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Douglas A. Orr, Ph. Abderahman Rejeb. Edward de la Rey , Vincenzo Gabrielle Rader. Calton Paratema. Kavali Suresh. Regulating Blockchain. The JBBA. Mohammed Thabet. Kanna Velusamy. Hubert de Vauplane. Glavanits, Judit: Blockchain technology in the glance of consumer protection.
Judit Glavanits. Maurice Demeyer. Log in with Facebook Log in with Google. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF. The Promise of Bitcoin and the Blockchain A product of.
Read Full Text Download. Related Papers. Blockchain in Education Management. Blockchain and economic development hype vs reality. Contracts Ex Machina. Blockchain: is Self-Regulation Sufficient? The world was reeling from the aftermath of World War II and leaders feared that if countries failed to adopt functional monetary policies the global economy could fall into an abyss. One of the reasons this resort was chosen in was its remote location, which would permit delegates to break free from the distractions that may have occupied their attention in a busier setting.
We chose the location for a similar reason and found that as we approached Bretton Woods, the rich, relaxing setting began to have its effect.
We came as strangers, shuttling in from nearby hometowns and international airports. Libertarians carpooled with federal regulators and it was enlightening for all.
We believe that we now find ourselves in a situation not unlike that faced by our predecessorsï¿½ In discussing what we sought to secure through our work in Bretton Woods, we wanted to tackle more than we could possibly address in one workshop.
We understood that, typically, those who try to make their product all things to all people end up making it nothing to any.
A few notes on the subject of identifying opportunities for Bitcoin and the blockchain to disrupt and improve the world: 1. Goals exist both on a large, strategic scale such as human empowerment, and also on a more tactical scale, such as specific opportunities or use cases. Since many of these specific opportuni- ties fit within multiple overarching goals, the first section will address overarching goals and tie specific opportunities to each of them.
The diversity of viewpoints represented by the authors of this paper means that the authors, and ultimately the signers, cannot endorse the idea that the realization of the enumerated goals are in themselves worth the cost of disruption, or that such a realization is in itself a goal worth pursuing. At the core of Bitcoin is the ability to send money faster around the globe, improve property rights, and enable people who have never met to fully trust one another. Efforts to launch digital currencies began in the s, with cryptocurrencies following closely behind in the s.
Bitcoin began as a technical experiment released to a mailing list of cryptography enthusiasts in by an individual known only pseudonymously as Satoshi Nakamoto. The idea of a universal currency without a centralized intermediary like a bank or government had been popular for years among diverse groups, such as cryptography experts, privacy advocates, and programmers; but it did not gain traction until a new system incorporated the additions described above.
Vigna, Casey The first adopter needs a second party to exchange bitcoin with ï¿½ in the same way that anyone can create a system of exchange, but unless that currency is recognized by someone else, it is useless. Another key facet of the system is that is has a controlled, finite supply; the release of new bitcoin tokens is slated to terminate in at 21 million tokens.
Since its inception, the Bitcoin protocol has seen setbacks to its reputation such as the notorious online marketplace Silk Road, which utilized bitcoins to trade drugs, pirated material, and hacking and forging services. However, the community of bitcoin users ï¿½ legitimate users ï¿½ has also grown immensely.
Nakamoto largely went underground in Vigna, P. The age of cryptocurrency: How bitcoin and digital money are challenging the global economic order. New York, New York: St. Opportunities 20 A.
Blockchain 1. Internet-Based Microtransactions 36 IV. Expanding Financial Access 40 B. Blockchain 2. Smart Contracts 44 II. Identity Issuance 48 III. Blockchain 3. To change something, build a new model that makes the existing model obsolete. Goals This paper identifies and explains the opportunities presented by blockchain technologies, the challenges faced by those opportunities, and potential ways to address those challenges.
Given that there are likely countless opportunities presented by blockchain technologies, this paper focuses on the 17 most prominent, best researched, or most promising use cases of the technology. While there are a potential infinite number of discrete use cases of blockchain technologies, there is a narrower range of broader strategic goals blockchain opportunities seek to address.
Many of the discrete use cases tackle similar objectives by using different tactics and therefore, can be categorized into groups based on their overarching goal.
For the purposes of this paper, goal will be defined as a long-term ambition, which aims to achieve a desired result through the completion of various similar or related shorter-term objectives.
This section identifies and explains the transformative goals that blockchain technology can achieve over time. Goal Descriptions The table below briefly describes the five overarching goals of blockchain technology use cases, as identified by the authors of this paper with consensus from numerous collaborators.
They are: efficiency, consumer choice, access, privacy and protection, transparency, direct self-governance, and human empowerment. Table 1. Efficiency saving time, reducing errors, minimizing waste, eliminating redundancies, increasing satisfaction, limiting information asymmetries, and fostering trust.
Increased options and availability of goods and services to con- II. Improved consumer privacy and protection. Increased and strengthened transparency in terms of the avail- III. Greater distribution of governance to individuals and collectives IV. Direct Self-Governance through the decentralization of authority.
