While Maltese business and political circles are abuzz with the news that Malta is attempting to set up a regulatory framework for technologies such as blockchain, The Malta Independent on Sunday sat down with economist JP Fabri to gain a better understanding of how disruptive this really is and how we got here.
Blockchain technology forms part of the wider Distributed Ledger Technology (DLT) and has so far not been regulated by any institution or body around the world. It is a technology that is an ever-growing list of records, called blocks, which are linked and secured using something called ‘cryptography’. Each record has a link with the previous record, or block, and contains a timestamp as well as transaction data.
Once the record is issued with a timestamp, it is not possible to alter or tamper with that information. While the majority of people find this new technology difficult to grasp, in practice it could potentially bypass lengthy procedures in day-to-day life.
For instance, a music band could use DLT platforms such as blockchain to eliminate the need for intermediaries to receive royalty payments whenever somebody downloads their music. Transactions would occur across a peer-to-peer network, and are computed, verified and recorded using an automated consensus method.
Fabri, who has been following the developments and impacts of the technology closely, quickly stresses that it is important to place DLTs in their correct context in order to understand it fully.
Starting with the highest level, he was keen to highlight how the media frenzy surrounding Bitcoin, the most famous cryptocurrency around, is just one element that plugs into the wider possibilities that DLTs offer in several aspects of daily life.
“Blockchain is the underlying technology allowing different elements to plug into it, one of which is cryptocurrency, and one of which is Bitcoin.
“One of the most fundamental ways of doing business, especially with money but in anything that you do, is all about trust. The system up until now has always placed its trust in a central depository of data. If we look at our identity records, all our data is stored at the identity office. If we are looking at health data, they are stored at the hospital. It is always built on this trust relationship with central, but distinct and independent sources.”
Understanding the enthusiasm surrounding blockchain
Going through the history of banking and finance, Fabri looks into how trust underpins the very fabric of our society, allowing banking systems, government systems and society in general to flourish.
“We had the famous Medici family from Florence in the Renaissance period who became the first bankers in the world. People trusted them with information and in turn, the Medicis kept a ledger of what the person had and owed. This system has been in place for a good 400 years.
“Jump ahead to the present day, and this year we are commemorating the 10-year anniversary of the 2008 financial crisis.
“The crisis showed that the system on which we based our banking failed on the trust element. We had financial intermediaries, banks, which started speculating on assets that did not exist. The collapse of the system was a symptom of a lack of trust.
“Ten years ago as well, a famous paper by Satoshi Nakamoto was published. He is the result of what was referred to as the cyber punk movement.”
Satoshi Nakamoto is a person, or a group of persons, who in October 2008, months after the financial crisis had spiralled, published a paper on Bitcoin – the famous cryptocurrency. In developing the software to create Bitcoin, Nakamoto inadvertently created the first blockchain database, which as previously mentioned is a type of DLT platform.
Delving into the cyberpunk movement, Fabri continues by questioning what movements were galvanised by the internet.
Cyber punks: the effort for transparency, openness and connectivity
“You always had these people who believed the internet would bring fundamental changes in the way humanity perceives and achieves transparency, openness and connectivity.
“With this idea in mind, the cyber punk movement began to launch trials in cryptography. Cryptography is what allows data to be entered into a DLT platform such as blockchain, and prevents the possibility of tampering with that data once it is time-stamped and authenticated.
“Going back to 2008, very soon after the financial crises, there was a whole outpour of anger on the whole institutions. People had had enough; they lost their money, wealth and jobs after the trust element was broken.
“There was this renewed vigour in trying to follow up on the cyber punks’ movement. Nakamoto issued a paper which heralded the birth of blockchain. He developed a technological platform which allowed this trust to flourish.
“He developed a system whereby blocks of data, even chunks, are crypted and hashed into 256 characters. You could even have War and Peace, an 800-page book cryptified into a 256-character hash on a block, and that block will continue being passed on and authenticated through the platform. No matter how big or small your input is, the output will always have a fixed 256-bits length. This becomes critical when you are dealing with a huge amount of data and transactions. Therefore, instead of remembering the input data which could be huge, you can just remember the hash and keep track.
