Could The Technology behind Bitcoins Be Used to Manage eAssets?

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For the last year everyone in the tech and financial worlds has been buzzing about the sudden rise of Bitcoins. As the Bitcoin wiki describes it:

Bitcoins is a distributed peer-to-peer digital currency that can be transferred instantly and securely between any two people in the world. It’s like electronic cash that you can use to pay friends or merchants.” [1]

There is currently a lot of debate about what a Bitcoin really is, how (or if) it should be regulated, if it is a real currency, and what (if anything) it is really worth. We will leave those questions for another day. What I want to talk about to today is an interesting question that was raised by the group at Ledra Capital:

“What asset registries, keys or related items theoretically could be implemented in a blockchain model?” [2]

Several of the suggestions involve transferable eAssets (so an asset that can be sold or securitized to another person or institution).  So can you (or could you) manage your eAssets in the block chain?  To answer that, we need to understand what “the block chain” really is.

The block chain is the real technology behind Bitcoins; it is a distributed hash registry that is shared by all nodes on the system.  It is called a chain because each block contains the hash of the previous block as well, this proves that all blocks from that point down are valid blocks.  In order to add a block you need to show “proof of work”, much like in algebra class in high school you could not punch the equation into your TI-83 calculate and have it spit out the answer.   You had to write out step by step how you reached that answer to prove to the teacher that you knew how to solve the problem yourself.  The block chain works in a similar way; you have to show proof of work of how you took the hash of your asset and arrived at the information that is in the block you are trying to add to the chain.

When that block is attempted to be added, all of the members/workers in the network are responsible for verifying a portion of the transfers/changes/additions within the network.  This raises a question for the first issue -how do you ensure all members of the network are willing to verify additions  since any user who is part of the network has to use some of their computing power to verify some of the transactions.  In the case of Bitcoins, they are in turn reimbursed for this by the chance to receive a Bitcoin as payment (through the mining process).   In an eAsset registry system, this could be solved by a closed and regulated network, which addresses a few issues in the finical securitization world.

Let’s take eMortages as an example.  You can ensure that only licensed financial institutions can join/participate in the network.   This could ensure that all members are participating in verifying new additions (if not they could lose their license or be fined).  This also solves the issue of anonymity, while anonymity is a major component in Bitcoins, if you are trying to create a distributed registry for an asset that is already regulated, you will need proof of what assets are controlled by what institutions.

So we now have a national distributed registry for electronic mortgages, with some single instruction (or board perhaps) governing who can join this eMortgage Block Chain.  Now all eMortgages in the US can be registered and verified by any of the members of the eMortage Block Chain, but we still have some other issues.  This registry is really only acting as a proof of existence system.  The organization that registered the hash in the block chain is able to prove they had that version of that document at that time to produce that hash.

However, transferable eAssets (such as mortgages) are governed by current regulations including the six Transferable Record criteria of the Federal Electronic Signatures in Global and National Commerce Act (ESIGN), the Uniform Electronic Transactions Act (UETA), the state Uniform Commercial Code (UCC) Revised Article 9-105,  the American Financial Services Association (AFSA), as well as the Mortgage Industry Standards Maintenance Organization (MISMO).  One of the many concerns raised by these standards is the ability to create documents that are unique, identifiable, authentic and unalterable.

The best way to do this is to manage your assets in an electronic vault.  eVaults provide the ability to create documents that are unique, identifiable, authentic and unalterable.  So while a Block Chain may be used as a national registry, you would still need an eVault to securely manage that Asset.   So how could an eVault integrate with an eAsset registry block chain?

The eVault would integrate with the block chain much like current Bitcoin exchanges and eWallets work.  The eVault would still ensure and secure the asset as it does today, except it would also control a private key for the different organizations within the eVault that it would use to register transactions, such as new eMortgages, or transfers of those eMortgages.  With the vault securing the private key, it ensures that two entities cannot claim ownership (i.e., if two people have control of the private key, 2 people have control of claim ownership of the registered eAsset).  Since the package and private keys live in the vault, each time it is transferred to a new entity within the eVault, the hash can be re-verified against the block chain to provide an additional layer of security, since that hash is known to the entire community, not just members of that specific eVault.

Besides transfers of ownership, the eVault could still produce the same legal artifacts it does today.   A Certified Print® could still be performed in which the eVault could produce a printable artifact showing the owning organization, the wallet address, public key, the hash of the document, the hash that was registered in the block chain, the audit trail, all signed with the wallet’s private key to prove ownership (much like a certification of funds).  Paper Out® could also still be performed in which a new private key is created, that hash is transferred to that private key, and along with all of the original documents, the private key is also printed in paper form and removed from the vault.

In summary, the block chain could be used today, as a proof of existence system for things like copyrighted materials, patents, etc.  There are currently systems out there today, that will allow you to place a hash of your document in the block chain for this purpose.  For the block chain to become a true registry for transferable eAssets it will most likely require  integration from existing eVault vendors, and even a separate block chain managed and regulated by an approved governing body.