Michael Casey, Senior Adviser of the Digital Currency Initiative at MIT Media Lab, will be participating in the session: “Banking on Blockchain: The Status and future Potentials of the Blockchain Technology for the Financial Industry,” at CL@B 2017. He shared some of his insights on the disruption of the financial services industry, financial inclusion, cybercrime, money laundering, hacking, the obstacles to unlock its potential and the MIT Media Lab’s new Digital Currency Initiative.
How will blockchain technology behind bitcoin and other digital currencies disrupt the Financial Services industry?
A lot of the work being done right now by financial firms is going into back-office and interbank applications of blockchain or digital-ledger technologies. This could help streamline reconciliation processes that occupy a lot of time and resources in the financial sector. Processes such as securities settlement and clearing, custodial services, escrow management, share and asset registration processes could all be disrupted as institutions shift to a shared-ledger structure in which trade, payment and settlement data is updated in real-time. But although those are the areas attracting the most R&D, I think there are more powerful financial applications to come in the customer-facing aspect of the industry.
If the blockchain can be used to create more reliable, tamper-proof records of assets and systems for measuring personal reputation and identity, the hope is that the barriers that deny billions of people access to credit and other financial services will be be lowered. We may see new systems of trade finance, for example, or blockchain-securitized loans, decentralized credit unions or mutualized insurance programs.
Will it help reduce or enlarge cybercrime?
There’s no doubt that bitcoin is currently being used by cybercriminals. The pseudonymous addresses make it easier to cloak’s one personal identity, which is why it being used to demand digital extortion payments — for example, the spate of recent demands for payment to decrypt frozen files in ransomware attacks. But it’s also risky for cybercriminals to use the bitcoin blockchain because all transactions are published on a fully public, traceable ledger, which law enforcement agents are increasingly using to track criminals. Once the attacker cashes out into fiat currency via a regulated exchange, they can be caught. Of course, criminals will use unregulated exchanges to obtain dollars and other currencies to avoid detection but these aren’t very liquid and make it difficult to move large amounts of money. There are also sophisticated encryption techniques for criminals to further cover their tracks and obfuscate their transactions, but with Big Data and network analysis, the ability for law enforcement agents to overcome these barriers and track them down is also increasing. In effect, there is a cat and mouse game in play. It’s not clear that bitcoin and other cryptocurrencies are always going to be easily used by cybercriminals as their payment method.
Will it turn money laundering easier?
For the same reasons cited in the question about cybercrime, I think money launderers will find that the traditional blockchain is not a good place to hide money flows. If truly anonymous, encryption-dependent digital currencies like Monero are used, perhaps it will be easier for money launderers to hide their tracks, but there is again another problem of liquidity in these markets. It’s hard to buy in and out of them without losing money. With bitcoin, there are movements now to use the system to better monitor flows of funds across borders and build sophisticated anti-money-laundering (AML) compliance models on top of it. I believe that the right combination of blockchain-based AML and lower standards for KYC (know-your-customer) can give more people access to affordable cross-border payments but also provide protection against money laundering and other forms of illicit finance.
What about hacking?
Other than as a payment vehicle for cybercrime (see previous answers), I don’t believe bitcoin and blockchain technology makes hacking any easier, and if used properly, can provide great protection against it. Yes, people have hacked bitcoin wallets and it’s very important that new security systems be developed to protect individuals’ holdings of bitcoin, but bitcoin itself has never been hacked. The ledger has survived without anyone being able to manipulate it. That’s because the distributed nature of the network and the high cost of computation required to take it over create a massive barrier to attack. The integrity of this ledger, then, suggests that similar design concepts can and should be applied to the management of all sorts of computer systems. Currently, our data resides in giant, centralized pools controlled by single-gateway institutions that spend enormous amounts of money building firewall protections of these “honeypots” of information and yet they’re constantly being hacked by outsiders. That’s because there’s a huge incentive and a relative low cost to carry out such centralized attacks. If data is spread to the edges, however — if it is broken up into fragments and controlled by individuals and different nodes in a distributed structure that, like bitcoin’s blockchain, can’t be overtaken — the cost-vs-payoff is considerably higher for an attacker. Since each node has to be separately attacked with only a small payoff in each case, there’s a disincentive to engage in this activity. So, a blockchain model may well help reduce hacking rather than increase it.
Will they forge financial inclusion?
That is the hope, yes. The costs of managing trust relationships within the current, convoluted global financial system, with its multiple different entities, each managing their own ledgers, makes it unprofitable for banks to service low-income people. Know-your-customer rules and other requirements also mean that the “unbanked” — whose numbers run to 2 billion adults, according to the World Bank — are locked out of the digital economy, with cash their only medium of exchange. Bitcoin and other digital-currency solutions should, in theory, allow them to send money remotely, anywhere, at a significantly lower cost. Financial inclusion is an important goal of this technology — and some of its spinoffs, including plans for digital fiat currencies issued by central banks, are squarely aimed at achieving it.
What are the obstacles it still faces before its potential can be unlocked?
Bitcoin and other blockchain currency solutions need to be able to scale more easily, and for that there needs to be a smoother governance of its system to allow changes to the protocol. Work is being done on solutions that would allow many more transactions to run on bitcoin, but the challenge lies in getting everyone to agree to those changes. For consumer-facing solutions, there will also be a challenge in getting people used to using these technologies. Work needs to be done on creating user interfaces that make it seamless and easy to use, and which allow for efficient transfers into and out of digital currencies into traditional currencies. . The concept of the blockchain, much like TCP/IP and other Internet protocols, needs to be shifted to the background; people don’t need to understand how it works to use it. However, they do need their entry points into such a system to be easy to use. In the same vein, more robust, reliable and easy-to-use approaches to key management need to be developed. The ordinary person in a developing country is not going to want the responsibility of keeping track of and protecting access to private keys that control all their wealth. Easy-to-use “multisignatory” custodial systems in which a third-party provider provides protection but is unable to abscond with the customer’s assets need to be rolled out and developed.
What is the MIT´s Media Lab’s new Digital Currency Initiative?
The DCI is working to develop the core infrastructure and applications associated with digital currencies and blockchain technology to help migrate the financial system and the Internet economy to a more open, free-access, peer-to-peer model. To that end, we are working on various projects. For example, developers are building out the Lightning network, which promises to dramatically increase the scale of transactions in public cryptocurrency networks such as bitcoin and to achieve interoperability across blockchains. We are also working with central banks to develop a prototype for a new system of digital fiat currency. Meanwhile, “higher up the stack” of applications, others are working on blockchain-based systems of asset registries, to help farmers, businesses and households in the developing world more easily obtain collateralized credit. And I’m working on developing blockchain-managed solar microgrids to unlocking innovative financing solutions that could rapidly expand the installation of locally owned, decentralized renewable energy systems.
About Michael Casey
Having closed a career as a journalist, Michael Casey is an author/journalist, public speaker, media commentator, blockchain technology adviser, and consultant who now researches and works on projects harnessing the blockchain technology that runs bitcoin. After 18 years at The Wall Street Journal, he is now at MIT Media Labs’s Digital Currency Initiative. He also consults for businesses on the challenges and opportunities in this emerging technology, and is an advisor to The Agentic Group on several blockchain projects worldwide.