Distributed Ledger Technology: beyond block chain

Distributed Ledger Technology: beyond block chain
A report by the UK Government Chief Scientific Adviser

Contents
Foreword..................................................................................................................4 Executive Summary and Recommendations......................................................5 Definitions..............................................................................................................17 Chapter 1: Vision...................................................................................................21 Chapter 2: Technology.........................................................................................33
Case study – Research and horizon scanning...........................................37 Chapter 3: Governance and Regulation.............................................................41 Chapter 4: Security and Privacy..........................................................................47 Chapter 5: Disruptive Potential...........................................................................53
Case study – Diamonds................................................................................56 Case study – Corporate actions...................................................................58 Case study – SETLing transactions.............................................................60 Chapter 6: Applications in Government.............................................................65 Chapter 7: Global Perspectives...........................................................................73 Case study – European energy retail market ............................................76 Case study – Estonian block chains transform paying, trading and signing........................................................................................80 References.............................................................................................................84 Acknowledgements..............................................................................................87
A short video has been made to accompany this report which can be viewed at: https://youtu.be/4sm5LNqL5j0
3

Foreword
The progress of mankind is marked by the rise of new technologies and the human ingenuity they unlock.
In distributed ledger technology, we may be witnessing one of those potential explosions of creative potential that catalyse exceptional levels of innovation. The technology could prove to have the capacity to deliver a new kind of trust to a wide range of services. As we have seen open data revolutionise the citizen’s relationship with the state, so may the visibility in these technologies reform our financial markets, supply chains, consumer and business-to-business services, and publicly-held registers.
We know there will be challenges as Distributed Ledgers mature and disrupt how we think about and store data. The UK is in a unique position to explore those challenges and help maximise the benefits to our public services and our economy. We already have world-class digital capability, innovative financial services, a strong research community and growing private sector expertise. It is vital that our key assets – including the Alan Turing Institute, Open Data Institute and the Digital Catapult – work together with the private sector and with international partners to unlock the full potential of this technology.
We are both, therefore, delighted to be jointly leading efforts in this area, and look forward to working with other departments on seizing the opportunity as well as understanding how its use can be implemented for the benefit of UK citizens and the economy.

THE RT HON MATTHEW HANCOCK MP Minister for the Cabinet Office and Paymaster General

THE RT HON ED VAIZEY MP Minister of State for Culture and The Digital Economy

4

Executive Summary and Recommendations
Introduction
Algorithms that enable the creation of distributed ledgers are powerful, disruptive innovations that could transform the delivery of public and private services and enhance productivity through a wide range of applications.
Ledgers have been at the heart of commerce since ancient times and are used to record many things, most commonly assets such as money and property. They have moved from being recorded on clay tablets to papyrus, vellum and paper. However, in all this time the only notable innovation has been computerisation, which initially was simply a transfer from paper to bytes. Now, for the first time algorithms enable the collaborative creation of digital distributed ledgers with properties and capabilities that go far beyond traditional paper-based ledgers.
A distributed ledger is essentially an asset database that can be shared across a network of multiple sites, geographies or institutions. All participants within a network can have their own identical copy of the ledger. Any changes to the ledger are reflected in all copies in minutes, or in some cases, seconds. The assets can be financial, legal, physical or electronic. The security and accuracy of the assets stored in the ledger are maintained cryptographically through the use of ‘keys’ and signatures to control who can do what within the shared ledger. Entries can also be updated by one, some or all of the participants, according to rules agreed by the network.
Underlying this technology is the ‘block chain’, which was invented to create the peer-to-peer digital cash Bitcoin in 2008. Block chain algorithms enable Bitcoin transactions to be aggregated in ‘blocks’ and these are added to a ‘chain’ of existing blocks using a cryptographic signature. The Bitcoin ledger is constructed in a distributed and ‘permissionless’ fashion, so that anyone can add a block of transactions if they can solve a new cryptographic puzzle to add each new block. The incentive for doing this is that there is currently a reward in the form of twenty five Bitcoins awarded to the solver of the puzzle for each ‘block’. Anyone with access to the internet and the computing power to solve the cryptographic puzzles can add to the ledger and they are known as ‘Bitcoin miners’. The mining analogy is apt because the process of mining Bitcoin is energy intensive as it requires very large computing power. It has been estimated that the energy requirements to run Bitcoin are in excess of 1GW and may be comparable to the electricity usage of Ireland.
Bitcoin is an online equivalent of cash. Cash is authenticated by its physical appearance and characteristics, and in the case of banknotes by serial numbers and other security devices. But in the case of cash there is no ledger that records transactions and there is a problem with forgeries of both coins and notes. In the case of Bitcoins, the ledger of transactions ensures their authenticity. Both coins and Bitcoins need to be stored securely in real or virtual wallets respectively — and if these are not looked after properly, both coins and Bitcoins can be stolen. A fundamental difference between conventional currency and Bitcoins is that the former are issued by central banks, and the latter are issued in agreed
5

