State of the (Blockchain) Nation: Part 1

by Russell Michell

Introduction

In December 2018, Callaghan Innovation in association with MBIE and Centrality produced their report summarising the state of Blockchain Technology in a New Zealand context. It acknowledged the input of industry leaders and provided a general understanding of where the country stands within this burgeoning space.

In this particular piece, I discuss my view of New Zealand’s standing in the growing global ecosystem of financial, industrial and organisational change, and focus a little on the confusion I frequently see when decentralised blockchain networks like Bitcoin and Ethereum are compared with what’s become known as Enterprise Blockchain.

It’s been quite a ride since Nakamoto wrote his white paper in 2008, but is the country strapped-in and ready to take on what lies ahead?

Background

The report reflects what much of New Zealand thinks about Blockchain Technology; That fully decentralised blockchain networks and Enterprise Blockchain can be considered equals as a technology choice. More often than I’d like, the two are mistakenly conflated: A Blockchain is a sub-class of Distributed Ledger, but a Distributed Ledger does not always comprise a Blockchain. For a refresher on this crucial point, please read my previous two posts on this subject: Part one is here, and Part two is here.

Companies and individuals have different expectations as to the solutions Blockchain technology might best be applied to. For some, the original intents of Bitcoin, such as private value transfer through decentralised means, are not especially important and may solve a problem in a way that’s unsuited to their business model. What this often means is that an aspect of the technology such as the blockchain itself is “cleaved off” and further developed as an independent technology. This process occurs in technology all the time and is one way in which it progresses. But those that propagate this view seem to do so without fully understanding the value proposition of truly decentralised systems. And especially damaging is those who are sold “blockchain” systems are left with the false impression that geographically limited and privately run networks are in any way analogous to the technologies from which they stemmed.

It took until working at Catalyst for me to understand the real importance of open source software and the open architectures that evolve from it. And it is these that are lacking in an inherently closed architecture. Permissioned ledgers have a necessarily limited node distribution and a constrained node ownership model. Their mechanisms for reaching an agreement as to the state of their semi-distributed ledgers, known as consensus, are without appeal to external sources of validation. In human societies, systems without appeal to external review are suspected of corruption. This is not just my personal viewpoint, others in the industry go further; Bill Barhydt, CEO of Abra, the cryptocurrency investment company, stated in February 2019 that private, enterprise blockchains “make no sense”, likening them to the extranets of the 1990s.

Make no mistake; there are big names involved in Enterprise Blockchain in New Zealand. NZPost and Fonterra are working with Chinese online retail giant Alibaba on a blockchain-based order-tracking system for improving food safety. New Zealand based Centrality's Trackback project, also in the traceability space, aims to showcase NZ products in a global marketplace. And looking over the ditch to South Australia, the state government has partnered with Horizon State to use “Blockchain Technology” to support an upcoming election.

And yet it’s unfortunate that the report cites cost savings as being a primary factor for the industry when considering blockchain projects. For those who are actively designing and building the entirely new content delivery, security and payment models that decentralised, borderless and private payment systems engender, this can seem bemusing indeed.

Decentralisation

For the “developed” world, the beginning of the decentralisation movement is usually traced back to conversations over the early internet between burgeoning cryptographers of the time, known as cypherpunks, who discussed the subject of privacy in all forms of communication.

With the advent of cryptocurrencies, money itself is now a content-type, broadcast as a form of communication. And just as for person to person, or internet communication, financial transactions should be similarly private. Not because transactees have anything in particular to hide, but because they shouldn’t have to worry about the impact of revealing anything about their finances, no different than guarding our addresses and salaries from strangers.

The Summary

The report defines common terminology and introduces use-cases from New Zealand and Australia. There is much evidence that New Zealand's banking and regulatory frameworks continue to be slow to adapt to the pace of change, relative to the needs of blockchain companies, many of whom experience difficulty in obtaining banking services. This is a two-sided problem, given considerable space in the report because of the real barrier to entry for start-ups on one side, and government’s ongoing desire to increase the country’s I.T. service exports on the other.

Horizon State incorporated itself in Australia even though its CTO lives in New Zealand, simply because New Zealand’s legal and accounting rules concerning cryptocurrencies and decentralised financial rails were considered to be well-behind those of Australia.

The reasons cited for bank’s reticence in supporting companies in this space in particular are about them bearing the regulatory brunt of the quality of each company's KYC (Know Your Customer) and AML (Anti Money Laundering) implementations.

But if banking has been sluggish to respond to the pace of innovation, then innovation itself has been anything but. As of December 2018, The Edmund Hillary Fellowship had attracted 1100 applications under the government's' Global Impact Visa, with the largest technology focus concentrated on Blockchain Technology. New Zealand companies such as BlockchainLabsNZ, Trackback, Dasset and others have been scaling in this space for some years, putting New Zealand on the global map of blockchain-friendly countries. However, we still lag behind equivalent economies. If the country wishes to engender further growth in I.T - currently it's third largest export - change is necessary, sooner rather than later.

The report reflects on some of the negative perceptions that traditional finance and I.T. still have towards cryptocurrency and blockchain systems. These comprise a persistent core that incumbents consistently cite as being reasons why it is unlikely decentralised blockchain-based systems will ever form part of their businesses. I attempt to address the most common ones in the next part of this article.

About Russell

Russell is a Senior Developer on our SilverStripe bespoke development team. He’s fascinated by the changes cryptocurrencies, decentralised technologies like IPFS and the applications built on top of them can bring about in the disruption and transformation of the world’s sociological and technological landscape.

Blockchain photo by Max Pixel, view licence infomation.

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Catalyst is a New Zealand-owned and operated company where values, community, and integrity are paramount. Since 1997, Catalyst has been dedicated to using the world’s best open source software and tools to deliver robust IT solutions for our clients. We have grown through long-term commitments to our clients, a culture of collaboration and organisations consistently experiencing the superior economic and social value that open source delivers.