Kurt Nielsen, PhD, President of Partisia Blockchain Foundation, discusses how the blockchain industry must facilitate the adoption of comprehensive confidentiality solutions if it is to survive.
The urgency with which the blockchain ecosystem must act to ensure the development of comprehensive privacy and confidentiality solutions cannot be overstated. Interest in digital currencies is at an all time high and one result of that is surging interest in the overall blockchain ecosystem. It is also undeniable that the Covid-19 pandemic has greatly accelerated the push for digital currencies to replace traditional cash and cross border transaction systems.
We have already seen plans emerge for a Chinese state sponsored digital currency, discussions of a digital Euro are seemingly underway, and even a Saudi and UAE state-sponsored cryptocurrency for cross border trade between the two countries looks to be in the works. Incredibly, it is expected that might see the rollout of a number of such state-backed digital currencies within the next two years. Before the pandemic, that timeline may have been closer to five years.
While the speed of development and adoption of blockchain technology is undoubtedly a positive thing, it brings with it amplified concerns. For one thing, the adoption of practically any new technology results in an influx of new data into the datasphere, and with more data at stake, the potential for data and privacy breaches grows in parallel. This fact becomes more alarming still when set against the backdrop of the incredible rise of online banking and other financial services.
After all, it’s one thing to lose access to your social media accounts, but if your banking data is compromised it’s a whole different ball game. And when it comes to exciting new financial services and platforms, all eyes are on blockchain, despite the fact that certain aspects of blockchain design could be said to increase, rather than reduce the risk of sensitive data leaks.
Blockchain can certainly act as a safeguard against data breaches by decentralizing sensitive information, but it might also be said that the lack of a privacy layer that is one of the fundamental principles of decentralized ledger technology (DLT) makes it, in its standard form, less suited to storing financial information. Radical new implementations of advanced cryptography are already providing the solution to this issue, but before widespread adoption can be achieved it is essential the lack of understanding among the general public about blockchain’s strengths (and relative weaknesses) when it comes to the processing of sensitive data be tackled head-on.
Decentralized by design, blockchains spread data across a network rather than locating it in a central repository, as is the case with centralized systems like cloud software solutions. This architecture is inherently superior to centralized systems when it comes to trustworthy representation of the data of individual users, largely because of the fact that it is not vulnerable to a single point of attack.
Looking ahead to the impending adoption of digital currencies, it’s clear that any such system will necessitate the storage of individuals’ sensitive financial and personal data, and DLT is clearly fit for purpose to provide a trustworthy representation of this data. However, in addition to decentralization, transparency is another central tenet of blockchain — something which could hamper the technology’s role in building the financial infrastructures of the future.
Unless the blockchain ecosystem can guarantee confidentiality, it will not achieve the level of disruption it is capable of as it will be restricted in its ability to maintain full compliance or meet established standards, best practices and regulations. This, in turn, will hinder the likelihood of mass adoption, ceding its potential to alter the power balance of our global economy towards a more equitable one, resulting in the failure of the great experiment of our industry.
Avoiding this failure is essential, but luckily, the solution is already before us. Zero-knowledge proofs (ZKPs) have been recognized in the industry as a great step forward towards solving the confidentiality problem. However, ZKPs are limited in what they can achieve in that they require a single party to enter a secret computation to prove if it is either true or false. This is quite useful for relatively simple operations, but if the blockchain ecosystem is to be as pervasive and well-functioning as it has the potential to be, it will require operations on a far more complex scale.
There is, though, another exciting form of cryptography that might just hold the answer. Secure Multiparty Computation, or MPC for short, differs from blockchain in its ability to operate on multiple nodes, computing directly onto encrypted data while maintaining zero-knowledge about the data; the best of both worlds. Bridging the gap between MPC technology and blockchain would eliminate all confidentiality concerns and facilitate a truly safe, secure and equitable system that would allow blockchain technology and all of its use cases, including digital currencies, to reach their full potential.
When it comes to the widespread adoption of decentralized finance, existing KYC and AML laws hinder the expansion of the sector, requiring all transactions over a small threshold to be documented. DeFi may be completely outside of the regulated financial system, but the laws on the books of governments still apply. New breakthroughs in MPC technology, which are being led by the seminal work being done at Aarhus University and by a number of other institutions around the world, allow for the establishment of jurisdiction management over blockchain transactions, which will prove incredibly useful as the regulatory landscape becomes more established in line with the levels of adoption the industry is witnessing.
The European Union is gearing towards regulating the space with their Markets in Crypto Assets (MiCA) regulatory framework, which has been in development since 2018. Complimentary regulatory frameworks such as GDPR, CCPA and PSD2 will also act on par with this technology to safeguard the data of individuals, and jurisdiction management solutions will facilitate the navigation of these differing legislative landscapes.
Blockchain is geared to facilitate a fairer, more equitable society and economy but, even with this groundbreaking technology, there will be speed bumps in the way of mass adoption — regulatory challenges are sure to arise as the ecosystem grows, for instance. In its current state, blockchain technology will not achieve widespread adoption until solutions that safeguard privacy and confidentiality are prioritized. However the incredible work being done to combine MPC and blockchain shows great promise and, if there’s one thing that can be said of the blockchain industry as a whole it’s that there is nothing in the way of this technology achieving its full potential that our industry has not already proven we are equipped to handle.
About Kurt Neilsen
Kurt Neilsen is CEO of Partisia Blockchain. Kurt combines Economics and Information Management in developing innovative it-services and businesses. He hold a PhD in Business Economics and did combined graduate studies at the University of Copenhagen, University of Toronto and UC Berkeley. He co-founded Partisia, Energiauktion.dk and Sepior, and functions as CEO of Partisia along side a parttime position as Associate Professor at University of Copenhagen.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.