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Dr. Stephen Castell

Abstract

The Reg A Conference is the largest gathering of deal-makers and investors interested in Regulation A, a prime opportunity for companies to network with like-minded business executives, as well as financial professionals who assist in bringing capital to companies (https://theregaconference.com/presenting-companies/). Many such companies are today basing their new business ventures and projects, and their search and submissions for funding, on blockchain technology applications. So-called cryptocurrencies such as bitcoin are just one example of the use of this functionality. The business implications of this secure online record-keeping tech are huge - and not only in cryptocurrency. This presentation provides a probing and extensive expert critique of blockchain, its cryptocurrency, distributed ledger and smart contract applications, and argues for a cautionary, savvy approach to implementing and investing in such business systems, on grounds of professional due diligence, rigorous corporate governance and wide experience of past leading-edge ICT systems failures.

Some Technical Background

The blockchain is a digital shared public ledger on which a 'cryptocurrency' (e.g. Bitcoin) network relies. It has a linked list data structure, with each block containing a hash of the previous block. Each block is formed by a proof-of-work algorithm, through which consensus of this distributed system is obtained via the longest possible chain. The blockchain provides the basis for the 'trustless distributed system' of a cryptocurrency and it is extendable in many ways through modifications of the parameters of the chain.

block is an aggregated set of data. Data are collected and processed to fit in a block, each block identified using a cryptographic hash (or digital fingerprint). The block formed contains a hash of the previous block, so that blocks form a chain from the first block ever (known as the Genesis Block) to the formed block. In this way, all the data are connected via a linked list structure.

A 'traded' cryptocurrency blockchain (e.g. Bitcoin) is a shared public chain: in principle everyone has access to the chain, not only to read the information on the chain, but also to append new blocks on the chain. This is known as an unpermissioned chain.

However, for blockchain applications other than cryptocurrencies, the chain can be modified for stricter access control, the strictest being that of a private chain, where only the owner of the chain has full access to the chain, others having no access at all, similar to the way a central database stores confidential data. In many real-world financial and business applications, or 'use cases', a system somewhere between a shared public chain and a private chain is likely to be appropriate. Through public key cryptography, access control can be implemented during setting up of the chain so that differentiated access controls could apply. An example would be the health information of an individual; another, the product reference and customer/supplier transactional details of supply-chain management. These could be set up to be accessed only by the 'data subject' (patient, procurement manager) or anyone granted access by that subject - only a trusted body could append new data to the chain. This is known as a permissioned chain. Investors are most likely to be involved in funding new permissioned chain start-up applications.

Crypto: the Millennials' Rock'n'Roll

"Blockchain technology introduces permanence and immutability into the digital world. ... Three aspects are needed to build a modern society. The first is memory. ... The second is communication. ... The third component, which underpins the other two, is trust. ... everything runs on trust. We trust our banks to keep our money safe. We trust Google with our personal and work emails. We trust the courts to make unbiased decisions and keep proper records. Memory and communication are of limited use in the absence of trust. For the most part, this trust is not misplaced. Banks and courts are highly regulated entities ... But this trust is still a human affair, and hence regularly betrayed. ... trusts costs money - we pay these institutions a trust tax, which in practice translates to thick legal agreements and insurance premiums. ...

Enter blockchain. Blockchain is the technological revolution that commoditizes trust ... by integrating trust on an infrastructural level into any service built on blockchain. Trust normally has to be enforced via laws, courts, armies, and other costly, fallible institutions. Replacing these with disinterested cryptography promises a revolution in the way we enable trust. ... [This brings up] the right to be forgotten. A law that grants individuals, under some circumstances, the right to demand of websites that they remove information about themselves. However, in a distributed consensus system like blockchain, enforcing the right to be forgotten becomes technically impossible. ...

As technology becomes part of our extended mind, the right to be forgotten can be construed as tantamount to memory manipulation. You might think that this is an important and necessary thing we have to do in order to protect social harmony, or you might loathe it as an entrenchment on your individual freedom. Blockchain technology, however, has no opinion. It takes no ethical stance. It protects our collective memory from adulteration, illintentioned or otherwise, with no regard for whatever the consequences may be. ... "

Júlio Santos, November 14, 2017 [1].

