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Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Blockchain – distributed ledger technology for Bitcoin

My November 2 blog on Bitcoin already mentioned Blockchain – a distributed ledger technology that monitors all Bitcoin transactions since its inception early 2010. Given my conclusion that Bitcoin may well be a massive asset bubble, Ponzi or pyramid scheme, I’m also skeptic about Blockchain as both are fully interconnected. The technology hype around Blockchain surprises me too.

Investopedia: “The ever-growing size of the blockchain is considered by some to be a problem due to issues like storage and synchronization. On an average, every 10 minutes, a new block is appended to the block chain through mining”. These technical issues indeed seem realistic to me.

On 18 March 2014, The Guardian wrote a very interesting article: “A history of Bitcoin hacks”. One of the company’s that was hacked subsequently recommended against anyone using services like his: “Please don’t store Bitcoins on an internet connected device, regardless of [if] it is your own or a service’s.” Guardian: “That advice leads to its own problems: if users aren’t storing their bitcoins – or, more accurately, the private key to their bitcoins – on an internet connected device, spending their money becomes difficult”.

It seems to me that interconnectedness as well as being internet connected are the main concerns when it comes to Bitcoin and Blockchain. To a large extent, I addressed my concerns in my 9 June 2015 blog called “Cloud computing and hacking”. The main security issues with internet still are “user access management” and “user identity restrictions”. As I stated back then: “Cloud computing to hackers is like breaking and entering into a house with a stolen key of the front door including a label telling you the name and address”.

I am a strong believer that efficiency and effectivity don’t go well with management of risks. Unfortunately, (enterprise) risk management is often only represented in the final stages of IT developments. By then it’s often very difficult to close major loopholes. The average job tenure for managers and employees may even cause an “après nous le déluge” mentality.

A distributed ledger technology takes away the need for reconciliations (eg, A/R coy 1 vs A/P coy 2) between companies. That may look like a blessing but it also implies that the quality of internal control will deteriorate to the weakest link in the entire chain. And that is genuinely worrisome.

Several decades ago, I learned that the banking ledgers were the legal basis in case of any customer dispute. A customer has to proof that the banking ledgers are wrong. A distributed ledger technology will pose very interesting legal challenges to the financial services industry: Who is responsible for what? I suppose this is one of the Big questions in the Greenwich Associates report on Blockchain.

There is some disagreement on the security issue. According to the Greenwich report, “making the distributed ledger network private doesn’t necessarily cure all security issues. … The blockchain is by definition a public network and, as such, cannot be broken into. A private network on the other hand, especially one storing sensitive banking information, will in all likelihood become a hacker target. This threat is something all financial services firms are adept at handling today, but it is important to remember that a private blockchain does not necessarily equal a perfectly safe one.” (source)

A public network cannot be broken into?? Seems the perfect way to “exchange” computer viruses….

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