Blockchain – the Future?

Comes with the Bitcoin fever and its fall, believe it or not blockchain is the future. This 10-year-old technology allows digital information to be distributed but not copied; its application ranges from the mostly-talked-about payments and banking—including the uses of cryptocurrences (Bitcoin, Ethereum, Litecoin, Ripple…etc.) and Initial Coin Offerings (‘ICOs’)—and smart contracts to many unsung potentials such as supply chain audit, counterfeit combat, governance and compliance.

But for the over-emphasis of the cryptocurrences, people would have had realised the epoch-making features of distributed ledger technology.

Crowdfunding through ICOs is probably the most powerful feature of these cryptocurrences. Yet, in Hong Kong, equity crowdfunding, as in the case of ICOs, is to be regarded as ‘regulated activities’ under the Securities and Future Ordinance, Cap. 571 (the ‘SFO’) whereas peer-to-peer lending, depending on its scale and frequency (ie business model), may subject to the requirement of a license under the Money Lenders Ordinance, Cap. 163 as well as the SFO. (See: the Securities and Future Commission’s news on 9th February 2018, circular on 11th December 2017, and notice dated 7th May 2014.) Assuming license is not a problem, one would still have doubts on the ‘smartness’ of the contracts built on these cryptocurrences blockchain after the hard lessons learned from the US$50 million hack of the decentralized investment fund from the Decentralized Autonomous Organization (DAO) in June 2016 and most recently, over US$500 million hack of Coincheck in Japan.

On 4th September 2017, the People’s Bank of China issued a ban on ICOs totally, declaring them to be illegal and disruptive to economic and financial stability. Settling for less, many suggested that cryptocurrences are the future of micropayments as they provide a free and instant way to exchange value without middleman and/or government supervision. The day won’t come unless and until technology of and confidence on cryptocurrences have been raised; the reasons are twofold:

The issue of efficiency: cryptocurrences are not totally free and instant; their current process time and level of energy consumption simply render them inefficient—transactions per second for Bitcoin is three to four, whereas those for Ethereum, PayPal and visa are 20, 193, and 1,667 respectively; the energy consumption of Bitcoin for each second’s transactions is 35 times higher than that for visa.

The issue of security: if you put your money in banks or use the credit cards issued by them, anything goes wrong, to a certain extent (say, HKD500,000 under the Deposit Protection Scheme), you are covered; none would apply for cryptocurrences—the case of Mt. Gox, world largest Bitcoin trader in 2014, losing over US$400 million investor money by theft for example.

The above problems coupled with the existence of cash eliminate any practical uses of cryptocurrences, save for speculation and illegal transactions. However, the current dead-end of cryptocurrencies uses does not mean an end of the blockchain application. To the contrary, blockchain technology has been applied to all walks of life, spearheaded by different bank-backed projects, such as IBM-backed Hyperledger Fabric project, the Utility Settlement Coin and R3’s blockchain consortium. The Hong Kong Monetary Authority has commissioned the Hong Kong Applied Science and Technology Research Institute to conduct researches on the deployment of such technology (see its two Whitepapers dated 11th November 2016 and 25th October 2017.) With blockchain application in different internet-of-things (IoT), such as your fitbit (imprecisely), one would expect to live in a truly ‘smart city’ in the near future.

Jurisdictions: 

Liberty Chambers, Barrister-at-law

Foster is a criminal barrister with experiences and qualifications in multi disciplines. He is a life member of Invotech and its Blockchain Special Interest Group (SIG)