Greater agency of individuals and collectives over their person, group, health, wealth, knowledge, property, and other factors V. Human Empowerment affecting self-determination including access to information, public goods, rule of law, etc. Some are unavoidable, such as those resulting from information asymmetries. Others can be overcome, such as outdated infrastructure, poorly trained workers, models or methods that have been outgrown, or much of the friction associated with interchange.
Goods, services, systems, processes, and technologies that increase efficiency can lower costs, save time, reduce errors, minimize waste, eliminate redundancies, increase consumer satisfaction, and help reduce information asymmetries. Lower costs resulting from improved efficiency greatly benefits consumers financially, while the remaining benefits can improve the quality of their experiences or even lives.
Technology can increase the efficiency of systems and processes, such as such as financial transactions, approval processes, and administrative procedures.
Blockchain technologies, specifically, can be utilized to foster these improvements in an innovative way that garners trust through transparency and decen- tralized record keeping. Such technologies could ultimately supplant traditional payment mechanisms such as wire transfers i.
This would ultimately lower the time it takes to process transactions as well as the cost associated with unnecessary, redundant, or superfluous steps and intermediaries. Improved efficiency through blockchain technologies can have a dramatic effect on the reduction of time, energy, money, and frustration caused by waste, opacity, redundancy, poor resource allocation, and avoidable friction in transactions.
Moreover, it can substantially increase the quality of work and life of those who embrace and adopt mechanisms to achieve it. This results in lost value to consumers and businesses alike. In terms of choice and access, a myriad of consumer choices are stifled by regulation, the prohib- itive costs of offering such choices, or sometimes a combination of both. For example, financially constrained persons in the need of loans are often unable to access them, because banks are limited by the maximum interest they can charge to mitigate the higher risk associated with making such loans.
These consumers are priced out of the traditional lending market and are limited to the high-interest, short-repayment-term loan options offered largely by payday or cash-for-title lenders. In terms of privacy and consumer protection, consumers are often required to supply their per- sonally identifiable information PII in order to utilize many services, even though much of the information requested is unrelated to the service itself i.
This leaves consumer privacy and data protection at the mercy of the security systems of service providers, opening them up to the risk of having their PII including bio- metrics, such as fingerprints hacked. Office of Personnel Management OPM , have been hacked, exposing millions to the risk of fraud or identity theft. In other words, the current models and systems are not working. Much value - financial as well peace of mind - can be gained by all parties consumers, businesses, and government entities alike through the meaningful expansion of consumer choice, access, privacy, and protection.
Blockchain technologies enable the paradigm shift necessary to achieve such an expansion, by allowing for new data and privacy models that offer variety and inclusion, as well as better mechanisms for ensuring security.
For example, cryptocurrencies, such as bitcoin, allow for the creation of new types of financial products, such as micro-loans, micro-payments, and multi-signature transaction multi-sig , to foster the inclusion of the under or unbanked who wish to have greater access and options, or who are unable to safely store their wealth with formal financial institutions because of corruption or insolvency.
Furthermore, blockchain-based companies have begun developing a system to establish credit scores for those previously without them i. In terms of security, similar to the example above, companies are developing blockchain-based applications that enable individuals to encrypt and own their own data, allowing the tracking of unique individuals without actually identifying them.
This prevents data breaches from having a significant impact on individuals by, housing their consumer data and PII separately and unlinked, safeguarding their identity. Greater consumer choice, access, privacy, and protection can increase value to all parties involved. Consumers derive value from lower costs and an improved quality of life through greater access, while businesses derive value from increases in customers, sales, and market share, and govern- ments derive value from lower threats to data security.
Honesty and transparency improve the visibility of errors, misappropriation, and misdirection. Corruption has fewer places to hide itself when all records are freely available for all to inspect. Increasing, strengthening, and in some cases allowing transparency in terms of availability of information, access to records, clarity of procedures and pro- cesses, etc. The blockchain serves as an immutable database of digital information. All data directly encoded submitted as a valid, signed transaction and written to a confirmed block on the blockchain is available and verifiable by any entity that has a copy of the full blockchain.
The implementation of blockchain technologies allows for immutable, distributed public ledgers to instill trust, efficiency, and legitimacy. For example, in underdeveloped economies the costs of bribes, corruption, etc. Blockchain technologies could also be employed to provide proof of reserves in banking systems, run companies on distributed ledgers, or trace government procurement flows or charitable distri- butions i.
Greater transparency through blockchain technologies could increase accountability, provide more accurate monitoring and evaluation across government, non-profit, and for-profit entities while democratizing financial and service delivery systems.
In some cases, such as the monopoly on the legitimate use of force, relinquishing control to a centralized body may be a necessary social contract to ensure harmony and security. In other cases, such norms may have outgrown their usefulness or necessity, such as the regulation of taxicabs. Decentralizing authority and increasing the distribution of governance to individuals and collec- tives, where the usefulness or necessity of centralization has been outgrown or become corrupted, enables greater direct self-governance and community or peer-to-peer governance.
