What do companies need to consider when using blockchain technology?

“Can it be a blockchain application? ”

According to Gartner analysts, the hype surrounding blockchain technology leaves Hype Cycle for Blockchain Business (2018) As time goes by, reality comes into focus. Many once-promising blockchain applications have now disappeared again or have even fizzled out as ideas. Some companies are trying their hand at this topic with more or less success - for example, you don't know whether and when Facebook's own cryptocurrency called Libra will come out.

When we talk about blockchain, we are talking about software, a basic technology with which an application such as Bitcoin can be programmed and operated. When digital cryptocurrencies are used, a database is distributed via a public peer-to-peer network. As in a register, a transfer of value in the form of a transaction is documented and transparently logged. Data blocks are connected to each other using cryptic methods. As in a chain, each link is connected to each other, because each data block also knows the previous data block, including the name “blockchain.” Since this register is stored in a distributed manner by all participants, it is almost impossible to manipulate it. This makes it possible for digital assets to be traded with a very high level of security.

When it comes to the cryptocurrency use case, it makes sense to rely on a global P2P network. In this way, the register is distributed across the globe and protection against manipulation is significantly increased.

Many companies see the benefits of blockchain technology, but questions remain unanswered in the business context. What is the legal framework? What needs to be clarified from a tax or regulatory point of view and who assumes liability?
For companies, further use cases are decisive when it comes to the possible uses of blockchain. Not every company wants to initiate a digital cryptocurrency right away. Why should a company operating in Germany provide internal information, customer data or digital values in a P2P network available worldwide, where the data is usually not anonymized, but only stored pseudonymized for eternity?

A look under the blockchain bonnet

There are five core components of blockchain technology:

repartition

The network was developed for distribution. Users can be in different locations and operate a node. In doing so, they actively participate in the network. Transactions are distributed over the network and each participant updates their copy of the database (ledger).

encryption

The blockchain uses public and private cryptographic keys to securely link data and record it pseudonymized. The participants have a pseudonym with the public key. During a transaction, participants can control which information should be shared.

immutability

Each processed transaction is cryptographically signed and timestamped. The data is stored in the ledger via the distributed network. Manipulating encrypted data is almost impossible. In some cases, there may be an adjustment, but this requires the majority of participants to agree to the change.

Tokenization

Digital values can be created using the blockchain and exchanged via transactions. The values are given in the form of tokens. A token can represent financial value as well as data and physical assets. Tokens can also be used to control access, participation or voting.

devolution

Within the blockchain network, the information, rules and functionality are managed using a so-called consensus mechanism. With the help of decentralization, no single entity should retain control, but each participant should be able to control the rules, as it were, via the consensus mechanism.

Compliance: Private blockchain regulated and transparent

There are public blockchain networks, so-called “public blockchains” or also known as “mainnets”, which make it possible to benefit directly from the core components of blockchain technology. An application can thus benefit from decentralization and the existing ecosystem. One should not ignore the fact that transactions and, in particular, writing data to public blockchains can be quite expensive. You are also dependent on scaling the infrastructure. The infrastructure is supported by the community and also sets the rules of the game. Should there be an adjustment of the protocol or the consensus mechanism, these changes must be implemented in the application.

Because the data is usually not stored anonymously, data protectionists see the use of current versions of available public blockchains with regard to the EU GDPR for The purpose of the company as problematic. Each participant can be held liable for processing the data by providing a network node. Violations of the EU GDPR can result in severe penalties.

In order to still be able to start using blockchain technology, a company can set up its own infrastructure. When choosing the technology, companies should be aware of which use case they want to solve. The Ethereum protocol, for example, is an industry leader and can be used for private blockchain infrastructure. As an operator of a private blockchain, there is initially no decentralization, but can grow through cooperation with other participants. Operators are able to determine the rules of the game for the network, such as the number of participants or the costs of a transaction. Although a central player then has power over the private blockchain, it is always necessary to weigh things up.

In a highly regulated financial market, you are subject to reporting obligations, compliance and special guidelines anyway. A private blockchain should be coordinated with the legislator or the responsible audit body and be auditable. Although blockchain technology has become more accessible, the professional, technical, organizational and legal framework conditions should be clarified in advance during the business evaluation.