Blockchain: Innovating Our Way to Economic Freedom? 

Those who dream of a world with greater economic freedom have traditionally relied on the pen, the ballot box, and sometimes the sword to effect change. But a relatively new technology called blockchain may make the computer a potent tool to achieve greater liberty.

A blockchain is a type of database that is distributed to all users without a centrally managed hub and that stores unalterable digital records. It is most commonly known today as the technology underlying bitcoin, keeping records of the cryptocurrency’s ownership and allowing ownership to be transferred. This may only be the beginning, as some observers predict blockchain will be as important an advance for transactions and record-keeping as the internet has been for communication and information.

This article will explain the basic attributes that make blockchain important, discuss some applications both proposed and already in use, and explain why anyone who cares about economic freedom should be very interested in the technology. While a full-on technological revolution may take a long time, many economists, technologists, and computer scientists do see one on the horizon.

What is blockchain?
It’s easy to get bogged down in the computing details of blockchain, so this article will focus instead on the attributes that distinguish this technology. As a first approximation, think of blockchain as an unalterable digital “paper trail.” Don and Alex Tapscott, authors of “The Blockchain Revolution,” provide a good summary: “At its most basic, blockchain is a vast, global distributed ledger or database running on millions of devices and open to anyone, where not just information but anything of value—money, titles, deeds, music, art, scientific discoveries, intellectual property, and even votes—can be moved and stored securely and privately. On the blockchain, trust is established, not by powerful intermediaries like banks, governments and technology companies, but through mass collaboration and clever code. Blockchains ensure integrity and trust between strangers. They make it difficult to cheat.”

Five key attributes of blockchain:

Universal access A blockchain is a distributed database, meaning that each user, no matter how big or small, has equal access to the entire database and its real-time changes.

Peer-to-peer transmission There is no central storage hub or manager of a blockchain. Changes or transactions (i.e., blocks) get transmitted peer-to-peer, and the constantly updated database is stored in the multitudes of distributed copies rather than in a central home.

Pseudonymity Each user has a unique alphanumeric address of at least 30 characters; users can be anonymous or choose to provide their identity to others.

Irreversibility Records are chronologically linked in a chain and unalterable, due to both the “clever code” mentioned above and the lack of central storage, meaning that even if a hacker succeeded in changing one copy, the overwhelming majority of copies would maintain their accuracy.

Algorithms Users can set up “smart contracts” that automatically transfer assets and clear under specific conditions. For example, such contracts could automatically nullify themselves if assets are not transferred on a certain date or other terms are violated.

What can blockchain do?
Many observers note how long it took for some of the most revolutionary internet-based applications we take for granted today to even be conceptualized. Similarly, they theorize, we are only scratching the surface of what blockchain can do. With that in mind, here are just a few of the technology’s current uses:

Currency The TCP/IP protocol that enables the internet involves users sending and receiving copies of data. This system is great for communication and transmission of information but not for money. The best TCP/IP can do is send orders to transfer money to a central clearinghouse, like the bank that provides your credit card. Because of the five attributes discussed above, blockchain can instead transfer digital representations of the real thing, impossible to copy. This is what allowed bitcoin to be the first cryptocurrency to solve the so-called double-spending problem. But blockchains can go beyond abstractions such as bitcoin and enable transactions with actual gold-backed currency. One can purchase gold, get a unique certificate of ownership, and make transactions with a blockchain in a manner essentially the same as bitcoin. In November, the U.K. Royal Mint announced plans to launch such a blockchain-backed offering.

Record keeping Physical records must be stored and are subject to damage or loss. Anyone who’s lost a birth certificate or Social Security card is all too aware of the hoops you have to jump through to replace it. On the other hand, current digital records usually require a centralized location and a good deal of technological infrastructure to protect them from hacking. With blockchain, unique unalterable records can be kept digitally and can even be transferred to another owner. What if the title of your car was safely kept digitally and could be transferred in a sale in real time? 

Financial services When investors buy stocks, derivatives, or syndicated loans, the transaction may feel like it happens in almost real time. But the actual settlement of trades currently involves archaic processes, with some trades taking as long as 20 days to settle. With blockchain, actual ownership of a financial asset, rather than a promise of ownership, can be transferred in real time. In addition, blockchain technology may facilitate regulation that is both more effective and less cumbersome, since all transactions are memorialized and market participants can agree (or be required) to turn over data to a regulator.