For example, decentralized tools like mesh networks allow communications in times of unrest, such as the use of Firechat to continue the flow of information during the Hong Kong protests.
Finally, with blockchain technologies, history cannot be amended any more than the public ledger can, helping to thwart censorship. In regions where states and markets have failed or are weak, blockchain technologies provide opportunities for more direct community and self-governance, allowing communities in these regions to engage in a form of self-help in which they can create decentralized solutions to col- lective problems.
Such decentralized local community solutions can allow these communities to leapfrog and partially bypass the development of some large, centralized institutions prevalent in regions with developed markets and states. Where states and markets function effectively, blockchain technologies provide an alternative mode of partial social organization and governance that may be more decentralized, transparent and efficient and that may provide a source of healthy competition and innovation for big govern- ments, financial institutions, and corporations -- thereby encouraging and showing a path toward more responsive governance by those traditional public and private institutions.
Greater self-governance through blockchain technologies can result in more amenable, efficient, equitable, and representative governance than current paradigms allow for, more effectively fostering trust and consensus among the various sectors of society. These constraints often appear to be out of their control, limiting their access, agency, and ability to achieve. Human empowerment occurs when individuals and collectives are enabled to have greater agency over their person, groups, health, wealth, knowledge, identity, property, and anything else affect- ing their self-determination.
Empowerment also includes the provision of greater access to informa- tion, rule of law, public goods such as education, transportation, and health systems , or any other structure that increases opportunity for achievement.
There are many ways to achieve greater human empowerment. Notably, the use of technology has proven capable of doing so on an exponential scale. For example, the advent of the telephone enabled people to communicate with others vastly beyond voice and broadcast range. In a similar fashion, the mass adoption of the Internet granted people near-instant communication around the globe and across numerous platforms.
Blockchain technologies have the capability of achieving human empowerment by even greater orders of magnitude than those described above. Open and distributed ledgers can be employed to empower and connect people, including those who were previously without access, shifting power away from the center and toward the edges.
Thus increasing global financial inclusion by empowering a segment of society who was previously powerless to exercise their voice. Additionally, when applied to functions such as voting and smart contracts, a digital identity system utilizing the blockchain technology could eliminate the need for third parties and therefore presents the potential for a more efficient, trustworthy interaction.
These opportunities are often described in terms of which stage they belong to - Blockchain 1. It refers to the underlying technology platform i. Such applications include traditional banking instruments such as loans and mortgages, complex financial market instruments such as stocks, bonds, futures, derivatives, as well as legal instruments such as titles, contracts, and other assets and property that can be monetized.
Such applications include art, health, science, identity, governance, education, public goods, and various 42cfb 03 af4 aspects of culture and communication. The narrow aims these various blockchain technol- ogy use cases seek to accomplish have distinct areas Blockchain 2. The table below lists key players as identified by the authors of this paper with consensus from numerous collaborators.
Status While some applications or use cases of blockchain Blockchain 3. Some influencing factors are drivers internal f6 and external forces , such as popularity of the application or VC funding, others are impediments hindrances or obstructions , such as lack of funding or lack of clarity surrounding regulations. Companies or organizations offering products that utilize Service Providers bitcoin or blockchain technologies.
Opportunistic individuals or entities lacking principle or regard for others who commit fraud, utilize unfair and Bad Actors deceptive trade practices, or selfishly exploit individuals, groups, or circumstances. Individuals or entities who serve as a link, guide, trans- lator, negotiator, mediator, etc. While drivers and impediments influence the likelihood of whether an opportunity will be realized, the greatest determinant of the realization of an opportunity is its ability to overcome threats.
A threat, as distinguished from an impediment, is an indication of imminent harm that endangers or risks the success of the opportunity. In the case of blockchain opportunities, some threats exist cur- rently, whereas others may manifest in the future. The table below defines the scale of likelihood a potential threat will come to harm a blockchain opportunity.
As threats differ in their ability to impact blockchain opportunities, the table below defines the scale of severity threats pose. Stage where a blockchain opportunity has achieved full implementation and widespread use on a national or Mass adoption international level that is more common than non-block- chain legacy counterparts. Recommendations Finally, this paper identifies and explains recommendations or potential solutions for addressing these threat.
This threat has the potential to become a serious concern, but it Somewhat likely remains relatively unlikely. Circumstances would have to change drastically in order for this All but certain threat to NOT become a seriou s concern. Opportunities A. The use of bitcoin tokens as money is currently the most prolific use of blockchain. The primary usage of the Bitcoin blockchain has been to exchange these bitcoins between users in monetary transactions.
What, if any, advantages does bitcoin hold over traditional currency and settlement methods? As commerce evolved from being based on barter, to minted coins to paper, it gained greater efficiency but developed a problem whereby consumers had to trust third parties for a host of services to include money creation, solvency, and accounting. For example, when the United States was on a gold standard, users of U.
On a daily basis, consumers also trust banks to remain solvent, merchants and payment processors to keep their databases secure from attack, and credit card companies to protect them in the event of fraud. This consumer trust has often been misplaced. Banks that established some of the greatest levels of trust among consumers failed famously in the financial crisis.
