Alternative Blockchain Uses Deepen Individuals’ Privacy and Ownership Losses

Social media connection concept with mobile, notebook and server technology illustration.EPS10 vector file organized in layers for easy editing.
Social media connection concept with mobile, notebook and server technology illustration.

Picture Credit: Cienpies Design & Communication

The system behind cryptocurrencies like Bitcoin, known as blockchain, is now being explored for other potential applications, according to NASDAQ. A blog post in the Wall Street Journal offered a basic definition of blockchain:

 A blockchain is a data structure that makes it possible to create a digital ledger of transactions and share it among a distributed network of computers. It uses cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need for a central authority.
 ZDNET explains that “preparing an enterprise to embrace the Internet of Things means more than simply linking with remote devices or sensors. The IoT means rethinking an organization’s relationship with technology, and the possibilities that are opening up. These possibilities go far beyond what anyone could have even imagined a couple of years ago.” Of course, the myriad of applications from these efficiency gains are all very promising but, as 1,200 lawyer international firm Taylor Wessing points out, you don’t own this data that is being collected! This truly must change or you are going to be paying Mark Zuckerberg of Facebook for the use of your own eye scan… ABSURD! Waay back in 2008, Facebook issued its new and improved (for them) “terms of service (TOS)” asserting that “anything you upload to Facebook can be used by Facebook in any way they deem fit, forever, no matter what you do later.*Consumerist shared their TOS confirmation. A 2015 Atlantic cover story details how utterly creepy it is that Internet users have suffered a total loss of privacy and ownership (Google assigns to term to vehicles, wonder why…):
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Picture Credit: Atlantic Monthly
“Facebook has also been thinking about faces. Last summer, the company’s artificial intelligence team announced that its facial-recognition software passed key tests with near human-level accuracy. (In June 2015), it presented a further development:”
‘Facebook’s Yann LeCun, the AI team’s director, boasted that a different algorithm could identify people 83 percent of the time even if their faces were not in the picture. The program instead works from a person’s hairdo, posture, and body type.’
Alternative Uses for Blockchain that NASDAQ Flags: Fortune applauded recently the ascendancy of ex-Caryle Group finance exec Adena Friedman to the role of NASDAQ chief executive, “making her the first woman to run a major U.S. exchange and catapulting her into the top ranks of women in finance.”
  • A blog on Bytecoin noted numerous alternative uses for blockchain, starting with Namecoin’s pioneering application of distributed DNA in which its goal is to allow registering standard DNS records, performing updates on them, and gaining access to these records. Others like Datacoin and Storj have suggested that blockchain could be used for cloud storage (peer to peer file sharing networks) or Satoshi Nakamoto’s suggestion that it could serve as a “distributed timestamp server” to protect data from being changed or deleted. Bitmessage and Twister both suggest that blockchain might be useful for communication platforms.
  • Startups like MyPowers is using blockchain technology as the basis to create a marketplace for digital content or any digital asset that can be traded online. It is pushing for the idea that the mass consumer audience can enjoy a decentralized marketplace for all types of products, merchandise, subscriptions and even influencers’ time.
  • Since blockchain has been used to authenticate transactions, an interesting application is to extend this to other applications like voting or any situation that needs authorization, such as for political parties or even proxy voting used by shareholders.
  • Identity management is another application in which tamper-proof digital identities can be created like those being developed by Onename. This is similar to Bitnation’s creation of digital identities both of which are now viewed as a potential replacement for the use of usernames and passwords in the online environment.
  • Records for businesses can be kept in a much more organized and succinct fashion through the use of blockchain technology, according to companies like Factom. At the same time, it addresses security and compliance issues based on the precedent set by blockchain’s original financial-based use.

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 Picture Credit: Shutterstock
  • An infographic created by Let’s Talk Payments offers these applications and other alternatives for blockchain technology. These other options include smart contracts, reviews and endorsements, real estate, precious metals and diamonds, Internet of Things (IoT) applications, app development, patient medical records, network infrastructure, gaming, ride sharing and numerous financial uses.

Blockchain Gaining Widespread Adoption but FinTech Poses New Risks

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Picture Credit: Oliver Wyman in WSJ -CIO Corner

Most financial professionals have heard about Bitcoin and early ValueWeb proponent George Howard  quipped that blockchain is a “distributed database that sequentially records transactions.” Bitcoin is simply the earliest example of some 750 cryptocurrencies. Ever the evangelist, Howard and many billionaires like Microsoft’s Gates, PayPal’s Thiel, Virgin’s Branson, and Google’s Schmidt (among others) have embraced blockchain as a disruptive technology:

Never has it been more important than to be the “patient zero” of a meme that goes viral; to coin a phrase that becomes part of the vernacular; to be the first to write, sing, paint, or otherwise express something that establishes you as a “creative,” a thought or key opinion leader.