Blockchain and economic freedom
Core tenets of economic liberty include property rights, lack of reliance on central authorities, privacy, and equality of opportunity. Blockchain can advance each of these principles:

Property rights The permanence of record-keeping on a blockchain provides a kind of guarantee that may be completely novel in some parts of the world. In places that are particularly susceptible to government seizure of assets, a blockchain-based record keeping system leaves the possibility that wrongs can be righted. Imagine a dictator launches a successful coup in a small country, burning the physical records of land ownership and forcing people off their land and redistributing it to his cronies. If that regime falls, sorting out who owns what could lead to chaos or even war. But if those records had been kept in a blockchain, it would be far easier to go back and return assets to their rightful owners, who would hold their encrypted identities.

Lack of central intermediaries Bitcoin has already provided a tantalizing view of the future for those who favor dismantling the government monopoly on issuing currency. Blockchain technology allows such a private currency to arise without a government or a private central entity to issue notes and establish trust. In fact, blockchain transactions are often called “trustless,” meaning that two parties don’t have to trust each other or a central authority to conduct a transaction. This term is something of a misnomer, however, because trust naturally emerges from the system, bottom-up rather than top-down. Users of a platform could also agree in advance to use a mediation body to settle more complex contractual disputes.

Opportunity Many people in developing nations currently have no access to banking services, due to lack of supply or lack of verifiable identity. Blockchain provides a cheap, easy way to accomplish both from the ground up, with no redistribution of wealth. Putting these people, along with their work and ideas, on the financial map at little cost would only be positive for the global economy.

Blockchain could radically alter the financial services landscape, or simply make the current one more efficient and profitable.

New technology can both disrupt and entrench existing large and powerful players in a market. Blockchain technology can empower financial transactions without governments or large corporations acting as intermediaries. However, large financial corporations are developing and deploying their own versions of blockchain technology. As blockchain is adopted, we may see both significantly less use of intermediaries and current financial intermediaries becoming more efficient and even more profitable.

The retail industry’s experience with the internet helps illustrate how new technology can lead to an array of seemingly disparate impacts occurring at once. It was fashionable 20 years ago to predict that the internet would democratize the retail business, enabling a myriad of small firms to exist without brick-and-mortar locations and with consumers reaping the benefits of heightened competition. This prediction was not entirely false: A small seller today can reach customers around the world, creating markets that were not previously possible for niche products. But existing retail giants like Walmart used the new information and communication technology to become even more efficient, placing new pressure on small competitors, especially brick-and-mortar stores. Finally, the internet enabled new retail giants like Amazon, which contributed to the failure of both small and large brick-and-mortar retailers. Trends resulting from major technological changes can cut both ways, disrupting markets but also strengthening existing players.

Public vs. private blockchains
Bitcoin uses a public, or “permissionless” blockchain, meaning anyone can choose to participate in the market, and all participants receive full and equal access to the (encrypted) data. But most of the applications being developed by financial firms discussed here use private, or “permissioned” blockchains, meaning one or more parties get to restrict access. While this makes sense in certain environments—for example, when participants in a market only want to interact with a select few parties—it might also reduce the technology’s ability to enhance and protect the economic rights of all people equally.

As observers like Chris Horlacher, CEO of Equibit Development Corp., point out, attempts to build blockchains that are not open and decentralized make the technology little more than a more efficient version of the databases and trade ledgers currently in use. However, even changes in efficiency have the potential to dramatically affect the financial industry and economy as a whole. In the examples that follow, we will discuss the implications of private blockchains, which generally enhance the efficiency of a market while leaving the current structure intact; and open, decentralized blockchains, which could radically alter the structure of markets.

Blockchain and big banks
Blythe Masters, former J.P. Morgan executive and current CEO of Digital Asset Holdings, notes the great disparity between the near-instantaneous execution and settlement of trades and the archaic “back end” in which reconciling different parties’ records and actually transferring ownership can take anywhere from three to 20 days. Because of the nature of blockchain technology, where a digital representation of an actual asset can be transferred rather than a copy, the time it takes to settle trades can be reduced from days to minutes. This alleviates a great deal of counterparty or settlement risk, which was shown to
be a huge problem during the 2008 financial crisis, when many already-executed trades by Bear Stearns & Co. and Lehman Brothers could not be settled after the collapse of those firms. In addition, transactions using a blockchain can vastly ease the time and effort needed to meet regulatory requirements such as reporting and transparency. Digital Asset Holdings is creating blockchains to take advantage of these efficiency gains, beginning with assets such as syndicated loans and U.S. Treasury repurchase agreements (repos).

A Digital Asset white paper describes its product, the DA Platform, which has the security features found in a blockchain but eliminates the openness: “Participants in the Platform share a single source of truth which provides continuous data integrity, and desired or mandated degree of transparency and the opportunity for rapid innovation.” DA believes that an open blockchain is not workable in markets for more complex assets due to the high dollar amount and volume being traded, and it has regulatory concerns. The DA Platform has an “operator,” which will typically be a “centralized market infrastructure provider that is responsible for processing transactions.” Sound familiar?