It is difficult not to notice the vigour and pizazz of the current mania for Crypto-Algorithmic Blockchain Technology and it is a fair bet that there is far more being written about, energy going into, and money being invested in (gambled on?) Bitcoin and other cryptocurrencies, blockchain, smart contracts and distributed ledger technology than even into Artificial Intelligence (AI). Almost every other person you run into, particularly if a Millennial, seems to be involved with an Initial Coin Offering (ICO) or Initial Token Offering (ITO). With just a 'White Paper', little or no investment due diligence, and taking advantage of a regulatory vacuum, this 'Crypto Tribe' are raising billions in real legal tender, 'fiat currencies'. This substantial finance-raising is being used to fund fantasy coins and tokens - with no more obvious or established economic utility or asset value than, well, a bar of gold - in the hope of developing and successfully launching a plethora of brave new business and social ideas, products and services, heralded by enthusiasts as a whole new 'crypto-economy'. [2]

No doubt a few of these will prove to be commercially-successful, reputable, significantly disruptive game-changers, and usher in the possibility of some sort of new - trusted - global 'crypto-economy' paradigm. But at the moment, one can be forgiven for believing that most ICOs/ITOs, cryptocurrency 'mining', and crypto-coin trading exchanges have already been largely taken over by the 'black cash' of drug-dealers and the like, and in a substantive not-easily-reversible way.

Many of the Millennials, let down after the post-2008 credit crunch by governments, the banks, and educational system, and, it appears, largely not needing to be subject to Know Your Client (KYC) and Anti-Money Laundering (AML) strictures, may not be too worried where they get their ICO money from, or how it is actually going to be (accountably) spent, or whether that will result in a viable business. Nevertheless, and leaving aside the fraudsters and money-launderers, I wish these crypto-enthusiast Millennials well.

Indeed, I have dubbed 'Crypto' the Millennials' Rock'n'Roll . Some of us were lucky enough to have lived through the exciting birth of the Real Rock Thing, sixty years ago and, still regularly feeling its enduring foot-tapping tingle, I simply say: Rock On, Millennials!

I myself suggested, over thirty years ago, just such a new, disintermediated wholly digital cash currency, in a letter published in July 1995 in Computing magazine:

"... As cybertrading grows, the new, powerful common electronic trading currency will be 'owned' by no single physical nation state, central bank institution, economic or political grouping. We could even call it the ECU. Not the European Currency Unit, of course, but the Electronic Cash Unit ".

And, long before the Millennials were even born, in a fictional article, 'Ye Nom De Das Geld', in the December 1971 issue of GONG (the student magazine of the University of Nottingham) I went even further with my conceit of a 'Post-Purse Paradise':

"Brother and sisters, I welcome you to the post-purse paradise. ... Geld is in heaven, all's well with the world. ... Cromstock and I first mooted the possibility of an Economic Reformation taking place in Britain in The Journal Of Comparative Economics during ... 1969. ... to put into practice ... the tenets of the Quasicurrency Theory which I had been formulating over the preceding twenty-five years. ... " [3].

It may well be that many, probably most, of the current species of cryptocurrencies, currently digitally 'materialising' daily, as if by magic, through one ICO or another, will fade away, and/or at some point be regulated out of existence. Blockchain applications generally however are undoubtedly here to stay. The majority of these will be serious, robust implementations, by established major corporations, with most of us, as consumers, hardly needing to know about the technical, legal or operational details. It seems clear that, within a few years, an extensive settled, but vigorous and continually innovating, 'blockchain applications industry' will be in place, one bearing little resemblance to the frantic cryptocurrency 'bandit territory' landscape of today.

Blockchain: Sceptical ICT Professionalism and Legal Due Diligence

As an ICT expert and professional I am however duly cautious about this newly unfolding 'crypto-economics' blockchain landscape. This caution is a proper part of being a skilled professional applying knowledge and experience to assess the most appropriate tools and technologies for a given (business or other) application's requirements. The savvy ICT expert bears in mind, for example, not only that there are no finalised international/ISO standards yet for blockchain (eight standards are in development under ISO/TC 307), but also there is far more to specifying, designing, developing, testing, deploying and maintaining an appropriate complete QA-assured system than just 'the blockchain bit'. And whether to use blockchain as a component at all for a given business/system requirement is of course a critical feasibility exercise that the seasoned professional will know is essential.

It should be no surprise if a diligent ICT systems engineer may conclude, on an experienced expert assessment, that many things can be achieved just as effectively by other means. He or she will carefully and responsibly consider all the pros and cons to ensure that the non-expert customer/client/investor/employer (to whom a professional fiduciary duty is owed) gets the most suitable, 'fit for purpose', secure, robust and performant system available, and takes properly risk-assessed competitive advantage of any new developments in technologies, tools, methodologies and processes (and always consistent with the budget/price willing to be paid, of course)[4]

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Dr. Stephen Castell Chartered Information Systems Practitioner and Member of the Expert Witness Institute, is Chairman of CASTELL Consulting. He is an internationally acknowledged independent computer expert who has been involved in a wide range of computer litigation over many years. He is a member of the Legal Affairs Committee of the British Computer Society, and a Committee Member, British Computer Society Law Specialist Group.

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