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Officials Explore Use of Secure Blockchain Technology

Monday, October 23, 2017   (0 Comments)
Posted by: Jeff Couture

Say you go to your town's general store and buy some Vermont maple syrup.

You slide the cash across the counter and take your syrup, and the merchant records the transaction on a paper ledger.

Now, imagine that the merchant then makes hundreds of copies of that paper and delivers it via courier to every person in town who shops at that general store. All those people can see what you bought, what you spent, and the date and time of your purchase. With every sale, an updated paper record is distributed again to every customer. The patrons see all the business that takes place at the general store, which is cooperatively overseen by everyone who shops there.

That, in a nutshell, is a "blockchain." It's a decentralized ledger that records transactions — a transfer of money or a digitally signed document, for example — and distributes that information electronically to every individual who's part of the system. Each record goes into a "block" and gets a unique numerical identifier known as a "hash." The information in those transactions resides on every participating computer.

The design makes a blockchain super-secure, because no one can tamper with the data without alerting all of the other computers linked in to it. No one entity has control over a blockchain. It can't be altered without the agreement of all or a large consensus of users.

"It becomes really, really hard to hack," explained Oliver Goodenough, a Vermont Law School professor who specializes in the intersection of law and technology.

Because of its inherent security and decentralized structure, the technology offers a way to authenticate, protect and still make accessible an array of sensitive information. That's one reason the state's economic development leaders are embracing it. California has Silicon Valley; they want Vermont to be Blockchain Terrain.

Most people know blockchain as a platform for financial transactions, particularly the trading of bitcoin, a cryptocurrency that first used the technology in 2009. The bitcoin blockchain records each transfer of bitcoin from one user's "wallet" — an electronic account that stores bitcoin — to another's.

But the technology has many other potential applications. Software engineers can custom-design blockchains to verify medical records, real estate sales, election systems. In the interest of secure data management, even big banks and computing giant IBM are exploring the technology.

"We don't know the extent of it yet," said Mike Schirling, secretary of the state's Agency of Commerce and Community Development.

But he does think that Vermont could lead the country by allowing the technology to flourish. Schirling and other state leaders hope to draw clusters of cutting-edge blockchain businesses to set up or move operations to Vermont, put skilled labor to work, and possibly pay registration fees or other revenue to the state.

In June, Gov. Phil Scott signed into law a new economic development initiative that directs the Center for Legal Innovation at Vermont Law School to draft an industry road map, due November 30, with input from Schirling, the Department of Financial Regulation commissioner and the attorney general.

The goal is "to have oversight over development, in a timely and responsible fashion, of an important and emerging tool for commerce," said state Rep. Bill Botzow (D-Pownal). He chairs the House Committee on Commerce and Economic Development, which reviewed the legislation. "I think that it is always important that Vermont keeps its eyes and ears, and keeps itself, open to what is emerging."

Some see blockchain as an economic opportunity comparable to what captive insurance offered the state almost 40 years ago. Back in 1981, Vermont passed a series of laws with tax breaks that helped companies manage their own liabilities. Big banks, agriculture giants, auto manufacturers and others have since set up subsidiaries in Vermont. The state now has 1,100 captive insurance registrations — making it the largest captive market in the United States and the third largest in the world, according to state agencies. The industry accounts for about $24 million a year in state revenue.

As with captive insurance, the expected economic boost from blockchain would come not just from the taxes the relevant companies would pay, but also from the activity generated by their support services: lawyers, accountants, equipment suppliers and computer coders.

Goodenough, director of the Center for Legal Innovation and chief author of the upcoming report, said he believes blockchain holds great promise but is missing a legal framework — which Vermont could provide. Blockchains don't operate under any rules or controlling body, other than the software code that users agree to follow.

"They need a governance wrapper to go around them," Goodenough said.

Beyond the operating rules, his report will assess ways to create a "blockchain-friendly" landscape, he said: "There's an opportunity for the first mover in the law to really provide a good structure."

Goodenough's won't be Vermont's first study of blockchain. Secretary of State Jim Condos, former attorney general Bill Sorrell and Susan Donegan, who recently led the state's Department of Financial Regulation, signed off on a January 2016 report that suggested it was premature to use blockchain to protect Vermont's own public records. But they agreed that economic activity around the technology could pay off. Their report led the legislature to pass a law that set an "evidentiary standard" — as lawyers call it — for courts to presume the authenticity of blockchain-based documents and transactions.

"That was a great step, and we're getting some traction from it," Goodenough said, referring to interest from blockchain businesses.

That initial report caught the eye of David Thelander, an attorney and Vermont Law School graduate. He shared it with Kate Purcell, a longtime friend and tech-development champion. A Burlington-based consultant who helps clients with engineering software, she's served on boards under multiple governors.

"This is a gold mine," she recalled telling Thelander at the time. The two have since become big boosters of blockchain as a state economic development tool. "You don't need permits. You don't need to build a building," Purcell said. "There's no issues with the environment. It's all clean, ready to go."

Thelander recently joined Burlington law firm Gravel & Shea but will be based in San Francisco, close to tech companies. "They're looking for states, jurisdictions that will create a supportive legislative and regulatory environment," Thelander said of his potential clients there.

Companies using blockchain technology could be lured to Vermont because they'd have legal protections here and rules that recognize business conducted through blockchain, Thelander said. Legal standards would default to the courts where a lawsuit is filed, usually where a company is based.

Other states have taken note. Arizona, Delaware and Nevada have all passed some laws related to blockchain. Whichever creates the most comprehensive and hospitable regulatory system will set the standard and theoretically attract the most business, according to Thelander. "The race is on," he said.

Vermont has the advantage of being small and nimble, Purcell said. "We can get legislation passed in three to six months, where it might take California three to six years," she noted.

Purcell and Thelander met with Schirling late last year to get blockchain on his radar. In May 2017, they organized a symposium at Champlain College for legislators and other state officials to learn more about the emerging technology.

One of the presenters was Igor Barinov, cofounder of BlockNotary, a company offering blockchain-based software that lets users certify documents without an in-person notary stamp. Having learned of Vermont's 2016 blockchain legislation, Barinov solicited Gravel & Shea's help to write an end-user license agreement for the BlockNotary app that references the new law, Thelander said.

Despite its promise, the technology does have potential vulnerabilities. With bitcoin, one has been the "entry point," where a third party brokers the conversion of traditional money to cryptocurrency. Once that third party has the user's wallet information, it can be hacked and that information misused, Goodenough said.

Legislators are more aware of the security risks inherent in internet transactions and the threats posed to personal data after high-profile incidents such as the recent Equifax breach, said Botzow. Blockchain could be an "antidote, if it's more secure than the current system," the state rep surmised.

The beauty of blockchain is its freedom from a central governing authority, so a single entity like Equifax doesn't control personal information, said Ryan Munn, an entrepreneur in White River Junction who has invested enthusiastically in bitcoin and owns a business consulting company focused on clients who want to use blockchain technology.

At its most innovative, blockchain allows people a different way of doing business, Munn said. It takes out the middleman — a bank or entity that collects money or holds documents — and connects those who seek mutual involvement in a transaction.

In this way, Munn said, blockchain encourages creative, grassroots initiatives that might not get off the ground with a traditional business structure. "We need things like blockchain ... to get these things to work," he said.

Source: Seven Days


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