According to the Oxford Dictionary, blockchain refers to a system in which a record of transactions, especially those made in a cryptocurrency, is maintained across computers that are linked in a peer-to-peer network.
In other words, Blockchain technology is an advanced database mechanism that allows transparent information sharing within a business network. A blockchain database stores data in blocks that are linked together in a chain.
An example of a blockchain technology is the Bitcoin. The purchase and sale of Bitcoin is entered and transmitted to a network of powerful computers, known as nodes. This network of thousands of nodes around the world vie to confirm the transaction using computer algorithms. This is known as Bitcoin mining.
Therefore, a blockchain platform is a shared digital ledger that allows users to record transactions and share information securely, tamper-resistant. A distributed network of computers maintains the register, and each transaction is verified by consensus among the network participants. Using this technology, participants can confirm transactions without a need for a central clearing authority.
The first decentralized blockchain was conceptualized by a person (or group of people) known as Satoshi Nakamoto in 2008.
Blockchain technology has many built-in security features that make it difficult for hackers to corrupt. While a cryptocurrency hacker can take over a blockchain, they can likely steal tokens from sources such as a wallet or a cryptocurrency exchange.
So why is the government skeptical about blockchain technology?
Among other things, Bitcoin enables the citizens of a country to undermine government authority by circumventing capital controls imposed by it. It also facilitates nefarious activities by helping criminals evade detection. Finally, by removing intermediaries, Bitcoin can potentially throw a wrench in the existing financial infrastructure system and destabilize it.
To understand why governments are circumspect about Bitcoin, it is important to understand the role that fiat currencies play in a country’s economy. Fiat refers to conventional currencies issued by governments. Fiat money is backed by the full faith and credit of a government. This means that governments promise to make the borrower of a currency whole, in case of a default.
Whether the state- and regulation-less future envisaged by Bitcoin evangelists comes to pass is still an open question. Meanwhile, governments around the world are trying to understand the effect that the cryptocurrency might have on their economies in the near-term. Specifically, they are grappling with the following three problems presented by Bitcoin in its current form.
Bitcoin can circumvent government-imposed capital controls
Governments often institute capital controls to prevent outflows of a currency because exports could debase its value. For some, this is another form of control exerted by governments on economic and fiscal policy. In such instances, the state-less nature of bitcoin comes in handy to circumventing capital controls and exporting wealth.
One of the more well-known instances of capital flight using Bitcoin has occurred in China. The country’s citizens have an annual limit of $50,000 to purchase foreign currency. A report by Chainalysis, a crypto forensics firm, found that more than $50 billion moved from China-based bitcoin wallets to wallets in other countries in 2020, meaning Chinese citizens may have converted the local currency to Bitcoin and transferred it across borders to sidestep government regulation.
Bitcoin ties to illegal activity
The ability to bypass existing financial infrastructure for a country is a blessing in disguise for criminals because it enables them to camouflage their involvement in such activities. Bitcoin’s network is pseudonymous, meaning users are identified only by their addresses on the network. it is difficult to trace the provenance of a transaction or the identity of an individual or organization behind the address.
Besides this, the algorithmic trust engendered by Bitcoin’s network obviates the need for trusted contacts at either end of an illegal transaction.
Not surprisingly, Bitcoin is a favored conduit for criminals for financial transactions. The most famous example of a crime involving bitcoin was the Silk Road case. Briefly, Silk Road was a marketplace for guns and illegal drugs, among other things, on the Dark Web. It allowed users to pay in bitcoins. The cryptocurrency was held in escrow until the buyer confirmed receipt of goods. It was difficult for law enforcement to trace parties involved in the transaction because they only had blockchain addresses as identification. Eventually, however, the FBI was able to take down the marketplace and seize 174,000 BTC.
In recent times, infecting popular applications with ransomware and demanding payment in bitcoin has also become popular with hackers. The 2021 Colonial Pipeline hack, which resulted in energy supply disruptions in various states, demonstrated the degree to which such attacks can become national security issues.
Bitcoin is not regulated
More than a decade after Bitcoin was introduced, governments around the world are still trying to figure out ways to regulate the cryptocurrency. There are multiple strands to bitcoin’s regulation problem.
For example, changing narratives about Bitcoin utility has complicated questions relating to the appropriate government agency to oversee the cryptocurrency, definitions to be used for lawmaking or, even, the approach for formulation of laws.
Is Bitcoin a currency to be used in daily transactions or a store of value that is primarily used for investment purposes? Is Bitcoin a safe haven asset during the times of global economic turmoil? Neither the so-called Bitcoin expert nor the average bitcoin investor seem to know.
An Opaque Ecosystem
While Bitcoin has the potential to upend established dynamics of the existing financial ecosystem, it is still plagued by several problems. Government wariness about the cryptocurrency can be partly attributed to fear and partly to the lack of transparency about its ecosystem. Those latter concerns are not misplaced.
Not much is known about the cause-and-effect relationship between Bitcoin price and global developments.
Several other blockchains are being developed to addressed some of these issues that the mother blockchain poses to governments and the economic space in general. I understand the Nigerian government in particular, is experimenting with introduction of the e-Naira. While blockchain economy is popular amongst tech savvy Nigerians, it is still a long shot to see when Nigerian government will transcend her skepticisms and fully accept the blockchain as a means of empowering her economy. A cashless Nigeria seems like a good baby first step to that.
