Interest in blockchain technology is increasing throughout Europe. Just recently, the European Parliament adopted a resolution on virtual currencies calling on the Commission to establish a task force to study blockchain and distributed ledger technology. The resolution notes that blockchain has “the potential to contribute positively to citizens’ welfare and economic development” by, for example, dramatically lowering transaction costs for payments, as well as enhancing the payment systems’ speed and resilience. Others agree: the World Economic Forum predicts that by 2025, 10% of global gross domestic product could be stored on blockchain technology.
Blockchain represents the next step towards enabling trusted transactions online. Blockchains, also known as distributed ledgers, consist of multiple online registers in which transactions can be recorded. Each transaction is tied to the previous one and verified through the use of cryptography. This series of transactions makes up the blockchain. Since they are distributed, blockchains can be shared by multiple parties, creating a system of verified transactions and ownership. This avoids the need for reconciliation of transactions and provides a proof trail for auditors. Santander predicts that use of blockchain technology could reduce banks’ infrastructure costs by $20 billion annually. Meanwhile, it promises to cut costs and lower the risk of fraud for consumers.
Blockchains have multiple potential uses. The virtual currency Bitcoin is the most talked-about; the ownership and supply of Bitcoins is controlled and verified through distributed ledgers. But this is only the tip of the iceberg. Imagine instantaneous and direct money transfers; “smart” contracts that can be initiated, verified, and enforced electronically; decentralized patient record management; or a real-time, online land registry. Blockchain technology can make all of this possible, since any asset that can be assigned a unique digital identity – or “tokenized” – can have its ownership represented via a blockchain, in the same way that a bill of lading represents ownership of goods in shipment. Blockchains have the potential to revolutionize supply chains, enabling secure tracking of items’ provenance.
Microsoft provides a powerful cloud platform on which to run blockchains, as well as middleware that makes it easier for startups, established banks and other companies to build blockchain services that meet their specific needs. During today’s “Blockchain: Beyond Bitcoin” event taking place in Brussels, we will explore how companies are using blockchain to pilot new services and we will examine the challenges to widespread deployment, such as the need to balance transaction speed with strong security. We’ve already set out our vision of how to achieve this in our Project Bletchley white paper.
Blockchain usage raises some regulatory and policy issues. In Europe and the U.S., there have been several legislative proposals to regulate the usage of virtual currencies like Bitcoin; from New York’s BitLicense, to the proposed Regulation of Virtual Currencies Act and legislation suggested in the UK Treasury’s Report on Digital Currencies. This regulation is timely and much-needed. We have already seen Bitcoin used for illicit transactions on Silk Road and as the payment mechanism of choice for ransomware. Meanwhile, consumers were harmed by the collapse of the Mt. Gox bitcoin exchange in 2014. If such misuses aren’t addressed by regulation, then the entire technology risks being called into question.
When regulating blockchain, however, policymakers should focus on specific uses rather than the underlying technology itself. Both transmission of virtual currency and entering into a smart contract can be achieved through transfer of a token on the blockchain. But it only makes sense to regulate the former in a similar manner to money transmission; the same risks simply aren’t present when the token represents a smart contract, an item in a supply chain, or another kind of asset.
It is also important to note that the immutable record of transactions stored in blockchains can help regulators investigate and track transactions. Much has said about Bitcoin’s anonymity – and any virtual currency regulatory scheme should include “know your customer” requirements. But the transactions associated with every Bitcoin address are publicly available and traceable, which isn’t necessarily true of other payment mechanisms. This allows for relationship mapping through data analysis and provides regulators and law enforcement with a wealth of information.
There are several other questions policymakers will need to consider when seeking to regulate uses of blockchain technology. For instance, blockchain technology could enable a single consortium to both engage in and settle transactions when trading stocks, or entering into swaps or other derivatives. But traditionally, trading and settlement have been kept separate, in order to guarantee system stability and insure against counter-party risk. Given that blockchain can allow for near-instantaneous and automatic settlement, the question then arises as to whether or not these restrictions should be relaxed.
Similarly, blockchain technology involves nodes which are widely distributed, to protect against tampering and ensure strong security. The information is immutable and accessible to all participants in the system. However, this means that personal data may be widely transferred, which raises privacy issues around who is considered the data controller, who has access to and can make use of the data, and how individuals can exercise their right to rectification and erasure under the new General Data Protection Regulation.
It’s clear there is a still a lot of thinking to be done around such issues. But if regulated correctly and thoughtfully, we can unlock the potential for blockchain technology to revolutionize the way businesses and consumers approach the way they trade assets, enforce contracts, and verify data.