Secrecy scandal after secrecy scandal have rocked the financial world since the 2008 financial crisis. In early 2014, the LIBOR scandal uncovered the manipulation of Forex markets.
Last week, the Panama Papers detailed the behavior of Panamanian law firm Mossack Fonseca, which has sold shell companies for the past 40 years so individuals could hide their wealth.
Political players, drug dealers, celebrities and athletes have been swept up in the revelations of the Panama Papers. It’s exactly this sort of behavior many blockchainers believe could be averted by the public ledger technology supporting Bitcoin.
As 11.5 million documents were leaked, the network of super rich hiding their funds in jurisdictions like Panama came into closer focus. Wikileaks claims there’s more to the story, brought to the public by Süddeutsche Zeitung out Germany.
In analysis by news outlets, the Panama Papers pose questions about how the world’s power brokers have avoided taxes. It’s a problem often discussed by the individuals in the nascent blockchain industry.
Overstock CEO Patrick Byrne’s project, t0, has reportedly developed a blockchain platform for trading crypto-securities that is open and transparent; an alternative to the Depository Trust & Clearing Corporation. Although the Libertarian CEO might not like it, it’s exactly the sort of technology of which regulators dream.
As has been pointed out in recent months, blockchain technology – the sort that powers Bitcoin – could bring transparency to a diverse array of industries, some of which don’t have a history as such, and do so in a secure manner.
One of those is the sort of offshore trust in which many world leaders, like David Cameron, have been implicated as using.
Trusts have been around for hundreds of years. It’s a legal form of property management, and one which perhaps the blockchain could facilitate; namely, via the concept of “smart contracts.”
A peer-to-peer, distributed public ledger – as used in the Bitcoin model – can track information in an immutable manner, possibly including the registration of legal titles for property and value.
The way in which information is tracked on a blockchain varies widely. The information can either be broadcast publicly or kept private. Permissions can be defined in ways other than how they have been defined on Bitcoin’s blockchain.
If, instead of handled by a web of corporations, global finances were handled by participant nodes on a new Internet infrastructure in a distributed manner, the issue of trust could be automated and available for scrutiny on a public ledger. A anti-money laundering and know your customer layer or feature could be applied to a blockchain like t0 and others.
A distributed Internet of Things, as envisaged by IBM and its Hyperledger project, could handle the sort of responsibilities currently held by corporations like Mossack Fonseca.
As IBM states: “…[T]he IoT represents a case of billions of players, not all of which can be trusted – some even malicious – with a need for some form of validation and consensus. And for this, the ‘blockchain’ offers a very elegant solution.”
Historically, the corruption demonstrated by the Panama Papers originates via connections, in which central points of authority exploit their positions for their own advantage. This is common across hierarchical societies. Lacking a degree of transparency, as such services generally do, two participants rather easily enter into unlawful financial arrangements.
The blockchain has demonstrated an alternative to the historical model of centralized authority. A public ledger, or blockchain, maintains a record of all transactions made by participants upon it. Before a transaction is conducted on Bitcoin’s blockchain, for instance, many of the participants verify it through hashing algorithms. In a similar manner, the sort of unlawful financial arrangements exemplified by the Panama Papers could be forbidden on a blockchain technology.
As IBM envisages: “In our vision of a decentralized IoT, the blockchain is a framework facilitating transaction processing and coordination among interacting devices. Each manages its own roles and behavior, resulting in an ‘Internet of Decentralized, Autonomous Things.’ – and thus the democratization of the digital world.”
In a sort of singularity, participants and devices blend and become one through secure identification verification and authentication. How IBM and its partners see it, a new model for business will be bore out of blockchain technology, in which devices can autonomously trade amongst themselves. This business is run on “compute cycles, bandwidth and power and low transactions costs with other devices.”
In other words, a global economy maintained by devices, and potentially an environment to the sort of transparency a police officer, banker and regulatory enjoys.
As highlighted by projects like Overstock’s to, Ripple and R3CEV, a need for a financial system with greater flexibility when it comes to privacy and transparency is demanded of the modern world. Their inspiration, a Bitcoin public ledger for all to see and analyze, has recently been called by President Barack Obama “A Swiss bank account on your smartphone.”
In blockchains imagined by R3 CEV and IBM, however, the code would be changed so that the identity of participants on a private ledger – deployed by, say, the likes of Wall Street – can be verified.
Ethereum, the popular smart contract protocol, could be used for a company registry, where annual accounts, profit & loss are posted automatically for to the blockchain, and thus not even hosted by the company in question. Accounting principles could be coded into a blockchain system to conduct financial audits and perhaps even law enforcement tasks. As blockchainers would have you believe, if most company transactions were posted and verified by a blockchain, accounting and auditing would be easier (and automated) and more transparent. In a way, a decentralized Company House.
In the eyes of the blockchainer, their technology would mean everyone – rich and poor – “plays the same rules.” Blockchain, they claim, evens the playing field.
Featured image from Shutterstock.