amounts by the global ‘collaborative’ endeavour that is Bitcoin. Cash as a means of exchange and commerce dates back millennia and in that respect there is a lineage that links cowrie shells, hammered pennies and Bitcoin.
But this report is not about Bitcoin. It is about the algorithmic technologies that enable Bitcoin and their power to transform ledgers as tools to record, enable and secure an enormous range of transactions. So the basic block chain approach can be modified to incorporate rules, smart contracts, digital signatures and an array of other new tools.
Distributed ledger technologies have the potential to help governments to collect taxes, deliver benefits, issue passports, record land registries, assure the supply chain of goods and generally ensure the integrity of government records and services. In the NHS, the technology offers the potential to improve health care by improving and authenticating the delivery of services and by sharing records securely according to exact rules. For the consumer of all of these services, the technology offers the potential, according to the circumstances, for individual consumers to control access to personal records and to know who has accessed them.
Existing methods of data management, especially of personal data, typically involve large legacy IT systems located within a single institution. To these are added an array of networking and messaging systems to communicate with the outside world, which adds cost and complexity. Highly centralised systems present a high cost single point of failure. They may be vulnerable to cyberattack and the data is often out of sync, out of date or simply inaccurate.
In contrast, distributed ledgers are inherently harder to attack because instead of a single database, there are multiple shared copies of the same database, so a cyber-attack would have to attack all the copies simultaneously to be successful. The technology is also resistant to unauthorised change or malicious tampering, in that the participants in the network will immediately spot a change to one part of the ledger. Added to this, the methods by which information is secured and updated mean that participants can share data and be confident that all copies of the ledger at any one time match each other.
But this is not to say that distributed ledgers are invulnerable to cyber-attack, because in principle anyone who can find a way to ‘legitimately’ modify one copy will modify all copies of the ledger. So ensuring the security of distributed ledgers is an important task and part of the general challenge of ensuring the security of the digital infrastructure on which modern societies now depend.
Governments are starting to apply distributed ledger technologies to conduct their business. The Estonian government has been experimenting with distributed ledger technology for a number of years using a form of distributed ledger technology known as Keyless Signature Infrastructure (KSI), developed by an Estonian company, Guardtime.
KSI allows citizens to verify the integrity of their records on government databases. It also appears to make it impossible for privileged insiders to perform illegal acts inside the government networks. This ability to assure citizens that their data are held securely and accurately has helped Estonia to launch digital services such as e-Business Register and e-Tax. These reduce the
6