Central banks the world over have diluted their currencies or, as seen most recently in Cyprus, seized depositor assets without warning. The livelihood of a confidence man rests upon the ability to instill confidence in a disreputable actor. Here is where the value of Bitcoin becomes apparent. It addresses the need to trust central banks in two ways. Second, Bitcoin allows consumers unfettered access to their capital. A Cyprus-style deposit seizure is impossible in a Bitcoin world where consumers control their bitcoin wallets.
Since MtGox famously collapsed in early , several bitcoin exchanges have conducted these fully visible audits. The Bitcoin protocol operates on a distributed network of currently over 8, independently operated nodes. The nature of this network is such that it would be so difficult to attack that hackers will avoid doing so altogether in the absence of a critical vulnerabil- ity. The encryption behind the network, SHA, would take million billion 6.
This opportunity includes almost every possible financial transaction possible, including: Consumer to Consumer transactions ï¿½ Person-to-person transactions have grown in popularity in the past few years with popular platforms like Venmo, Paypal, Apple, and Google launching applications that empower consumers to send money directly to other consumers.
These transac- tions typically originate from and end with traditional banking infrastructure. With these services a sender provides a credit card or bank account information and the recipient provides their bank account information to receive their ultimate, usable deposit.
Depending on the service and the amount being transferred, these transactions take between one and four business days for the money to go from one bank account to another. Consumer to Business transactions - The low fee for sending bitcoin between wallets reduces the cost for businesses of accepting payments for goods and services by eliminating middlemen.
These fees are usually higher for online merchants because of increased fraud risk. Receiving Bitcoin payments is completely free for merchants. B2Bï¿½ 1 International remittances - The majority of international remittances are consumer-to-consumer transactions from developed to undeveloped nations. Current remittance platforms involve brick- and-mortar operations both for the sender and recipient.
The costs incurred by the sender make up a significant portion of the total remittance. It takes the same time and incurs the same fee to move from two nodes on the Bitcoin network, regardless of their geography or local currency. Bitcoin has the potential to save poor workers and their families tens of billions of dollars every year.
Key Players End users - Retailers, consumers, and financial institutions comprise the main group of end users whose transfer of money and value has the potential to become more efficient through the adop- tion of digital currency and blockchain-driven innovations. Service providers - Examples of current service providers include companies which facilitate P2P bitcoin transactions, bitcoin transaction processing for retailers, or bitcoin remittance platforms.
These agencies include but are not limited to the U. Though not a company, cash is the ultimate P2P value transfer mechanism and can be viewed as a legacy infrastructure in this category.
There was much debate in the construction of this paper as to how to define these. Often, we know them when we see them, and these parties include those selling weapons, counterfeit money, or child pornography over the Dark Web in exchange for bitcoin. Intermediaries Status Bitcoin as money, with the potential to streamline transactions, is one of the applications that can be taken full advantage of with the basic core technology and a few applications for user interac- tion.
Options for P2P, P2B, and international remittances are advanced and implemented. Threats Identification of threat s and likelihood of occurrence as of Threat 1: Overly burdensome regulation. Regulation to prevent Unassured safety and soundness b.
Regulation to mandate greater consumer protection c. On the front-end, these are designed to make it more difficult for criminals to be paid for a good or service in the first place. On the back-end, they strive to also make it more difficult for those who have received money for illicit activities to return that money to the financial system through laundering.
Covered financial institutions must have AML programs. These institutions have expanded to cover more businesses over the past decade, and some bitcoin businesses might be surprised to find just how much work they should be devoting to compliance in this area. Anti-Money-Laundering AML regulations require banks and money-transmitters to take steps to detect and prevent money laundering, codified by the Bank Secrecy Act of Know-Your-Customer KYC regulations attack the same problem as AML rules but from a different angle and with an arguably stronger focus on the prevention of identity theft, financial fraud, and terrorist financing.
These programs require that businesses especially those that deal with large amounts of money collect a predetermined amount of information on their customers engaging in transactions of a predeter- mined type or size. Companies must also file Suspicious Activity Reports SARs for customers whose transactions are suspicious or meet certain thresholds.
The level of detail that businesses need to retain on their customers varies according to the transac- tion, but generally includes basic identity information and information related to spending pat- terns. Traditionally, these regulations were meant solely for banks but have come to govern businesses that transact in financial equivalents, such as sellers of precious metals and other expensive items that maintain their value.
It is in this category that Bitcoin companies find themselves governed by KYC requirements. This list is a database of personnel whose assets the U.
Companies must confirm that they are never sending these individuals any funds or acting on behalf of these individuals to help them move funds under their control. Consumers should understand the implication this regulation has for their own interests. Avoiding or trying to skirt regulations or compliance has the potential to result in negative, possibly even criminal, consequences. Once a business recognizes that it needs to set up a CIP, the company should aggressively invest in compliance.
Unfortunately, the cost of creating and administering a CIP and a program to prevent serving those on the OFAC SDN list, is often overly-burdensome for a startup with limited resources.