The implications of DA’s product are still important. For example, banks currently set aside billions of dollars for settlement risk; blockchain technology could free that money in the economy. The technology could greatly enhance the transparency of banks’ books and operations. Banks work with large customers and need voluminous knowledge of institutional details and current market developments, suggesting a continued role for large financial intermediaries. But the type of product being developed by Digital Asset enhances the efficiency of a market while leaving its centralized structure intact. It will be interesting to see, if this technology takes hold, who will gravitate toward open-blockchain trading platforms and who will still be willing to pay intermediaries large fees.

Blockchain and exchanges
The Nasdaq stock exchange has made significant and highly publicized investments in blockchain technology. Most notably, it uses Linq, a blockchain-based private trading platform for companies not listed on a stock exchange. In addition, Nasdaq has launched a pilot program in Estonia to use blockhain for shareholder-proxy voting.

Linq is another example of using a private blockchain to provide efficiency benefits without decentralization. In fact, Nasdaq says that you don’t need the revolutionary aspects of blockchain that establish trust between peer-to-peer users, because you can always trust Nasdaq: “Since the inception of bitcoin’s blockchain, the notable underpinning of this technology has been trust, since it is not controlled by any single user. However, with Linq being a private distributed ledger (as opposed to bitcoin’s open, public blockchain), Nasdaq is expecting efficiency and transparency to be the foremost virtues of its blockchain technology. According to Voss (Fredrik Voss, Nasdaq vice president of blockchain innovation), ‘When you have a trusted party, and, of course, Nasdaq is a trusted party, then you don’t really need the concept of mining.’” (Mining refers to the decentralized process with which cryptocurrencies like Bitcoin are created.)

It is tempting to dismiss Nasdaq’s proclamations of its own trustworthiness and see its investments in blockchain as an attempt to stay relevant in a world where stock exchanges will no longer be necessary. But exchanges serve purposes beyond being a source of trust in transactions. For example, by enforcing financial and transparency requirements before a company can be listed on its exchange, Nasdaq plays a curatorial role for smaller investors who don’t have the time to research companies. However, if transactions could be decentralized on an open blockchain, this curatorial role could be separated from the exchange itself and could be provided instead by investment advisers or even decentralized communities of investors. If blockchain is widely adopted, intermediaries like stock exchanges may be on shakier ground than big banks.

Will blockchain technology help guarantee civil liberties or simply empower governments to have more control over citizens’ lives?

Blockchain technology has the potential to either upend or further entrench existing ways of governing. It is not likely to do one or the other, but a combination of both is possible as the technology goes through still unforeseen stages of evolution. Below, we discuss the interaction of blockchain technology with two core civil liberties, privacy and property ownership, as well as how it may change some of the basic functions of government, such as currency and taxation.

How private is the blockchain?
Privacy is one of the major factors restraining government control over our lives. While the desirability of privacy is debatable in criminal contexts, for example, most people regard it as an important right. One common misconception about transactions on blockchains is that they are entirely private or anonymous. This notion stems largely from the association of bitcoin, which uses a blockchain ledger, with black market online transactions from websites like the now-defunct Silk Road, best known for its drug trafficking. However, those transactions often also use anonymous web browsers and are potentially traceable. The Bitcoin.org website is very clear about the currency’s lack of privacy, and is worth quoting at length:

“Bitcoin works with an unprecedented level of transparency that most people are not used to dealing with. All Bitcoin transactions are public, traceable, and permanently stored in the Bitcoin network. Bitcoin addresses are the only information used to define where bitcoins are allocated and where they are sent. These addresses are created privately by each user’s wallets. However, once addresses are used, they become tainted by the history of all transactions they are involved with. Anyone can see the balance and all transactions of any address. Since users usually have to reveal their identity in order to receive services or goods, Bitcoin addresses cannot remain fully anonymous. As the block chain is permanent, it’s important to note that something not traceable currently may become trivial to trace in the future.”

While blockchain transactions are not entirely private, they are in certain ways more private than the status quo. When you buy something online today, you usually send your data through a maze of banks and credit card companies. With a blockchain, the record of the transaction would exist for all to see. Someone making a concerted effort could view your data, but no central clearinghouse would own the data simply by means of its existence.

