Unexpected News: Report on Blockchain Points Out Flaws In Its Application

On January 15, 2016, the government of Vermont, a small state in the northeastern part of the U.S., published a report on blockchain that includes findings and recommendations concerning the potential opportunities and risks of creating a presumption of validity for electronic facts and records that employ blockchain technology and addressing any unresolved regulatory issues. It is not the first time that we are seeing the government researching blockchain. Close to Q4 2015, UK government also expressed an interest via its blog in using the blockchain technology for maintaining all their registers. The UK Government wants to conclusively make the registers perfect where data hasn’t been tampered. For this purpose, they have been researching blockchain technology for keeping their registers clean, transparent and interconnected.

However, the conclusions about blockchain technology for Vermont’s recordkeeping is not something that you would have expected. For them, the costs and challenges associated with the use of blockchain technology for Vermont’s public recordkeeping outweigh the identifiable benefits. The report states, Providing legal recognition of blockchain technology may create a first mover advantage with the potential to bring economic activity surrounding the development of blockchain technology to Vermont, but this potential is difficult to quantify and challenging to capture due to the nature of the technology. The report indicates a red signal to the usage of blockchain technology by the state of Vermont.

Apart from costs, the report mentions that their research leads to the conclusion that blockchain technology does not address the reliability or accuracy of a digital record. Instead, it can address a record’s authenticity by confirming the party or parties submitting a record, the time and date of its submission, and the contents of the record at the time of submission.

Their research concludes that blockchain technology offers no assistance in terms of the reliability or accuracy of the records contained in the blockchain; if bad data is used as an input, as long as the correct protocols are utilized, it will be accepted by the network and added to the blockchain. If a document containing false information is hashed as part of a properly formatted transaction, the network will validate it.

It also identifies another flaw that the network is unable to distinguish between a transaction by an actual user and a malicious transaction by someone with unauthorized access to the user’s private key. Furthermore, the network could not obviously, through its protocols, determine whether a sender was reliable in terms of the veracity of the submitted information.

On the other hand, the report states that it not a technology that is completely incompatible with their legal structure but that there are benefits associated with it too. Explicitly pointing out the difference between reliability/accuracy and authenticity, the report states, Where blockchain technology does provide an advantage is in its ability to evaluate the authenticity of records. The blockchain can potentially provide an immutable registration of a record, to which future records can be compared for authenticity. Any presumption of validity around records registered in a blockchain must be limited to authenticity.

Even if the blockchain technology benefits the private record keeping in the state of Vermont by eliminating centralized recordkeeping or authenticity-verifying authority, there are complications to it. The report states, First, the blockchain does not store documents, only hashes. Parties transacting business in a blockchain would need to preserve electronic documents themselves (which could be confirmed by comparison to the hashes in the blockchain). Private individuals and organizations are often not well-equipped for the long-term preservation of their electronic records. Second, while a blockchain may reduce costs, there will likely still be some transaction fees related to verification, as described above.

One of the biggest problems in using blockchain for recordkeeping as pointed out in the report is the need to preserve copies of electronic records for a long period of time as blockchain technology will only register hashes. The need to preserve copies of electronic records for long periods of time is already essential to state business and strategies and tools are in place to address these needs. Hence the researchers conclude that blockchain technology would be of limited value in conducting state business.

The report continues to highlight the benefits of blockchain on the financial transactions side. It mentions that the underlying principles that underpin this technology are well established, and recognizing it for confirming authenticity of a document seems well-founded.

Along with the benefits, the reports also included the risk of using blockchain technology for recordkeeping and financial transactions. The researchers are afraid that if the system becomes decentralized, the individual economic gain (from lower costs in transactions) must be balanced by the inevitable losses in employment in those areas where people are no longer needed to perform all of the back-office work. The state of Vermont also does not want to take any initiative to make blockchain regulated as any additionals costs may discourage companies from being located in Vermont. The state of Vermont also expresses concerns about the absence of consumer protection associated with blockchain technology and exemplifies bitcoin for the same. It mentions the numerous problems (fraud, illegal activities, etc.) associated with bitcoin and states that something similar may happen to other applications of blockchain.

Finally, the report concludes by stating that blockchain or any application of blockchain will have to support and not replace the existing records management infrastructure and that the benefits of adoption of blockchain technology by state agencies is, at this time, not outweighed by the costs and challenges of such implementation.