How up to date is a blockchain?

No one knows, but it's very fast. While it's not a block chain application, try sitting next to someone accessing the same WiFi connection and sending them a WhatsApp. In most cases, wherever you are in the world, the message will arrive almost before you can say "I've sent you a message." In theory, that's how quickly transactions are relayed around the block-chain. Of course, network congestion can cause delay, as can broken primary undersea cables and, of course, internet filtering imposed by some governments.

How secure is blockchain?

It's no less secure than keeping your cash in a physical safe in a bank and, just like if the bank manager decides to raid the safe and run off with the money, there is the risk that an insider might just steal your tokens. There have been a number of instances where providers of "wallet" services have done exactly that - or where their servers have been hacked and records stolen which has then enabled tokens to be transferred.

However, there are emerging threats and they are as yet both unknown and, probably, unknowable. The basic problem is that we can essentially consider blockchain technology as creating the ability to generate alternate universes and no, that is not as outrė as it sounds.

There are no restrictions on the nature of data that can be saved to a blockchain. It doesn't matter whether it's numerical or alphabetical or, even, in non Romanised characters. If a computer can be programmed to understand it, then it can be saved and if it can be saved it can be accessed and manipulated. In short, the data that can be subject to blockchain applications is limited only by the imagination of those using it.

One application, popularised by the platform Ethereum, is "smart contracts." This has already become such a buzzword that it's been used in at least one fraud.

But of more interest is that, when a fraud was committed by someone fraudulently abusing a smart contract, Ethereum, it is reported, took a very technical action and effectively abolished the transaction.

This isn't easy to understand but stick with it because it's important. It is reported that Etherium, being made aware of the fraud, made what is called a "hard fork" of the history in the ledger and this meant that they were able to delete all records of the fraud. The imperative was clear: the fraudster had "tricked" a so-called smart contract into executing repeatedly and that transferred some "ether" (the name of Ethereum's currency) to the value of about USD80 million. Like all currencies, the interchange value of ether is defined only by the confidence people have in it. Ether's value immediately fell by about a quarter.

This has caused considerable debate. Some say that by intervening, Ethereum has undermined the independence of the blockchain and that things should be left to their own devices. Others say that, where there is demonstrable error or fraud, intervention is the appropriate course of action.

But... if Ethereum did as reported, it is groundbreaking news for law enforcement. See below.

The blockchain does not make new things happen.

What the blockchain is not is a form of artificial intelligence. Nor is it machine learning or any of the other current buzzwords. It is not fintech, nor regtech, nor is it a technology for identifying potential money laundering. Let's be very clear: of itself, it does nothing except store data and make it accessible for processing.

The blockchain only does what it is told to do. And for that it is necessary to have applications, although many in the tech industry are trying to find new names to try to make it sound as if there is something new when, in truth, the only new thing is the clever bit of the blockchain and their applications are just doing more or less what they have done before but underpinned by something that is, for now, novel.

Interacting with a blockchain

How Ethereum demonstrated the benefits of blockchain-based currency for financial crime reduction.

Interacting with a blockchain

If we remain with the idea of blockchain-based currencies, then we can easily see the basic principles.

First, to interact you need an account. There are many ways that these can be set up but they all require you to join an exchange.

Without going into detail, one simply signs up to one of dozens of exchanges and completes a form that buys bitcoins, or whatever. The value is saved to your "wallet." When you want to make a payment, you complete a form. Payments can arrive in your wallet without any action on your part. Your account access security is managed by a "key" which is a long jumble of characters.

In the early days of internet commerce, there was a trend towards what was called "trusted third party" arrangements which, in the USA, were called "escrow" arrangements. Basically, it was a commodification of the traditional letter of credit arrangement for simpler and cheaper services than provided by banks. The money would be released only upon evidence of delivery of the goods, for example.

The blockchain industry has started to use the bizarre expression "trustless" transactions. In essence, what it means is that, because access to the whole ledger is available, there is no need for money (i.e. data) to be stored by a trusted party. However, this is facile because, as has been demonstrated over and over again, instances of theft and fraud, and downright recklessness, have caused substantial losses to large numbers of people. But it's a buzzword and like all buzzwords it takes on a life of its own and rarely do people ask what's behind it. But the truth is, it does not do what it says in the tin.

In 2014, a self-professed "bitcoin evangelist" wrote "And the other thing is that everyone using is following the same rules we are so we don't even need to trust them because we know that Bitcoin was built to make it impossible to break the rules." That's simply not true.

But where the system is "trustless" (it's still a stupid use of the word) is in the sense that where person A transfers tokens to person B, that is a completed transaction that (until the Ethereum case) was thought to be irrevocable.

Nick Tomaino, an industry commentator, said in July 2016 that it is more correct to refer to "distributed trust systems rather than trustless systems." That does, indeed, make more sense.

How Ethereum demonstrated the benefits of blockchain-based currency for financial crime reduction.

Until June 2017, it was generally accepted that blockchain transactions were irrevocable i.e. once completed, they were permanent. However, in the Ethereum case described above it was demonstrated that, while transactions could not be reversed, they could be cancelled.

That has enormous implications for all those involved in the question of how blockchain currencies can be used for financial crime.

First, it shows that something akin to asset freezing and recovery are feasible if one can act quickly enough and demonstrate sufficient evidence - and that Ethereum (at least) is amenable to acting even without a court order. Given that Ethereum is based in Switzerland, where asset freezing is especially tough, this is a remarkable benefit.

Secondly, it shows that it is possible to identify specific transactions and, at least to a degree, isolate them and their connected users. But the Ethereum case is possible because Ethereum has some kind of central authority: it's got at least something in common with the hub arrangement described at the beginning of this paper.

One of the selling points of bitcoin, as a concept, has always been that it has no home base, no hub, no central authority. Ethereum has moved away from that model and businesses based on the Ethereum platform (which allows relatively tech-light development of products) are therefore subject to at least a degree of connectivity to the centre. US authorities have long struggled with the lack of a central point of contact for bitcoin, even trying to prosecute those who have been (so far as can be reasonably ascertained) little more than information providers.

Is Ethereum therefore the future of responsible blockchain development? Maybe.

Given that governments are now proposing to adopt blockchain technology for a wide range of purposes, including managing benefits payments, the question is going to be whether they use an Ethereum-style platform or build their own totally independent systems.

This article is in five parts:
Part 1: https://worldmoneylaunderingreport.com/publications/web/wmlr_articles/s…
Part 2: https://worldmoneylaunderingreport.com/publications/web/wmlr_articles/s…
Part 3: https://worldmoneylaunderingreport.com/publications/web/wmlr_articles/s…
Part 4: https://worldmoneylaunderingreport.com/publications/web/wmlr_articles/s…
Part 5: https://worldmoneylaunderingreport.com/publications/web/wmlr_articles/s…