“The biggest question was always how to nudge people to keep the trust and remain plugged into the blockchain technology or some variant of it. Nudges can be used by both businesses and government to shape the behaviour of employees, customers, and citizens. This was done through the concept of data mining. Therefore, the idea was that if you keep this distributed ledger, you will be rewarded by getting so-called bitcoin. The nudge theory is very important in economics; in fact, Richard Thaler, the economist who developed the nudge theory, was awarded the Nobel Prize for Economics last year. Nakamoto was able to bring all these links together and start this revolution that we are currently experiencing.
“This progressed and electronic wallet was also developed, people started storing their virtual currency and making purchases with the cryptocurrency. This is where we are now.”
How can Blockchain technology help us today?
Fabri boldly commented that, “We are potentially living through the fifth industrial revolution. Unfortunately, the headlines have been totally hijacked by Bitcoin which is a subset of the whole thing.
“All this has been creating chaos and uncertainty. The worst thing that can happen is that the focus remains on cryptocurrency and we forget the revolutionary element of blockchain.
“Let’s look at elections and the effect block chain can have on them. Elections require authentication of voters’ identity, secure record keeping to track votes, and trusted tallies to determine the winner. In the future, blockchain tools could serve as a foundational infrastructure for casting, tracking, and counting votes – potentially eliminating the need for recounts by taking voter fraud and foul play off the table. By capturing votes as transactions through blockchain, governments and voters would have a verifiable audit trail, ensuring no votes are changed or removed and no illegitimate votes are added.
“In education, certification is imperative. By nature, academic credentials must be universally recognized and verifiable. In both the primary/secondary schooling and university environments, verifying academic credentials remains largely a manual process (heavy on paper documentation and case-by-case checking). Deploying blockchain solutions in education could streamline verification procedures – thus reducing fraudulent claims of un-earned educational credits. In this regard, Malta is already utilizing this education.
“Entertainment entrepreneurs are turning to the blockchain to make content sharing fairer for creators using smart contracts, whereby the revenue on purchases of creative work can be automatically disseminated according to pre-determined licensing agreements
“The real-estate sector is also ripe for improvement. Blockchain offers a way to reduce the need for paper-based record keeping and speed up transactions – helping stakeholders improve efficiency and reduce transaction costs on all sides of the transaction. Real estate blockchain applications can help record, track, and transfer land titles, property deeds, liens, and more, and can help ensure that all documents are accurate and verifiable.
“Healthcare institutions suffer from an inability to securely share data across platforms. Better data collaboration between providers could ultimately mean higher probability of accurate diagnoses, higher likelihood of effective treatments, and the overall increased ability of healthcare systems to deliver cost-effective care. Use of blockchain technology could allow hospitals, patients, and other parties in the healthcare value chain to share access to their networks without compromising data security and integrity.
“One of the most universally applicable aspects of blockchain is that it enables more secure, transparent monitoring of transactions. Supply chains are basically a series of transaction nodes that link to move products from point A to the point-of-sale or final deployment. With blockchain, as products change hands across a supply chain from manufacture to sale, the transactions can be documented in a permanent decentralized record – reducing time delays, added costs, and human errors apart from reducing the possibility of fraud.
“Finally, for those making charitable donations, blockchain provides the ability to precisely track where donations are going, when they arrived, and whose hands they actually end up in. From there, blockchain can deliver the accountability and transparency to address the perennial complaints about charitable donations – including fraud and misappropriation of funds.
Malta – the blockchain island
Fabri continued saying that the blockchain is truly a revolutionizing force that is impacting so many industries and sectors in ways no other technology has done before. It is therefore very promising that Malta has set its eyes on becoming a key pioneer in regulating such technologies.
“Malta has built its whole economy on using its jurisdiction innovatively. If we look at financial services, the pharmaceutical industry, the aviation and maritime register and the remote gaming sectors are all built on regulations and laws that set Malta apart from other jurisdictions. In this case too, the Government had the foresight to regulate this sector.
“The proposed sets of legislation have the potential of establishing Malta as the blockchain capital with various companies wanting a certification for their technology and products. Malta will be able to grant this and to also regulate the issuance of cryptocurrencies and Initial Coin Offerings. I think we are living in very exciting times and Malta has the potential, once again, to be leaders in the field and to sow the seeds of an important economic sector.”