Potential also exists to utilize blockchain technology to better track funds and verify user transac- tions in a CIP. Once technological solutions are developed that overcome the issues intended to be fixed through regulations, a company should work to provide education for regulators on these solutions. Other uses include blockchain solutions for financial audits.
Many of these will be covered in later sections. In giving advice to regulators, we would encourage assessing the promise that Bitcoin and block- chain technologies hold for improving regulatory practices, and focusing on a method of regulating services by activity and behavior rather than technology. This is an abiding principle of regulatory design.
Just as not all Internet companies are the same, not all companies that use Bitcoin and blockchain technologies should be treated the same. We encourage focusing regulation at general purpose regulators e. FTC , which are harder to capture than specialty regulators e. It is important, as a general principle, to ensure that courts scrutinize regulatory decisions under a meaningful standard with rigorous analysis.
It is the responsibility of regulators to subject their actions to the same scrutiny as they would expect of a court. The solution to the advent of Bitcoin and blockchain technology is to find points of agreement between regulators and enforcement agencies with technologists.
Technology can enhance protection while allowing for innovation. In the past, regulators could enforce rules against chartered banks and expect that it would enforce the same rules against all citizens. With Bitcoin, the use of the core protocol means that consumers can effectively transfer value outside of the banking system.
The more burdensome it is for users to use bitcoin, the more will choose to do so without complying with regulations. In the developing world it is not clear that regulatory overreach is the most immediate threat. Historically, the basis for assessing the trustworthiness of a bank has been limited to assessing the economic solvency of the bank itself. Even in this area, though, American consumers have often placed their trust in institutions unworthy of being trusted.
The most famous of these instances is the panic of , when depositors rushed to remove their funds from banks. To quell the panic, FDR proclaimed a six-day bank holiday. When it was over, the country had four thousand fewer banks than it did at the beginning of This policy has boosted depositor confidence more than any other single measure. FDIC insurance comes at a cost, though. It comes along with a banking charter, something that is not easily earned.
So the real quandary, which has been highlighted by high-profile events over the past few years, is how to protect consumers from Bitcoin companies and custodians who are potentially one security breach or unsavory owner away from insolvency? So far, the industry has found itself outside a great deal of scrutiny from those who are concerned with protecting consumers from the dangers of poor safety-and-soundness. Notable solvency failures include the Japanese-based MtGox, which in February was discovered to have lost over , customer bitcoin.
Due to these failures, Bitcoin has developed a poor reputation for protecting the safety and soundness of consumer funds. Bitcoin businesses should be aware of what regulations exist in this field of consumer protection. To begin with, all companies whose business model involves acting as a fiduciary for multiple parties generally require a money transmission license. In the United States these are issued both by states as well as the federal government.
This regulatory mismatch can create difficulties for a startup trying to work in multiple states, especially with a borderless currency such as bitcoin. With most developed countries adopting structures similar to US law on financial regulation, this is an obstacle that the Bitcoin community needs to solve if it is to become a serious player in interchang- ing funds.
How is that going to work when a business deals with entirely digital currency? That said, if a company is using dust tiny amounts of bitcoin with data attached to them to transfer information, does it fall under this regulatory regime? This lack of clarity is in itself an obstacle to the development of Bitcoin businesses in the United States. Large investors are generally turned off by businesses which can be dramatically affected by an evolving regulatory environment.
Threat Likelihood as of today All but certain - The United States has, as previously described, one of the most highly-regulated banking sectors in the world. To the extent that Bitcoin is exchanged through the American banking system for U.
Chief among these are the institutions which are legitimately operating in the open within the United States but are not yet large enough to afford the 6-figure cost of submitting their Bitlicense appli- cation, coupled with the ongoing cost associated with maintaining compliance.
While this decreases the availability and diversity of Bitcoin services available to consumers while raising the costs of compliance, it does not necessarily reduce the ability for Bitcoin and blockchain to be used to streamline transactions and improve interchange on a global level. Additionally, businesses should work to make the jobs of regulators easier and better by improving the processes they use to inform their decisions and enforce their mandates. An example of this would be developing an open-source tool that sits on the blockchain that improves upon the current system for notice-and-comment rulemaking, or provides mechanisms for more regular updates of regulatory mandates.
Other uses would include blockchain solutions for financial audits such as real-time tracking of proof of reserves to address solvency issues and Big Data tools for analyzing aggregate transaction flows in identifying threats. Establishing a relationship with the people not just the agency, but the people who work there who are in charge of regulating your business and educat- ing them on how you operate is one of the most important proactive steps that a Bitcoin company can take to overcome this obstacle.
Legacy institutions are among the best-positioned to both reap the rewards of blockchain technol- ogy while complying fully with overlapping and competing regulatory frameworks.
Large banks exist in a highly regulated environment and have established processes for dealing with regulators in areas whose regulations are not clear.
Guidance on improving current regulation, law enforcement efforts, or informing future policy making and regulation. Threat 1c: Insufficient Consumer Protection during transactions A current threat to the streamlining of transactions and improving interchange is the absence of traditional consumer protection during transactions.
