Technology – what is your blockchain strategy?
For the past 2-3 years we have been advising clients on blockchain and crypto related matters (e.g. the tax consequences of locating a server farm in Norway; setting up a crypto fund in Malta; peer to peer platforms in Gibraltar; initial coin offerings from U.S. blockchain companies, etc etc). Even the most cynical, dyed in the wool, nostalgic would have to agree that the blockchain is here to stay and that this is the direction of travel for the future. However, what is the blockchain? Getting to grips with the basics is fundamental, particularly when dealing with a new and, some might argue, nebulous concept.
By now you no doubt have an awareness, if not a basic understanding, of blockchain. You’ll know that it is the technology that underlies the cryptocurrency, Bitcoin. Perhaps you know how it works or its uses beyond Bitcoin. Here, we explain blockchain in (hopefully) simple terms, how it may change certain industries, the barriers to this change and what organisations are doing to overcome these hurdles.
In simple terms, blockchain is a digital archive of information pertaining to an asset, individual and/or organisation. But this is no ordinary digital ledger, its technology features:
- the ability to validate data entered on the blockchain as correct and complete at the time of creation;
- the data cannot be changed, new blocks of data are added sequentially and chained to the last block – the story the data tells can be added to, but the past not modified;
- multiple parties consent on a majority or pre-defined basis on the validity of additions to the blockchain;
- multiple copies of the data, in encrypted form, are stored on the computer systems of numerous globally disseminated individuals/organisations participating in a particular blockchain network;
- it is possible that a malicious attack on a particular computer may be successful in changing data held on its copy of the blockchain, but the other participants in the blockchain network would be alerted and the true blockchain restored. In this sense, the blockchain is immutable; and
- an accessible audit trail.
These characteristics mean that the blockchain represents the truth, producing trust in the transfer of information and assets. Blockchain technology can, therefore, be used for societal and commercial benefits.Just some blockchain use cases include:
|Use case||Example benefits|
Fundamentally, it diminishes the role of certain intermediaries, which is great for the consumer, but not the intermediary. Whilst we’ll see profound changes to such industries, new industries will develop. The internet may have killed or radically changed a number of industries (e.g. high street shops, Film & TV, music, publishing, travel), but new industries were born out of this (e.g. internet service providers, cloud storage providers). All that said, we’re quite a way off this change and that’s because of fundamental issues with existing blockchain tech.
|Issue||What does this mean?|
|Scalability & speed||Adding new data to a block and a block to a chain takes enormous computational power and time to validate the transaction as true is significant. For example, Bitcoin is said to be able to process 4.6 transactions per second, whereas Visa can process 1,700 transactions per second. Organisations are working on these issues by decreasing transaction costs, increasing block sizes, decreasing latency and other more radical solutions.|
|Environmental impact||The computational energy cost for downloading and storing an entire blockchain network on multiple computers is not sustainable. It is said that the energy consumed in running the Bitcoin network is equivalent to 159 nations!|
|Network size||If there are not sufficient participants in a blockchain network (e.g. in a private network used by public body) it is potentially more susceptible to malicious attack.|
|Human error||Blockchain is only as good as the data entered; work needs to be done across different uses to ensure the initial data entered can be verified as true and complete.|
|Interoperability||Numerous blockchain networks are being developed by the public and private sector, but until they can talk to one another and transfer information mass adoption is unlikely.|
Organisations are working on these issues (e.g. Bexam and Elrond on scalability Cosmos and Polkadot on interoperability), whilst also seeking to combine the use of blockchain with artificial intelligence, quantum computing and light-based computing. In our view, the benefits of blockchain in the short term may have been overstated and perhaps the long term benefits underestimated. We predict that Blockchain issues will be solved and, in time, there will be a dominant free open blockchain that will impact every area of human life.We are helping clients in four ways:
- navigating the tax and regulatory environment in respect of cryptocurrencies, initial coin offerings and simple agreements for future tokens;
- structuring investments in blockchain companies;
- structuring ownership of IP and its exploitation across multiple blockchain uses and industries; and
- supporting a company/group to develop its own blockchain strategy.