Recently I came across an article published by the New York Times and feel inclined to offer a rebuttal. The article argues that Bitcoin’s immutability is a weakness and that a blockchain should allow its history to be rewritten to fix accounting errors.
The narrative of mutable private blockchains may be a symptom of financial institutions trying to use technology that was never built for them. In fact, the entire purpose of a blockchain is to circumvent those very institutions.
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. -Satoshi Nakamoto
Knowing this, it should come as no surprise why the legacy financial system sometimes fail to comprehend what blockchains are used for. It’s somewhat ironic that they’re spending millions of dollars researching how to use technology that was meant to put them out of business. Perhaps their interest in blockchain technology is a survival attempt to slowly change the narrative and co-opt the movement.
The main danger with the institutional oligarchs adopting blockchain technology is that they could one day seek a monopoly over the industry. Perhaps regulators are lenient towards the tech because it’s still in the experimental phase for the banking sector.
They stand to benefit from the free innovations offered by the open-source community. Once the tech is more established and integrated into their system, we may start to see additional layers of regulation that restrict open blockchains in favour of their private counterparts.
A Clash with Privacy Laws
The author makes an argument that blockchains could clash with privacy laws that require personal data to be stricken from the record.
“This challenge is coming to light with new data privacy rules like the European Union’s general data protection regulation, which will add new consumer data privacy and ownership rights over the next two years. These rules will not just affect Europe; they will have a far-reaching impact on global companies, and not least on the back offices of major financial institutions…
Blockchain’s immutability could eventually run at odds with existing regulations, too. For example, the United States Fair Credit Reporting Act, the Gramm-Leach-Bliley Act and the Securities and Exchange Commission’s Regulation S-P all require personal financial data to be easily redacted.”
Privacy laws want to protect data yet KYC requires sending personal information over the internet. Entrusting the security of our data to multiple companies increases the risk of data breaches and identity theft. Financial privacy is important, which is why bitcoin transactions are pseudonymous.
Using Ethereum as an Example
The author uses the Ethereum hard fork debate as an example of blockchain purists lacking pragmatism.
“For example, a hacker exploited a programming error this spring in a self-executing blockchain “smart contract,” stealing more than $60 million of “ether” (another digital currency) from a start-up fund called the Decentralized Autonomous Organization.
When lawyers argued that the hacker was entitled to the assets under the erroneous code, a surprising number of blockchain purists agreed. Even after the project’s leaders succeeded in winning a consensus of participants to bifurcate the code at a point before the transaction occurred, a large number of participants continue to use the version of the chain where the theft occurred.”
One of the reasons why the hard fork caused so much controversy, is because of the contradiction caused by the DAO’s strong marketing campaign around immutability…
“its by-laws are immutably chiseled into the Ethereum blockchain.”
“The DAO is borne from immutable, unstoppable, and irrefutable computer code… bla, bla, bla”
The debate around the DAO is not simply one of immutability but also the contractual terms of service that explicitly state that the DAO code is the final say in all matters. The entire reason we have contracts is to keep a record of agreed upon terms so that one party doesn’t violate their end of the bargain. This is why people spend thousands of dollars to hire lawyers to write contracts because loop holes are exploited all the time.
Ethereum also offered a social contract of immutability, which is a necessary ingredient for operating a decentralized ledger. Having a mutable blockchain does not give financial institutions the right to break contractual agreements and the records of these contracts need to remain immutable.
Bitcoin can be used as a permanent ledger to store hashed records of contracts that should not be changed. This could eliminate the need to trust a third party to keep the records unadulterated.
Mutable Blockchains to Prevent Fraud
The article argues that mutable blockchains can help prevent financial fraud…
“One thing is clear: If the financial services industry is to embrace a new technology, it cannot be one in which mischief and mistakes are immutable and fraudsters can defend their actions on spurious ideological grounds.”
This statement is beyond ironic because the entire raison d’etre of immutable blockchains is to inhibit the fraud caused by trusting fiduciaries. Most of the major bitcoin thefts weren’t the result of its immutable blockchain but rather trusting our private keys to be managed by exchanges.
To finalize my position in favour of immutability I will leave you with a list of fraud examples that blockchains can help prevent.