This irreversibility of transactions is one of the great advantages Bitcoin holds from the point of view of merchants and at the same time is one of the greatest dangers to consumers. In Bitcoin, if someone acquires the secret key to a wallet, they can instantly send all the bitcoin in that wallet to any recipient, a transaction that cannot be reversed unless the recipient willingly returns the funds.
That translates into a consumer protection regime which does not depend on consumers reading Yelp or visiting the Better Business Bureau before making a purchase. An example of this is that even if a consumer writes down their PIN onto their ATM card, he or she is still protected from the theft of their funds.
With Bitcoin, we have seen serious breaches, thefts, and hacks which have resulted in consumer funds disappearing. In the annex is a table of all documented hacks prior to June of or more bitcoin. While this is happening, though, regulators will likely be working out how to adopt existing statutes and regulations governing fraud to this new payment system.
Businesses must address the threat of consumer protection head on. Best practices include using end-to-end encryption in communications will help protect customers from bad actors, including rogue employees who have access to back-end administrative tools. This end-to-end encryption can also make platforms less susceptible to the actions of nation-states, though this presents a clear dilemma. If platforms are free from the threat of government intru- sion, what incentive do they have to comply with any laws?
First, we believe that consumers do not wish to become criminals in order to save a few cents on their purchases, so any company working on value-transfer in the Bitcoin world will have to convince its customers that it is operating within the letter of the law.
Second, the blockchain is as discussed later a terrific tool for law enforcement. Companies that operate outside of the law can be sure that law enforcement will be tracking the movement of their funds, and will open up their executives to prosecution within whichever jurisdictions they reside.
Multi-sig technology creates a more secure environment than that of the existing banking system, where information is centrally held and therefore vulnerable to hacking and criminal activity.
In the instance of streamlining transactions and improving interchange, that means disrupting every financial institu- tion from credit unions to banks to the Federal Reserve. To the extent that this results in a higher regulatory burden, it has the potential to discourage innova- tion in new markets. Parallels to this obstacle exist in every industry. The use of regulatory apparatus by incumbents has been observed recently in cities where taxi commissions have lobbied, often successfully, to ban their newest competitors, Uber and Lyft.
When New Jeresey auto-dealers lobbied to prohibit Tesla Automotive from selling cars via their corporate-owned showroooms, the legislature shut down the showrooms, leaving consumers traveling to Pennsylvania or New York to purchase their Teslas.
The incumbent status of banks is more powerful than the incumbent power wielded by taxi commissions by virtue of the size of the banking industry and the complex regulatory apparatus by which they are already governed. Threat Likelihood as of today Somewhat likely ï¿½ The likelihood of financial companies protecting their vested interest through regulatory capture are mitigated by two caveats.
First, the Federal and State regulatory apparatuses are designed to not be captured by special interests. Rather, the opposite is true, they are designed to be immune from regulatory capture. Unfortunately, the world is not ideal and these agencies have proven that they are not immune from the pressures exerted by the industries they regulate.
The more important mitigating factor is that there is scant evidence that financial institutions are threatened by a Bitcoin-version of blockchain technology.
Much like the disruptions before, such as the internet and electronic trading, the establishment believes that if bitcoin ever does pose a true threat to their business model, they will be able to build or purchase the necessary infrastructure to co-opt the technology for their own use.
Its severity is lowered by the ability for those who are threatened to operate in different geographies, where incumbent organizations have not captured interests and created overly-burdensome regulatory requirements. Bitcoin has promised a revolution; they need to deliver more than an evolution. Products like these allow for smart regulation that serves consumers and does not inhibit inno- vation because consumers demand access to the product. Uber depended on the ability to rally consumers to their side in their fights against various city halls.
The best way to energize those consumers was to introduce them to their product and then tell them that it was their elected officials who wanted to take it away. Unfortunately for blockchain companies, the United States has a pretty efficient financial system compared to the rest of the world. Products that offer a 10x improvement upon our current state are not as easy to develop, even with the assistance of blockchain technology. The best markets for such disruption exist in the developing world, where Bitcoin may play the role that cell phones did to land-lines, allowing consumers to skip the phase of development that relies on brick-and-mortar banks and skip ahead to digital money.
Threat 2: Insufficient Adoption, Abandonment, or Disinterest Threat Status Insufficient adoption, abandonment, or disinterest threatens the streamlining of transactions and improving of interchange because if consumers fail to embrace and adopt blockchain technology or Bitcoin, the currency will have no fungibility among potential enterprise clients.
A couple of contributing factors to this include that consumers may not care about adopting some use cases, such as capitalization of lower value assets.
While cryptocurrency itself may offer a more trustworthy alternative, the on and off ramps, if not appropriately regulated, may present the same issues as traditional banking institutions, which have so-far not attracted the unbanked.
As the anti-money laundering regimes expand and become more rigorous, better customer identification may present a big problem among illegal and undocumented immigrants.
