Looking at 2018 | Doubling down on crypto-currency

In April Prime Minister Joseph Muscat revealed that his Cabinet had approved a first draft of a national strategy to promote Blockchain and announced that Malta would become one of the first countries in the world to embrace Blockchain, promising public consultation in the near future.

“This is not just about Bitcoin, and I also look forward to seeing Blockchain technology implemented in the Lands Registry and the national health registries,” he said at the time. “Malta can be a global trailblazer in this regard.”

The Malta Gaming Authority has also recently reiterated its commitment to cryptocurrencies. In a recent white paper, the MGA suggested an overhaul of existing legislation to reduce the financial and regulatory burden on iGaming operators who currently require multiple licences.

It commissioned a study to assist in the development of a legal framework, to bring itself in line with the 4th Anti-Money Laundering Directive, which is also currently being revised to include further provisions specific to crypto-currencies.

Parliamentary Secretary for Financial Services, Digital Economy and Innovation Silvio Schembri told this newspaper that Malta will be the first in the world to have a regulator for the cryptocurrency sector whilst the government is working on a plan to attract Regtech and Fintech companies to Malta.

But what is this new technology and how can it help us?

Explainer: What is Bitcoin? 

Bitcoin traces its origins to a 2008 paper written by the mysterious Satoshi Nakamoto - a pseudonym for an individual that nobody has been able to trace.

The semi-official definition of cryptocurrency is “a peer-to-peer, decentralised, digital currency whose implementation relies on the principles of cryptography to validate the transactions and generation of the currency itself.”

Conceptually, Blockchain technology is just a new way of maintaining ledgers. Imagine that a bank maintained a single ledger listing all its customers, their accounts and the corresponding balances. Every time a customer wants to pay someone, they notify the bank, who updates the ledger by subtracting currency from one account and adding them to another.

The big difference between Blockchain technology and existing methods is that in the Blockchain, this ledger is not maintained centrally by one authority, but by many people instead. Let us call the people who participate in maintaining the ledger, peers.

Each peer has their copy of the document with the full ledger, which includes all owners, their accounts and the corresponding balance. There is no longer one single paper document on which the true ledger is written, every peer owns a copy.

With every transaction, all peers would have to update their ledger copy because every peer should have the same information. But in order to ensure that all the peers have the same ledger, they would need to meet and agree to update the ledger, before signing each other’s document. If this sounds like a nightmare of brain-rending tedium, that’s because it probably would be - had it not been for Blockchain technology.

Bitcoin

Bitcoin is a cryptocurrency that uses Blockchain technology. Whenever a Bitcoin is sent, it doesn’t physically move from place to place, rather, the agreement about the ownership of the bitcoin, which is distributed throughout the Blockchain, is updated. The sender’s account balance is reduced and the recipient’s balance goes up.

At the moment, Bitcoin’s anonymity makes it a semi-safe way to finance purchases of illicit drugs and weapons on the dark web. But some argue that aside from the anonymity aspect, it’s hard to see what problem Bitcoin actually solves.

Silvio Schembri said that while the cryptocurrency market presents certain risks, it also offers opportunities for growth for our financial and technology sector.

“The Government of Malta is aware that regulators across the globe have issued warnings on the risks of failure and investor detriment that may result from the field of business. In this regard, to address these concerns, we want this sector to grow in Malta within a regulated and supervised environment that achieves the investor protection, market integrity and financial stability objectives of regulation.”

Schembri continued to say that in line with government policy, the MFSA has been for the past months working on establishing a regulatory framework for this purpose. A discussion paper was issued by the Authority on the 30 November 2017, and relevant stakeholders are being encouraged to give their feedback to the MFSA by 11 January 2018.

Blockchain

The same does not apply to the Blockchain concept that underpins the Bitcoin system, however. Blockchain is the technology behind cryptocurrencies, which however has a wider array of applications.

“Blockchain technology has various advantages, including disintermediation that enables a database to be directly shared without a central administrator,” Schembri said.

“In line with Government policy of making public service more efficient and effective, we started a process of identifying areas where blockchain can be implemented, particularly for maintaining public registers and information. In this regard, blockchain technology simplifies the management of such information and makes it easier for users to access and make use of critical public sector areas.”

Blockchain is basically a reliable, difficult-to-hack ledger. It is based on distributed ledger technology, which securely records information across a peer-to-peer network.

Cryptocurrencies are the reason for which Blockchain technology was created, but are far from being its only application. Bitcoin is simply the first and best-known of several hundred applications that use the Blockchain system today.

The Blockchain’s massive potential lies in its use of disintermediation and encryption. It is simply not possible for someone to tamper with a vast public ledger, because all the successive lines have been encrypted, validated and then distributed to a multitude of computers across the network. Such a system is virtually impossible to hack or to lose data from because it’s stored in several places, simultaneously.

The Maltese government recently announced a pilot project allowing government agencies to issue educational certificates on Blockchain. All diplomas and training certifications issued by state institutions, as well as documentation from the national accreditation agency, would use the emerging technology.

Once the educational institution issues the certification on the Blockchain, the document becomes jointly owned by the issuing entity and the receiver - the student. This would also give former students the ability to share their credentials with third parties without seeking the permission of the issuing institution first.

Blockchain can also potentially replace traditional intermediaries such as bankers, notaries or tech specialists with computer code tasked with verifying that the two parties to a deal are trustworthy before approving any transactions.

In the United Kingdom, the government has implemented Blockchain-as-a-Service, empowering government agencies to experiment, build, and provide services, such as welfare payments, using Blockchain. Last year, the US State of Delaware used the technology for “smart contracts,” which are stored on a distributed ledger, for data integrity and security reasons.

One of the European leaders in the use of Blockchain technology is Estonia. Citizens there are given a cryptographically secure digital identity card which uses Blockchain technology, giving them access to public services. The country wants to go a step further and try use a Blockchain system to maintain the country’s one million health records.

But not everyone is  as enthusiastic about Blockchain as the Maltese Government and doubts nip at Blockchain’s heels. As the power behind a fundamental shift in how the internet is used, Blockchain promises to usher in a new global economy of immediate value transfer, where big intermediaries no longer play a major role. The downside to all this is that it will also potentially disrupt hundreds of intermediary-reliant industries and lead to job losses. So while it’s great that the technical aspect has been perfected, we mustn’t forget to plan for the social impact of this new paradigm.

Bitcoin mining

Blockchain has also created an unexpected environmental threat: Bitcoin mining. The majority of this activity is carried out in China and requires enormous amounts of computing power. According to some estimates, Bitcoin’s electricity demand is equal to three million US homes.

Additionally, the number of Bitcoins in circulation – which is currently approaching 17 million – is supposed to max out at 21 million. As this limit is approached, the coin-creating algorithms are designed to get more difficult to solve, meaning that more computing power is required and therefore more carbon is generated.
  The majority of Chinese electricity comes from burning coal, which makes this technology harmful to the environment.