Even if you don’t know exactly what Bitcoin is, or how blockchain works, chances are you’ve at least heard about or read the words in the media. The technology is undoubtedly groundbreaking – but for some it conjures up images of shady dealings, tax evasion, and cross-border crime.
However, others are touting these technologies as potential tools in the fight against corruption, primarily because all transactions are recorded and their details may not be altered, thereby creating a trail.
Neither view is absolutely correct nor incorrect and the truth, says Transparency International (TI) in a recent publication for its research helpdesk, lies somewhere in between.
What exactly are blockchain and Bitcoin, though?
Bitcoin and blockchain explained
Created in 2009 by a mysterious person or group of people referred to as Satoshi Nakamoto, Bitcoin is an example of a digital currency – it doesn’t exist as physical coins or notes. As a cryptocurrency, Bitcoin uses cryptography to secure transactions, control the creation of new units, and verify the transfer of assets.
Cryptocurrencies overcome the limitations of banks or credit card companies, as transactions are of a peer-to-peer nature and users can store, send, and receive value (like money) without going through a middleman.
The data is stored simultaneously on all nodes in a system, rather than in one dedicated location, and each node communicates with the others to record and verify each transaction. Technically, a node can be any device with an IP address that can run a programme validating bitcoin transactions.
Other cryptocurrencies include Etherium, Ripple, Litecoin and Cardano.
As for blockchain, this refers to the publicly accessible ledgers known as blocks, or collections, in which data is stored. This type of technology is referred to as distributed ledger technology (DLT).
Blockchain can be used for other applications, and its great value lies in the fact that blocks contains not only recently stored data, but all previous data points. This means that a block can be linked to the previous block, creating a chain of information.
During this linking process, the information in the block is meticulously time-stamped and cryptographically sealed. This ensures that no blockchain data can later be changed or deleted. Furthermore, all data can be traced back to the exact moment it was added to the blockchain.
Mining refers to the process of adding data to the blockchain – this requires computing power, effort and luck, as a cryptographic problem is generated in the digital signing key associated with each new transaction, and this must be solved to add data to the blockchain. However, the reward for this effort is given as bitcoins, which are distributed to the mining computers.
The potential is huge, says TI, for using blockchain to facilitate more transparent, more accountable and efficient ways of storing government data and administering transactions – but there are still a number of legal and logistical challenges to overcome.
Risks associated with using bitcoin
Cryptocurrencies provide users with anonymity, as transactions outside of a bitcoin exchange do not require a real name. They can therefore lend themselves to non-attributable transactions, says TI, which provides a potential for misuse.
Opinions are divided on whether Bitcoin is uniquely situated to promote and support illegal activities such as money laundering, drug dealing and computer virus attacks, TI adds. “The salience of these risks hinges on the (assumed) anonymity Bitcoin provides, as well as the lack of a central monitoring body that would otherwise flag or block suspicious transactions.”
For money laundering especially, Bitcoin and other cryptocurrencies provide anonymity, flexibility and immediacy, which are tremendous boons to those who need to rapidly and discreetly get rid of ill-gotten gains. However, the other side of the coin is that all transactions are recorded in the blockchain and are publicly accessible for inspection.
The digital keys, or unique identifiers, must be used by all involved parties – these keys and their associated activities can be tracked, because the flow of bitcoin is globally visible, according to a 2013 paper by Meiklejohn et al., titled A Fistful of Bitcoins: Characterizing Payments Among Men with No Names. Bitcoin identities are thus rather pseudo-anonymous, the authors state – “while not explicitly tied to real-world individuals or organisations, all transactions are completely transparent”.
Meiklejohn et al. suggest that eventually all transactions will arrive at a mainstream bitcoin exchange, which does keep personal details of account holders. This is unavoidable, they argue – therefore, if there is a suspicion of illegal activity and the exchange is pressured or even subpoenaed for information, the bitcoin user may be identified.
The other big concern is that there is no central monitoring body to flag or block suspicious transactions. The South African Reserve Bank (SARB) is setting up a fintech programme to track and analyse financial technology (fintech), as well as monitor activities involving virtual currency in the country. This is the first step in the regulation of cryptocurrency and the development of a clear regulatory framework.
The SARB is also set to launch a project which will experiment with DLTs. Working with the banking sector, Project Khokha will seek to “gain a practical understanding of DLTs through the development of a proof of concept”, according to the SARB.
With this news, experts say, South Africa is poised to become a global centre of fintech excellence.
Blockchain used to boost good governance
Blockchain itself, as a form of DLT, has the potential to “make data more secure, make changes transparent, support and verify transactions”, says TI. The technology has certain characteristics that make it resilient to corruption – transparency, immutability, security, inclusiveness and disintermediation.
“Immutability and security features make it harder for corrupt actors to manipulate data,” says TI. “The removal of third parties lowers the opportunity for bribery or fraud. Transparency and inclusiveness establish constraints on corruption and make corrupt transactions easier to recognise. Based on these attributes, experts see a lot of potential for DLT to support anti-corruption efforts.”
Although there are legal and physical challenges in the implementation of blockchain, the benefits are considerable, especially in terms of improving data management in the public sector. “It might be able to increase trust in governments in contexts which are affected by corruption and thus often show low levels of trust. Its implementation, however, also presents considerable challenges,” TI notes.
One application is in the storage of land registry entries and land titles to protect them against fraud and corruption. The technology is in use in some countries:
- In Honduras, Factom is building a land registry database on the blockchain to empower citizens to fight for land titles in court.
- In Sweden, ChromaWay is testing the possibility of running housing purchases using blockchain and smart contracts.
- In Brazil, the state-run technology company Serpro recently launched a blockchain platform that hopes to reduce fraud in Brazil’s antiquated land titling system, which currently allows vast swathes of Amazon rainforest to be cut down for soy and beef farming.
- In Ghana, Bitland aims to protect and secure land titles by putting them on the OpenLedger blockchain (Bates 2016). It has provided its proof-of-concept but has not yet been fully implemented.
Voting fraud and corruption could also be minimised through the use of blockchain to make electronic voting secure. With the FollowMyVote app, the voter will be issued with a key once their identity has been verified against a registry, in the manner of a cryptocurrency transaction. They would then submit their vote to a blockchain-based ballot box. Another app called Sovereign also offers blockchain-based voting solutions, using tokens that voters can send as votes via the blockchain.
Financial transactions, for instance those involving humanitarian aid or support for projects in other countries, and supply chain management (SCM), where a paper-based system presents a vulnerability to corruption, are more examples of the beneficial application of blockchain.
In the case of SCM, storing product data on a blockchain makes transaction data instantly available and traceable in real time. Transactions are safer and more transparent as time stamps make it possible to audit transactions.
In Zimbabwe, a cryptocurrency ATM for Bitcoin and Litecoin has been installed in Harare, with a view to providing the population with a trustworthy means of financial exchange.
• Image: Flickr / BTC Keychain