Despite the decline in price and stagnation in investment, more people seem to be continually attracted to the idea of Bitcoin and blockchain technologies. Threat Severity Moderate ï¿½ Even if most of the passionate Bitcoin community decides to abandon the project, the software and value-transfer aspect of the protocol will remain useful to a number of entities who are looking to streamline transactions and improve interchange.
If abandoned by technologists in developed countries, it may find a home among enterprises in developing ones. If infrastructural solutions enable consumer applications, the adoption of Bitcoin technology will organically take place.
Guidance on improving current regulation, law enforcement efforts, or informing future policy making and regulation Lower costs and lower barriers to entry serve as proliferators to adoption.
To ensure adoption, any proposed regulation should consider whether or not entrepreneurs building and providing these products and services face too high of a barrier for innovation ï¿½ whether it is time or money. Threat 3: Volatility Threat Status Unlike a fiat currency, there is a fixed amount of bitcoin 21 million BTC once all have been mined which gives it properties similar to that of commodities such as gold.
Instead, its inherent inflation is, in a sense, built in via a mining process. The perceived store of value of bitcoin is what fluctuates against the value of fiat currencies. As exchanges have consolidated, many have implemented circuit breakers and all have upgraded their trading engines over the past few years to keep up with the increased volume and prospect of volatility. The more this happens the more institutional investors will be attracted to exchanges trading bitcoin, which will further bolster liquidity and safeguard against complete collapses or stratospheric explosions in the price.
When bitcoin achieves sufficient adoption its vulnerability will be comparable to that of stable fiat currencies, such as the USD. Also, time will help solve this. Bigger, deeper sources of demand and better hedging instruments will make the market more efficient, less volatile regardless of whether the price increases tenfold or stays near where it is. In other words, the shorter the wait time to confirm receipt of bitcoin, the less damage a volatile exchange rate can do. Threat 4: Co-option by States or Incumbent Financial Institutions Threat Status States may develop and issue alternative centralized digital currencies.
In such cases, the main- tenance of the blockchain ledger may be subject to the control or manipulation of a centralized authority, annulling the benefits of decentralization offered by digital currencies such as bitcoin.
Centralized control may result in burdensome regulation, fraud, corruption, or manipulation such as the ability to invalidate legitimate transaction or validate illegal ones. Threat Severity Existential - Completely depending on the implementation, this has the potential to threaten the existence of bitcoin and damage the long-term open source nature of blockchain protocols. Recommendations Recommendations or potential solution s for addressing threat in terms of: This is rather unavoidable.
The solution is to maintain innovative energy around the alternative decentralized technologies ï¿½ Bitcoin and the like ï¿½ and lobbying pressure to ensure that the regula- tory environment is conducive to that. These are the end goals, not that Bitcoin takes over the world per se. Increased access to technology is a good thing ï¿½ even when a ledger is state-owned and issued, the use of the blockchain to enable electronic payments is still a net-positive from governments to companies to consumers.
Additionally, since this a centralized service, the ledger will be maintained by interested parties or discarded because the nation is no longer trustworthy just as in traditional fiat currencies. The individual government will not be able to influence the global Bitcoin ledger without total consensus, inhibiting and driving down corrupt bad behavior or manipulation.
Summary Paragraph s The promise of Bitcoin and blockchain technology in the field of value transfer is clear ï¿½ it has the potential to fundamentally transform the rails of the financial world, creating a much more efficient, egalitarian, and decentralized system.
The promise is not without obstacles, though. Some obstacles are outside the control of the Bitcoin community, such as whether nation-states choose to adopt or prohibit bitcoin and blockchain technology.
The best steps that can be taken to ensure the opportunity of streamlined transactions and improved inter- change are realized is to create a motivated community of bitcoin users compliant with regulations and building useful apps atop the Bitcoin network which are of value to consumers. Streamlining Financial Services Regulation Voluntary transparency is a self-regulatory mechanism that could substantially enhance consumer protection and prudential oversight.
Furthermore, regulated financial institutions seem incapable of providing unimpeachable transactional and financial reports to demonstrate their solvency definitively. History has shown that regulation lags behind technological innovations, especially in the realm of financial service design and delivery.
Focusing on bridging this gap is an up-to-now overlooked, but critical approach to financial oversight that could address the core purpose of prudential financial regulation. In other words, the primary purpose of regu- latory oversight is the protection of consumer funds against loss and mismanagement by financial intermediaries.
Licensing is an invasive and heavily front-loaded process. In the United States, all of this is required to be done forty-eight times, one for each jurisdic- tion requiring licensure of non-bank financial services providers. There is periodic reporting, an annual renewal of the license, which usually consists of the payment of a renewal fee, and there are examinations, which occur in approximately eighteen-month cycles, are mostly conducted on site, and are paid for by the license holder.
Gas fees decrease as a result, making transactions faster and cheaper. The main difference compared to ZK-rollups is that layer 2 transactions take a longer time. Optimistic rollups have to rely on external validators to check the merkle roots before the state can be updated.
