This past year has seen the integration of blockchain technologies into businesses around the globe. Serious technology professionals regard the technology as a great leap forward for distributed computing, transparency, and security. The blockchain may well be the panacea that they envision it to be, but that doesn’t mean that it is without its share of risk.
The overwhelming hype about blockchain-based services (aided by the explosive rise in the value of Bitcoin and other cryptocurrencies) has created an investing frenzy that calls to mind the dotcom bubble of the late 1990’s or the more recent derivative-fueled financial crisis of 2008. The problem is that the level of excitement far exceeds the tech sector’s ability to bring meaningful and innovative blockchain products to market. This reality has resulted in a speculative vacuum.
Hype breeds fraud
As is usually the case, the first people to notice the overwhelming potential of blockchain technology as a moneymaker were those who would use it for nefarious purposes. As investors clamoured to pour money into any ICO they could find, crypto pioneers and financial moguls sounded alarms that were mostly ignored. There have already been some notable red flags.
In November, the team behind a startup called Confido disappeared, taking $375,000 of investor funds with them. The company had claimed to be creating a blockchain-based escrow platform. Investors, in their rush to get involved, were duped by their false promises. In December, the U.S. SEC intervened in the ICO of a company known as PlexCoin, putting a stop to what they identified as a plot by long-time fraudsters to cash in on the ICO craze.
Secure reputation, insecure products
Defrauding investors isn’t the only trend associated with blockchain technologies that should be cause for concern. There is also the potential for the technology to be misused by criminal enterprises to hide illicit transactions, and by startups relying on the public perception of the blockchain as inherently secure as a means of selling products that are anything but. Both have already become a problem.
There are a number of ways that cryptocurrencies, underpinned by the blockchain, may be used as a conduit for illegal activity. There are already real-world examples of the technology being utilized to funnel money to terrorist organizations. Then there are companies like Privatix. Once a consumer VPN service, similar to wink-and-nod offerings like the VPN Hidemyass, Privatix suddenly rebranded itself as a blockchain VPN bandwidth marketplace. In practice, this has the same inherent risks as the Tor network, and they seem to be conflating “blockchain” with “secure” in an effort to mislead consumers.
Guilt by association
What’s at stake in these early days of the blockchain story may be the fate of the technology itself. As large financial institutions and consulting firms seek to position the blockchain in the public consciousness as the ultimate trust platform, there are no shortage of damaging incidents and examples working to undermine them. It also isn’t reasonable to expect that the public at large will draw a distinction between public and private blockchains, nor that they will even comprehend the difference.
It’s far too early to know if big business will be able to co-opt the blockchain and disassociate it from an external market that has been likened to the Wild West. The only thing that is certain is that they have great incentives to do so, since the blockchain could, at least internally, be as transformative as advertised. For now, all we can do is to stay tuned to see what comes next.
To learn more about the blockchain as a trusted platform see Blockchain: Pharma’s Answer to Restoring Trust in Healthcare.