Blockchain: Financial and non-financial uses and challenges

Markets – such as the housing market or for commercial goods – are currently dependent on institutions such as banks or other intermediaries to simplify transactions. But blockchain technology can reduce the need for these steps, while providing a reliable, tamper-proof overview of transactions.

While this new technology may help to level the playing field for businesses of all sizes or enable greater financial inclusion, it also faces some challenges and poses some risks to consumers and businesses hoping to use it.

In today’s WatchBlog post, we look at blockchain technology, including the benefits, challenges, and risks of using it.

What is blockchain?

Blockchain is not a new technology, but instead an innovative way to use existing, mature technologies. Its core function is to create a tamper-proof ledger for digital assets, such as cryptocurrency.

There are two types of blockchain implementations: public (sometimes known as “permission-free”) and private (“permission”). Public blockchains can be used by cryptocurrencies such as Bitcoin, and anyone can add to the chain. Private blockchains are usually used by institutions (such as companies or government agencies) and have restrictions on who can participate in the network.

Financial blockchain applications

The most well-known uses for blockchain are in the financial sector. When people think of blockchain, they can also think of cryptocurrencies like Bitcoin. Cryptocurrencies are a type of digital representation of value that uses blockchain technology to act as an investment or money. These uses can lead to cost savings, expanded access to financial products and other transformational changes.

Unfortunately, more risks and challenges can prevent these benefits from being realized, or even lead to negative consequences for users and the financial system. These include risks for users and for the wider financial system, due to a current lack of consumer protection, and the ability to use technology to facilitate illegal activity.

Potential non-financial blockchain applications

Blockchain has potential non-financial applications. For example, blockchain can help fight counterfeit medicines and track down foodborne illnesses. Authorities can use it to maintain property registers or to improve information sharing. Blockchain can also be used to create new types of non-hierarchical organizations (ie those without clear management titles as CEO).

Blockchain has many potential non-financial applications

In our review of some applications, however, we found that blockchain did not solve most of the critical challenges associated with each application. We also found that blockchain can introduce new challenges. For example, it may end up excluding people who do not have Internet or computer access.

In addition, not many of the non-financial blockchain systems we looked at have emerged from the pilot stage. For example, the Ministry of Finance’s blockchain pilot was designed to increase payment efficiency and reduce reporting requirements for federal grants. There were two reasons. The type of blockchain chosen was inconsistent with the National Institute of Standards and Technology’s cryptographic standards, and there is currently no legal authority that allows the system to work.

Political challenges and how to solve them

We have developed four policy proposals to help improve the potential benefits and reduce the challenges of blockchain technology. These proposals are for decision makers from all backgrounds – including Congress, state and local governments, and business leaders, academia and non-profit institutions.

1. Politicians can consolidate blockchain standards. This can help make it easier for organizations trying to use blockchain to integrate technology with their existing systems.
2. Politicians can either clarify existing rules and regulations or create new ones around the blockchain. This can reduce the current uncertainty about how different implementations of the technology can be regulated, which can help companies and others to feel more comfortable using blockchain solutions.
3. Politicians can support the development of blockchain teaching materials. This can help users avoid common blockchain scams, and companies will be better able to find talent to help them implement the technology.
4. Politicians may consider using blockchain to achieve their own specific goals. This can help public and private institutions determine if technology can help solve specific problems.

Want to learn more about blockchain technology? Check out our new technology assessment on blockchain here.