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So, what's this blockchain thingy? - a World Money Laundering Report exclusive (part 5)

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 systgems 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.


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