Bitcoin valuations have made many recent headlines. The attractions of anything which increases in value by 40%+ in weeks is understandable.
Yet there are problems. Some of these involve Bitcoin (which ET will not address here).
Others involves blockchain fundamentals, two of which (though there may be many more) stand out:
- the transparently opaque conundrum
- the immutability identity problem.
The blockchain transparently opaque conundrum
Businessweek has highlighted this. It thinks that some 40% of all Bitcoins (but this could be any blockchain-backed cryptocurrency) are owned by around 1000 users (so-called ‘whales’). With a Bitcoin capitalisation that has exceeded US$250B, this is a large amount in a few people’s wallets (one has to hope they do not ‘lose’ their wallets).
But Business week goes on to make a fundamental point. Crypto currencies lack regulation. They are not securities. ‘So what?’ you may cry.
So a lot. To quote Businessweek: “the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market.
“I think there are a few hundred guys,” says Kyle Samani, managing partner at Multicoin Capital. “They all probably can call each other, and they probably have.”
One reason to think so: “At least some kinds of information sharing are legal,” says Gary Ross, a securities lawyer at Ross & Shulga. “Because bitcoin is a digital currency and not a security, there’s no prohibition against a trade in which a group agrees to buy enough to push the price up and then cashes out in minutes.”
The implications of this are enormous for all cryptocurrencies. Wholly legally, and without breaking any regulatory rules, markets in cryptocurrencies are susceptible to manipulation by concert parties. Oil companies cannot do this. Banks cannot do this. Automobile manufacturers cannot do this. In the cryptocurrency markets you can.
The immutability opaque conundrum
One of the attractions of blockchains is that the data recorded in a block is immutable. Although blockchain transactions are designed to be anonymous, each one associates with a coded address visible to anyone. Immutability, the inability to change what enters a blockchain, is what enables new business models for supply chains or trade finance or food provenance to develop. All can see. No one can change.
Now throw in one of the tenets of EU identity legislation – the concept of the ‘right to be forgotten’. As an EU paper puts it “the Court in its judgement did not elevate the right to be forgotten to a “super right” trumping other fundamental rights, such as the freedom of expression or the freedom of the media. On the contrary, it confirmed that the right to get your data erased is not absolute and has clear limits. The request for erasure has to be assessed on a case-by-case basis. It only applies where personal data storage is no longer necessary or is irrelevant for the original purposes of the processing for which the data was collected. …
“The Court also clarified, that a case-by-case assessment will be needed. Neither the right to the protection of personal data nor the right to freedom of expression are absolute rights. A fair balance should be sought between the legitimate interest of internet users and the person’s fundamental rights. Freedom of expression carries with it responsibilities and has limits both in the online and offline world.”
How imutability and rights to regain anonymity will pan out is unclear. On the one hand the EU is very clear: “It only applies where personal data storage is no longer necessary or is irrelevant for the original purposes of the processing for which the data was collected”.
But that will not cover all instances. Indeed, the impression today is that there is a veritable data minefield awaiting enterprises who have not thought this through – in the context of either blockchains or data privacy.
What does this mean
Many speak of the attractions of the conceptual attractions of blockchain. They are correct to assert that the principles underpinning blockchains could, arguably should, open up new ways to do business.
Yet not all is solved or resolved. The devil is in the exquisitely painful detailing of how blockchains will work. Keep an eye out. As with Bitcoins, blockchain enthusiasm will encounter unexpected roadbumps or even legal pitfalls.