However, the advantage is that optimistic rollups can support smart contracts in a similar way to the underlying smart contracts blockchain. Bitcoin lightning network promises the following benefits: instant payment, scalability, low cost and cross blockchains swaps. The Bitcoin lightning network also claims that it is capable of processing millions to billions of TPS, which is many times higher than legacy payment providers like Visa.
By settling transactions off-chain as layer 2 solution, fees are greatly reduced, allowing for instant micropayments. Starkware is a Ethereum layer 2 scaling solution provider. The main benefits of deployed on Optimism is that it is fast, simple and secure. Users can move assets in and out of the network using Optimistic Ethereum Gateway, and projects looking to deploy can submit a form to get whitelisted by Optimism.
Projects that meet their launch criteria will be approved within 2 weeks. Arbitrum is a layer 2 solution designed to boost the speed and scalability of Ethereum smart contracts, while adding additional privacy features. The layer 2 platform allows developers to run unmodified EVM contracts and transactions on layer 2, without compromising on layer 1 security.
Arbitrum positions itself as the ideal scaling solution for DeFi apps, with the ability to use Arbitrum rollup to scale any Ethereum contract.
I'm a technical writer and journalist covering cryptocurrency and tech. I believe blockchain can build a better world - I'm here to report on how we get there.
CoinMarketCap Updates. Table of Contents. Why Are Scaling Solutions Necessary? By Kevin Dwyer. What Is a Parachain? What Is Ethereum 2. What Is a Hashgraph? Blockchain technology offers tremendous benefits ï¿½ decentralization , trustless interactions, high levels of security and immutable record-keeping. It has enabled a booming cryptocurrency ecosystem to develop and has underpinned consistent technological innovation.
However, one of the main problems with many blockchain networks is their scalability. Scaling problems are an issue when the amount of data passing through the blockchain hits a limitation due to the insufficient capacities of the blockchain. In an ideal case, a blockchain would be able to handle an infinite number of transactions per second, also referred to as throughput or with the acronym TPS.
However, the Bitcoin main chain can only handle around TPS. The difference lies in the level of decentralization and privacy that Bitcoin and other blockchains aim to provide. It takes a good deal of time and processing power to replace a simple centralized system.
Each transaction must be accepted, mined , distributed, and validated by a global network of nodes. To solve these problems, blockchain developers are working to improve the scope of what a blockchain can handle. That means allowing for a higher number of transactions per second and faster processing times.
One method is to use layer 2 scaling solutions. This would make the common goal of the blockchain community a reality: to make cryptocurrencies and blockchain-based systems accessible to everyone in a convenient, secure and efficient manner. Layer 1 blockchain solutions help to improve the base protocols E. For example, the Ethereum network is now moving to a proof-of-stake PoS consensus algorithm.
This new method of mining supports faster transaction speeds and more efficient energy use in the mining process. Sharding is another layer 1 scaling solution that breaks down the job of authenticating and validating transactions into smaller pieces. It spreads the workload better across the peer-to-peer P2P network to bring in more computing power from more nodes. This all allows for blocks to be completed faster. Layer 2 solutions to scaling establish an additional protocol that is built on top of blockchains like those of Ethereum and Bitcoin.
Sidechains are in fact something of a hybrid between layer 1 and layer 2 solutions to scaling. They are linked with a two-way peg 2WP that is a protocol that allows for the open transfer of cryptocurrency from the main chain to a layer two chain that requires a degree of third-party trust. Like other layer 2 scaling solutions, it aims to tackle scalability problems by offloading some of the validation and transaction processing processes to another blockchain. This frees up the main chain to take on a greater number of transactions.
They are all created within the same framework, which allows them to have the same security attributes, and they are all connected to the central relay chain. However, they can all also act independently to address their specific applications. This is the central idea behind Polkadot.
Parachains allow for very fast transactions as the distribution is efficiently spread to handle workloads. Ethereum 2. This set of improvements will increase the scalability of Ethereum and put it on par with other leading blockchains when it comes to throughput. Ethereum investors can stake their coins to earn rewards in return for their contribution to validation efforts. Hashgraphs leave the realm of blockchain and are considered a different technology altogether.
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|What do bitcoin sidechains mainly promise to introduce||However, none of introducf initiatives have utilized blockchain technology. Stacks is an entirely separate blockchain from Bitcoin, with its own network, miners, and native asset STX. The biggest problem is that they mainlj not always incorruptible ï¿½ conflicts of interest between judges and the parties involved in a contract dispute cannot be ruled out, for example. Given the size and severity of the problem, a number of governments and non-government organizations have attempted to deploy digital technologies to broaden registration and siddechains tity-issuance and to increase access to the rights and services often attached to possession of a verifiable identity. It supports incredible scalability at 10, TPS, lower fees, less energy usage and lower processing times. Compared to btc to usd layer-1 blockchains, Bitcoin tends to take longer to evolve.|
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WebSkip to main content Bitcoin Insider. Menu. WebSidechains have become essential for helping pre-existing blockchains like Bitcoin to scale and become more interoperable. Webadditional Information on what do bitcoin sidechains mainly promise to introduce Scroggins Texas TX So there you have itï¿½a total Linux n00b with no previous PC .