Early April’s leak of documents detailing how global elites hide their money has put a new spotlight on the issue of financial secrecy. Power players throughout the world have been connected to shell companies set up by Mossack Fonseca, the law firm in Panama that was the victim of the breach.
The Panama Papers have already displaced the Prime Minister of Iceland, Spain’s industry minister, the CEO of an Austrian bank and — ironically — the head of Transparency International’s Chile branch. Thousands of protesters have also called on British Prime Minister David Cameron to resign. In response to the revelations, appeals for reform came fast, and Europe’s five biggest economies have agreed to crack down on abuse by sharing information.
The leak raises an age-old debate on how to balance privacy and transparency. Many libertarian-minded privacy advocates think the future of financial secrecy lies with cryptocurrencies like Bitcoin and the blockchain technology that supports them. These digital currencies enable anonymous transactions and have become deeply associated with illicit financial dealings, like the drug trade on the dark web marketplace Silk Road.
But it’s not that simple. Blockchain advocates believe that the technology behind Bitcoin is the future of transparency, not secrecy.
Bitcoin’s crucial innovation is a distributed public ledger, known as a “blockchain,” that builds trust in a decentralized manner. Rather than relying on a single trusted source like a bank or clearinghouse, the blockchain defers to a decentralized swarm of machines. These computers verify transactions on the system. This network creates safety through redundancy, based on the consensus calculations of many machines. And thanks to the decentralization and strong cryptography, dishonest dealers cannot go back and alter historical transaction records. To do so would require altering thousands of ledgers that are distributed globally. Every transaction that has ever taken place is available for all to see, even if specific transactions can’t be traced to specific people. As one writer succinctly put it, the blockchain is “transparent and tamper-proof.”
This model of distributed trust offers a solution to the many social problems caused by a lack of open, trustworthy and agile recordkeeping. At a recent event hosted by the MIT Center for International Studies, Blockchain expert Michael Casey noted that automating trust through public ledgers will streamline business and government transactions, destroying information bottlenecks and improving transparency and efficiency.
Consider, for instance, the domain of property titles. As Casey points out, the lack of a formal title for many in emerging markets means they cannot collateralize their wealth. A distributed, immutable ledger powered by blockchain technology might unlock the wealth stranded by poor record keeping and title systems.
Honduras, where 60 percent of land is undocumented, is trying this out, and another project is rolling out in Ghana. Using the blockchain to build property title databases should be an economic boon for people in these countries. It’ll also strengthen their democracies, since these systems have built-in safeguards against tampering with records and thus corruption and expropriation.
Another area Casey noted as ripe for innovation is digital rights management. Blockchain technology could provide an elegant way for artists to get credited — and paid — for their work. Imagine a system in which “smart contracts” automatically pay photographers or musicians when their works are remixed. By automating the trust in such smart contracts, blockchain technology would minimize intellectual property theft and lower legal fees.
Despite its reputation for anonymity, blockchain technology could also be used for identification. Governments could create public ledgers to record births and deaths, reducing fraud in the procurement of government services. These systems could also bolster privacy by ensuring only needed information was accessible to agencies.
Health care is another area where blockchain could shine. The technology offers the prospect of encrypted medical records that hackers will have trouble tampering with. Estonia is currently implementing this kind of system. Other potential health care applications include drug verification and “DNA wallets.” With advances like these and others, storing medical information on the blockchain could simultaneously drive innovation in personalized medicine and also cut costs.
As Casey points out, the new technology could also revolutionize supply chain management. Rather than having a single entity, like Wal-Mart, hoarding valuable information about the flow of goods, a public ledger would allow everyone to see what’s where and when. Using a blockchain would also let recipients of a good to understand its origin and ensure its authenticity. It may even enable origin-to-destination validation.
Despite the potential for anonymity in financial transactions that Bitcoin offers, its underlying technology, the blockchain, is likely to make the world a much more transparent, democratic and efficient place. It shouldn’t be lost on us, as Casey noted, that the biggest concerns banks have about the technology is that it is too transparent, not too secretive.
However depressing the Panama Papers revelations are, we can take solace in the fact that the future likely belongs to openness, not secrecy.