Accenture: Absolute Immutability Will Slow Blockchain Progress

David Treat is managing director and head of Accenture's capital markets blockchain practice.

In this opinion piece, Treat discusses how the immutability that provides trust in permissionless blockchain environments poses difficulties for financial firms seeking to adapt it for new enterprise use cases.

In a permissionless environment like bitcoin, absolute immutability is one of blockchain's greatest strengths.

For those who only believe in the permissionless mode of blockchain solutions, there is no need to discuss alternatives. But as industries explore new uses for blockchain beyond cryptocurrency and permissionless systems, there will be situations when that same immutability could make it difficult for the technology to advance.

For decentralized cryptocurrency systems, immutability has been crucial in building trust between parties and faith in the system, and that has resulted in the rapid interest and growth in this area. The value of all blockchain-based currencies in circulation was $14.37bn in mid-June, with the price of bitcoin alone rising $300 since May.

But looking beyond cryptocurrencies, blockchain has huge potential to transform the world of enterprise technology. From financial services to healthcare, and from energy to education, the ability to safely, securely and transparently record and store data in a decentralized and distributed database is only just beginning to be understood.

Within the financial services sector, the level of interest in permissioned systems is growing fast. A recently published World Economic Forum report noted that 2,500 patents have been filed in just the last three years. More than 90 companies have joined blockchain consortiums, 90 banks are engaged in blockchain discussions and more than $1.4bn has been invested.

Blockchain has many practical applications within financial services right now. Banks, capital markets firms and insurers are engaged in trials, pilots, proofs of concept studies and initial production solutions. Blockchain’s audit and data-tracking capabilities are beginning to be deployed in new settings such as payments, reference data, know-your-client and trade finance, for example.

Immutability is an obvious benefit in most cases. But it's also increasingly apparent that there will be instances where absolute immutability is one of the biggest hurdles standing in the way of blockchain's adoption.

Here's why

Customers of any financial system have an expectation that something can be done "when things goes wrong" (which is inevitable). New or existing financial institutions will not be comfortable, or even capable from a regulatory perspective, to operate systems that don’t allow the means to fix problems quickly and effectively.

Companies will always need to have control over their technology and platforms. This control allows them to properly manage risk and meet the complex regulatory requirements that they operate under. Their risk managers will expect it and their regulators will demand it.

Moving into permissioned blockchain environments gives them this control, but it is here that absolute immutability presents a range of challenges.

Here, we’re focusing on five important ones:

· Data storage: In a world where every transaction remains on the blockchain permanently, its size will continue to grow posing eventual challenges around data storage. Hard and soft forks, and pruning, could alleviate some of this system storage stress. Currently, transaction volumes are low, but as use cases that involve on-chain data scale will expand and new solutions will be required.

· Illegal actions: On an immutable blockchain, illegal or nefarious activities could stand uncorrected. In the recent case of the $60m smart contract hack of The DAO, participants succeeded in building consensus to roll back the transaction by creating a hard fork. But many disagreed with the decision and have continued to transact on the original chain. The hard fork solution is a blunt instrument that can only practically be considered if applied quickly after the issue. This approach will be too impractical for larger scale or high stakes business processes. Even users of permissionless systems have begun to focus on the difficulties associated with this issue.

· Operational errors: Transaction booking errors are a far too frequent issue in financial services. We have to assume that human error won’t ever be completely eliminated. Executing a reversing transaction in a blockchain-based solution is not always an acceptable answer as the mis-booked information may be confidential or required by law to be removed.

· Permanent mischief: And mischief too will remain on the blockchain forever. Pornography is already permanently embedded on the bitcoin blockchain. Furthermore, in excess of 250,000 classified US diplomatic cables disclosed by Wikileaks are there, too. It is not impossible to imagine how other sensitive data – perhaps our fingerprints or our social security numbers – could end up there one day too. In a decentralized system, this may be tolerated. In a heavily regulated industry like financial services, such risks will have to be mitigated.

· Regulatory concerns: Privacy and personal information may be incompatible with an immutable blockchain. The European Union's incoming General Data Protection Regulation, a landmark ruling around consumer data privacy and ownership rights, has financial institutions scrambling to ensure their still nascent blockchain platforms will adhere to these strict regulatory guidelines. And the US Fair Credit Reporting Act, the Gramm-Leach-Bliley Act and the SEC's "Regulation S-P" all require personal financial data to be redactable – something that is not possible on an immutable platform.

One thing is clear – we live in an imperfect world where mistakes will be made, data will need to be updated after an event and records like personal information will need to be deleted to meet regulatory requirements.

In permissioned systems, we believe that adding the combination of a technical ability to make a change with a governance construct that participants can trust and audit will be the basis for a 'pragmatic immutability.'

This will pave the way for greater blockchain adoption outside the world of cryptocurrency. A number of solutions are in play (including one that we are introducing): improving traditional forking approaches, using "manual overrides," leveraging off-chain solutions and using cryptography so changes can actually be made to a block, but will also leave a "scar" so they become permanently identifiable.

As blockchain’s utility continues to grow, we see the technology evolving to meet the needs of different industries. Decentralized cryptocurrency has popularized this technology and holds an important place in society. As with all new technology breakthroughs, for the world to benefit more broadly from it, we must be open to its development and evolution.

Tortoise shell image via Shutterstock