Blockchain 101 10110

From the July 2018 Trumpet Print Edition

One of the most discussed new financial technologies is blockchain. This technology is at the heart of bitcoin and other cryptocurrencies.

Digital information is simply numbers: a string of zeroes and ones. The key challenge of a digital currency is how to stop someone from spending it twice. If the currency is a number, you could pass that number on to as many people as you like.

The solution is blockchain. How it works is complicated, but what it does is simple. It is an uneditable list. For bitcoin, the blockchain is a chronological list of all transactions that a coin has been involved in, and it is spread around the world. To change the record, you would have to hack not one central database, but a huge number of systems.

So any time you want to make an uneditable audit trail available to a lot of people, blockchain could be useful.

An uneditable list has potential far beyond finance. It has been touted as a solution to conflict diamonds, for example, by creating a verifiable audit trail so a concerned buyer can be sure their engagement ring didn’t come from a war zone. This is just the tip of the iceberg: It has been hailed as the solution to problems as diverse as Internet privacy and world hunger.

The decentralized nature of blockchain offers another advantage. Because a list of past transactions is readily accessible, two people can do business without needing a third party. You can do that with cash, of course. But it wasn’t always possible online; you would have to instruct your bank to get in touch with your client’s bank to organize the money transfer. Blockchain allows one individual to verify he owns some bitcoin and pass it on to someone else without reference to a central database. Blockchain eliminates the middlemen, reduces or eliminates transaction fees, speeds up international payments, and frees users from reliance on banks and governments.

This is why governments have been suspicious of blockchain. Many see it as merely a tool of tax evasion. Like cash transactions, cryptocurrency transactions using blockchain cannot be traced by the government. Unlike cash, even the creation of cryptocurrencies is independent of governments.

But if organized differently, blockchain-based transactions and records could become a tool for government surveillance. Some users are finding this out for themselves. From 2011 to 2013, shoppers could use bitcoin to anonymously buy almost anything illegal online at a website called Silk Road: cocaine, cyanide, hacking software, firearms and hit men. The site was shut down in 2013. But the records of those transactions are forever included in the blockchain. The details of their transactions are available for anyone to see. If users weren’t careful to hide their details when buying the bitcoin, the government can find them.

The vice president of the Chinese central bank has outlined this possibility. Under his proposed state-run cryptocurrency, the government can see every transaction every citizen makes, in real time.

Thus blockchain—a tool designed to aid anonymous transactions—could become the ultimate tool for government surveillance and control.