchanges and withdrawn their support for the digital assets since the Government is unable to figure out how to regulate this system.

Having Regulation is critical; the reason being, even if the digital assets under the blockchain records and maintains the transaction history, yet they do not reveal the identity of the individuals who do the transactions. Just maintaining the data does not mean the Government is aware of the individual’s financial status and therefore the regulative authority has no control over the system. For, e.g., Until recently the Swiss Bank would not disclose the details of individuals who have an account with them. India had requested access to this data. In Nov 2017, “The Commission for Economic Affairs and Taxes of the Council of States — a key panel of the Swiss Parliament’s Upper House approved the proposed pact with India as also with 40 other countries. The pact will help provide continuous access to details about alleged black money hoarders in once-all-secret Swiss banks and will help check cross-border tax evasion.” However, this access only starts from 2018, which means the details of the old accounts might not even be available.

Independent computers or nodes in the blockchain network are maintaining the records which are neither available to the public nor the regulative authorities. This becomes the most significant cause of concern in the system. The blockchain platform will only be able to provide security to that individual who is doing the transaction allowing the bubble for the black money in the market. Let us take the case of US Federal Reserve or the Reserve Bank of India or the Bank of England. They have no access to the transactions that are happening right under their nose in the computers and on the blockchain network, these banks are unable to track the volume and value of cross-border transactions that are taking place and the amount of money that has gone out of their countries.

The unregulated growth of the cryptocurrencies and the blockchain technologies are causing havoc in the system. There may be certain disruptive forces in this world like the dictators or terrorists who will be able to do transactions without the knowledge of the regulative authorities that are illegal and giving rise to the enormous growth of black money in the market. In Nov 2017, news emerged that Russian president Vladimir Putin had approved a plan to create an independent Internet by 1 August 2018, first reported by the Russian news agency, RT. The alternate Internet would be used by BRICS nations—Brazil, Russia, India, China, and South Africa—and shield them from “possible external influence,” The “backup” servers would be placed in BRICS countries – Brazil, Russia, India, China, South Africa – and be exclusively for their use. The rationale for setting up such a system is, according to the document, “the increased capabilities of western countries to carry out offensive operations in the information space, and their willingness to use them.Hence Russia wants to abstain its people and country from succumbing to any unregulated mode of business operations and also protect their systems from being hacked by the cybercriminals.

Hence it becomes extremely critical for Government and regulative authorities to monitor the financial dealings that are happening in their respective countries and ensure there is no illegal and unaccounted money in the form of digital assets. In India; the Cryptocurrencies appear to be living up to their cryptic reputation. According to the latest news report, “The Indian Government has sent tax notices to about 5 lakh high net-worth individuals (HNIs) who own bitcoins or any other cryptocurrency worth more than $3.5 billion trades and transactions in a 17 month period. Indian officials suspect that the cryptocurrency traders are evading taxes. The income tax department may also find it difficult to figure out whether these wealthy investors hold any cryptocurrencies or the income earned from these instruments. The department may also struggle to calculate the capital gains tax on bitcoins as investors have used complex investment strategies. Some also claim that they have never bought any cryptocurrency, or that their accounts may have been hacked a few years ago. The tax department is investigating the source of income and whether money invested in bitcoins or any other cryptocurrency is from money laundering,” 

Let us now take the following use-cases to understand the gap in the blockchain technology:

1. Supply Chain Management: In a typical scenario the supplier, manufacturer and the distributor will be able to authenticate the transaction along the way. As a customer, they can have full transparency with the authentication and confidence that the life story of that product or goods is legitimate. How will the regulatory authorities in the respective countries come to know how much cash transactions have been undertaken?

However, let us take the case of a company ‘X’ is manufacturing its phone in China and distributing the same across countries in the region. All their transactions are being done on the Private blockchain to protect the sales figures from their competitors. If the payment is being made via cryptocurrency, then all these business transactions will open the world for a “Black Economy” since it is not coming under the vision of any regulative authorities. Despite being a private blockchain, it still encourages the growth of black money in the market. People with sufficient computing power can manipulate the system. This mode of business dealing will give rise to the businesses eliminating the intermediaries and all the taxes and other legitimate duties/levies associated with that particular business and transaction. This flaw in the technology poses a significant concern for future economic growth. How will the country or nation run without them being able to collect the taxes and other duties from the respective business operations across the sectors?

2. Financial Institutions: The banks can transact millions of transactions on these private blockchain networks. Assume there is a bank which would like to operate in the grey market like the bullion market; they definitely can do and disclose the transaction details from the world. Some Erring banks in the world maintain nefarious records of nefarious people and may not share the details with the regulative authorities. What happens in such scenarios? For eg: According to the news report on the most significant scandal in the Panama Papers leak,”The world’s biggest businesses, heads of state and global figures in politics, entertainment and sport who have sheltered their wealth in secretive tax havens are being revealed this week in a major new investigation into Britain’s offshore empires.The details come from a leak of 13.4m files stolen from the Panamanian law firm Mossack Fonseca revealed just how unequal the world is. It exposes the global environments in which tax abuses can thrive – and the complex and seemingly artificial ways the wealthiest corporations can legally protect their wealth.”

In a blockchain, one can validate the transaction details but cannot identify the person who has done the transactions may be a year ago if the person has withdrawn the money and gone away eliminating his entire profile. This can be explained by the example from the 2008 most significant financial crisis of all times in the US by the Lehman Brothers with over $639 billion in assets and $619 billion in debt, Lehman’s demise also made it the largest victim of the U.S. subprime-mortgage-induced financial crisis that swept through global financial markets in 2008. The rest is history and left the US Regulative authority with no record of the people who were involved in these transactions. Hence the involvement of the regulatory authorities is exceptionally crucial because at the end of the day it still translates into finance or money which needs to be monitored and tracked by an authorised system. Anyone with muscle power can tamper or manipulate the system.

Therefore Blockchain is a not a fool-proof technology as there is a massive gap in the system. The blockchain technology only allows an individual to see the transaction details, but it cannot identify the perpetrators. In the recent report by RT, “Researchers found that a single actor was “likely” behind several accounts that bought millions of dollars worth of bitcoin and drove the exchange rate in the US from $150 to $1,000 over the course of two months. In a paper published in a recent issue of the Journal of Monetary Economics, a team of researchers examined the impact of fraudulent activity that occurred on the leading bitcoin currency exchange in 2013 and found that a single actor was “likely” behind a massive spike in exchange rates.In their paper, “Price Manipulation in the Bitcoin Ecosystem,” the researchers from Tel Aviv University in Israel and the University of Tulsa examined Mt. Gox transactions over a ten-month period from February to November 2013, and found that approximately 600,000 bitcoins, valued at $188 million, were “acquired by agents who likely did not pay for the bitcoins.”

Hence the intermediaries such as Financial Institutions and Government Regulative Authorities cannot be eliminated. Adoption of Blockchain technology by the Industry needs to be regulated on ‘Government Regulated Domains’ by the regulative authorities of the Federal Governments. If not it can create a Hydra Monster and can have their own currency just like the monopoly game currency which will impact the Socio-Economic well-being of the nation.

To conclude, I did like to ask the Industry Stakeholders, Technologists, Researchers, Scientists, and Subject Matter Experts to share thoughts/comments/feedback regarding this challenge in blockchain technology and how will this gap in the technology be addressed?

Check my BlockDelta profile for further details.

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