Once data has been written into a blockchain, it cannot be altered. Imagine, for example, having a permanent unalterable digital record of a document such as your birth certificate. The permanence of data in a blockchain, however, is a double-edged sword. Such permanence also makes it impossible to have a fresh start. If a government used a blockchain to record criminal histories, the data might be very safe, but it would be impossible to fully expunge anything from the record. More generally, the decentralized and encrypted aspects of the technology might make surveillance costlier, but like the data issues discussed above, they might make surveillance even easier for a government that chose to make a concerted effort.

One final positive aspect of the permanence of data on a blockchain is the flipside of government surveillance: government transparency. For the same reasons that citizens’ data could not be expunged, blockchains could provide unalterable records of our government’s communications and transactions. The 2016 election controversy over Hillary Clinton’s deleted State Department emails is just one example of an issue that could be avoided with blockchain technology.

Ownership of property and information
Because blockchains allow the storage and transmission of digital representations of assets rather than simply copies of data, a good deal of work has already been done on blockchain-enabled property registries. In Honduras, a pilot project was tested in late 2016 for what is slated to become a nationwide land registry using blockchain technology. The Property Rights Alliance wrote that “a reliable, secure asset base would increase lender confidence, lowering the cost of borrowing, and opening economic growth opportunities for Hondurans. An immutable register would lower the number of property disputes moving forward, providing respite to a region’s judicial system to work through the backlog of disputes.” As previously discussed, a blockchain-enabled land registry could also discourage government seizure of assets and ensure they are returned to rightful owners.

The development of such applications currently focuses on the world’s poorer countries, where the protection of property rights is particularly problematic. But one property right that lags behind others in the developed world is the right to own one’s data and information. Data about our demographics, views, and shopping behavior are a valuable asset, as many businesses that have grown out of the internet show. Currently, when we shop with an online retailer, use a search engine, or even click links in a browser, we implicitly exchange our data along with any monetary cost for the service. What if such data became a trade asset that we had the right to own? Blockchain technology could enable this in two ways. First, as discussed above, the decentralized peer-to-peer nature of the technology means that centralized entities are not automatically collecting data. Second, efforts by computer scientists are underway to add to the technology, allowing individuals to grant permission to see data and enabling individual ownership.

More efficient government, or just more government?
Because blockchain technology is so decentralized and potentially empowering to the individual, governments and big banks will likely use it for their purposes as well. This process could lead to gains for everyone in terms of efficiency or transparency, but it could also entrench undesirable aspects of a status quo that such a technology could otherwise overturn.

One example of this fork in the road is currency. Many of bitcoin’s earliest adopters like that it is not controlled and cannot be inflated by any government. Such evangelists would likely be horrified to read a 2015 Deloitte white paper that asks, “What would happen if we combined the best attributes of the technology of cryptocurrencies with the features of an established fiat currency under the sponsorship of a central bank? The result very well may just be a new method of handling payments that would revolutionize the current system.” No central bank has done more than exploratory research on the topic yet, but such a currency, relative to what exists today, could benefit economies in terms of speed and efficiency. But it would also further entrench a system that most of bitcoin’s biggest proponents believe should be overturned.

Conclusion
Observers across many fields believe blockchain is a hugely important technology, but some warn not to expect massive change soon. Writing in the “Harvard Business Review,” Marco Iansiti and Karim Lakhani suggest big changes will take a long time not in spite of but because of the technology’s importance: “True blockchain-led transformation of business and government, we believe, is still many years away. That’s because blockchain is not a “disruptive” technology, which can attack a traditional business model with a lower-cost solution and overtake incumbent firms quickly. Blockchain is a foundational technology: It has the potential to create new foundations for our economic and social systems. But while the impact will be enormous, it will take decades for blockchain to seep into our economic and social infrastructure.”

It is often easy to identify markets ripe for either efficiency gains or restructuring resulting from new technologies like blockchain. But as experience with the internet in the past two decades has shown, actual outcomes are the result of a complex web of entrenched interests, institutional details, technology adoption, management decisions, and many other factors. Furthermore, if blockchain succeeds, there will likely be major applications we have not yet thought of. Predictions help us think through a technology’s applications, but it is critical to remain open to changing ideas as a technology evolves.

During the dot-com bubble, people went overboard in their predictions of what the internet would change, but the real changes turned out to be massive. It is similarly easy for many to project their hopes and dreams onto blockchain during this early, underdeveloped phase. But given its potential enabling of bottom-up interactions and governance, it may be appropriate to dream a little about its future impact on society.

Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research often focuses on free markets and technology, including blockchain and cryptocurrencies, the sharing economy, and internet commerce. He is a frequent speaker at industry conferences, especially on blockchain technology. Max’s research and writing also touch on other economic topics, including governance, competition, and small businesses.
 
Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.