LetsTalkPayments.com (LTP) explains that, “The blockchain network consists of nodes, i.e. distributed servers. All the nodes can accept and process the transaction. The nodes on the network share information about the candidate transaction.” A distributed ledger, above right, is a network that records ownership through a shared registry. 1) The devil is in the details as payments get approved autonomously when a “majority” or credentialed nodes accept a transaction and these systems can be overwhelmed or manipulated due to very uneven liquidity (look up the Koinify case). The technology could cut financial services firm costs by up to $20 billion annually by 2022, according to Santander’s Finextra.

“Blockchain technology continues to redefine not only how the exchange sector operates, but the global financial economy as a whole.”

–  Bob Greifeld, Chief Executive of NASDAQ

Earlier this year, bitcoin expert Chris Skinner released The ValueWeb (available on Amazon) which explained that the Internet of Things (IoT – or sensor-enabled machines) cannot operate in the framework of the old payments system and needs an Internet of Value (or “Valueweb”) to function.  Chris’s fall 2014 book Digital Bank explained how the planning activities of incumbent banks (Barclays in the UK and mBank in Poland), new start-ups (like Metro Bank), and disruptive new models of banking (like FIDOR Bank in Germany) and finance (like Zopa and Bitcoin) signaled early ValueWeb adoption. The problem with traditional banks is that they are a captured oligopoly with privileged access to the clearing systems at national central banks with excessive leverage and inadequate regulatory compliance and enforcement. 2) The breakup of the fiat or fractional banking system is another important looming risk from blockchain to a next generation ValueWeb payment system. Nonetheless, Business Intelligence cites KPMG data as demonstrative that this Fintech market opportunity is getting funded fast.

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LTP beautifully details how the Blockchain Platform is being used for various use cases and business models such as:

– Crowd Funding – Blockchain Technology is being applied to the crowdsourcing platforms. When individuals are granted certain responsibilities or chunks of business, a blockchain-like system could determine which of those individuals are worthy of credit. Blockchain has the potential to make crowdsourcing smooth and secure. Examples of such companies are  BitcoinCapital (a fund from RT’s Max Keiser), Koinify (which failed) and others. Max’s partner Simon Dixon of the BankoftheFuture explains the blockchain opportunity here and transactional vehicles like StartCoin.

– Identity Management-  In the field of identity management, user first scans his/her identity document and then signs it. Then, the mobile app will generate a private and public key to seal that record. It is encrypted, hashed and sent to the network of communicating nodes running on the Blockchain network. Examples of such companies  are  ShoCardBlockChain Factory and others.

– Smart Contracts – A cryptographic Blockchain is  used to digitally sign sensitive information, and decentralize trust; and this is being used to develop smart contracts and escrow services, tokenization, authentication, and other services. Examples of such companies are  SymbiontSAE and others.

– Remittance – Blockchain protocols are used by many companies already for P2P money Transfer across international borders. Its a segment worth $500 B. Examples of such companies are RipplelabsBitspark  and  BitPesa.

– Data Management & Analytics – Blockchain-based identity ledgers are used  in database management and data analytics to support various application. Examples of such companies  are  Factomnumsight and others.

– Trading Platform – Using Blockchain technology, individuals and firms can  produce and exchange financial contracts. This peer-to-peer contract creation and settlement means that all transactions are cleared on the Bitcoin Blockchain with no intermediary involved. Examples of such companies  are KrakenNasdaqMirror  and others.

Last week, twelve large banks in the 70 member R3 Consortium (Barclays, BMO Financial Group, CIBC, Intesa Sanpaolo, Macquarie Group, National Australia Bank (NAB), Natixis, Nordea, Royal Bank of Canada (RBC), Santander, Scotiabank, and Westpac Banking Corporation) just participated in a trial to demonstrate cost-cutting and increased efficiency of cross-border payments using startup Fintech player Ripple’s ‘digital asset’ XRP.

The Financial Stability Oversight Council (FSOC), a US Treasury entity, warned that blockchain technology and marketplace lending could present risks to financial stability. Henry Blodgett’s (of dot.com hype and convictions) BusinessInsider does cover blockchain closely which lists other risks:

  • Marketplace lending. FSOC warned that marketplace loan investors could become less willing to fund loans during a trough in the business cycle, increasing the risk of the model. It also said that as the number of marketplace lenders competing with traditional lenders rises, they might lower their underwriting and loan administration standards in order to attract customers. This would likely mean riskier loans.
  • Blockchain technology. FSOC suggested that risks associated with blockchain may not emerge until solutions are deployed at scale, because of participants’ limited experience with the technology.
  • Blockchain fraud. FSOC also said that some blockchain systems could be vulnerable to fraud, if a significant minority of participants colluded to defraud the rest (as the role of centralized intermediaries diminishes).
  • Regulatory diseconomies. FSOC also highlighted that financial firms using blockchain-based systems may operate over multiple regulatory jurisdictions or national boundaries.

Still interested ? MIT offers a FinTech certificate for a twelve week course starting November 21st, 2016 for $2600 – Cambridge is more fun than online.