administrative burden on the state and the citizen. Estonia is one of the ‘Digital 5’ or D5 group of nations, of which the other members are the UK, Israel, New Zealand and South Korea. There are opportunities for the UK to work with and learn from these and other like-minded governments in the implementation of block chain and related technologies.
The business community has been quick to appreciate the possibilities. Distributed ledgers can provide new ways of assuring ownership and provenance for goods and intellectual property. For example, Everledger provides a distributed ledger that assures the identity of diamonds, from being mined and cut to being sold and insured. In a market with a relatively high level of paper forgery, it makes attribution more efficient, and has the potential to reduce fraud and prevent ‘blood diamonds’ from entering the market.
An important challenge for this new set of technologies is communication of its significance to policymakers and to the public — this is one of the important purposes of this report.
The first difficulty in communication is the strong association of block chain technology with Bitcoin. Bitcoin is a type of cryptocurrency, so called because cryptography underpins the supply and tracking of the currency. Bitcoin creates suspicion amongst citizens and government policymakers because of its association with criminal transactions and ‘dark web’ trading sites, such as the now defunct Silk Road. But digital cryptocurrencies are of interest to central banks and government finance departments around the world which are studying them with great interest. This is because the electronic distribution of digital cash offers potential efficiencies and, unlike physical cash, it brings with it a ledger of transactions that is absent from physical cash.
The second difficulty in communication is the bewildering array of terminology. This terminology is clarified by Simon Taylor who has provided a set of definitions at the end of this summary. A particular term that can cause confusion is ‘distributed’, which can lead to the misconception that because something is distributed there is therefore no overall controlling authority or owner. This may or may not be the case — it depends on the design of the ledger. In practice, there is a broad spectrum of distributed ledger models, with different degrees of centralisation and different types of access control, to suit different business needs. These may be ‘unpermissioned’ ledgers that are open to everyone to contribute data to the ledger and cannot be owned; or ‘permissioned’ ledgers that may have one or many owners and only they can add records and verify the contents of the ledger.
The key message is that, by fully understanding the technology, government and the private sector can choose the design that best fits a particular purpose, balancing security and central control with the convenience and opportunity of sharing data between institutions and individuals.
As with most new technologies, the full extent of future uses and abuses is only visible dimly. And in the case of every new technology the question is not whether the technology is ‘in and of itself’ a good thing or a bad thing. The questions are: what application of the technology? for what purpose? and applied in what way and with what safeguards?
7

To help answer these questions, the Government Office of Science established a senior group of experts from business, government and academia to assess the opportunities for distributed ledgers to be used within government and the private sector, and to determine what actions government and others need to take to facilitate the beneficial use of distributed ledger technology and to avoid possible harms. The aim was to decrypt the terminology behind the technology for policy audiences and provide policymakers with the vision and evidence to help them to decide where action is necessary, and how best to deploy it. In summary, distributed ledger technology provides the framework for government to reduce fraud, corruption, error and the cost of paper-intensive processes. It has the potential to redefine the relationship between government and the citizen in terms of data sharing, transparency and trust. It has similar possibilities for the private sector. This executive summary now sets out the eight main recommendations from our work. These are presented in the context of a summary of the key points from the seven chapters of evidence which cover vision, technology, governance, privacy and security, disruptive potential, applications and global perspective. The chapters have been written by experts in distributed ledger technology in a style that should be accessible to non-experts. I am extremely grateful to these experts for their guidance and thoughtful contributions. Mark Walport, Chief Scientific Adviser to HM Government, December 2015
8

Vision
Distributed ledgers offer a range of benefits to government and to other public and private sector organisations. As their name implies, they can be distributed extremely widely in a precisely controlled fashion. They are highly efficient because changes by any participant with the necessary permission to modify the ledger are immediately reflected in all copies of the ledger. They can be equally robust in rejecting unauthorised changes, so corrupting the ledger is extremely difficult. However, distributed ledgers should not be seen as an end in themselves. It is only when they have other applications — such as smart contracts — layered on top on them, that their full potential can be realised.
The first role for government in supporting the development of distributed ledgers is to develop a clear vision of how this technology can improve the way government does its business and is able to deliver services to citizens. This needs to be followed by government acting as an expert customer to implement the technology — procuring distributed ledger solutions where they are applicable. In doing so, government can support and influence the development of economic activity in this sector, including new and growing businesses as well as larger incumbent businesses.
The opportunity is for government to enable a future where the delivery of government services is more personal, immediate and efficient. Wherever appropriate, citizens should have the opportunity to signal their individual preferences and needs through participation in smart contracts. The implementation of distributed ledgers with embedded smart contracts should lead to substantial improvements in compliance, cost-efficiency and accountability.
The UK Government Digital Service is developing a digital platform for government to deliver its services and distributed ledgers could be at the heart of this.
Recommendation 1: We recommend that government should:
• Provide ministerial leadership to ensure that government provides the vision, leadership and the platform for distributed ledger technology within government. Specifically, the Government Data Service should lead work in government as a user of distributed ledgers and the DCMS Digital Economy Unit should lead work on government as an enabler of distributed ledgers (working with the Department of Business, Innovation and Skills and with Innovate UK).
• The Government Digital Service and the DCMS Digital Economy Unit should develop a high-level capability road map and a supporting outline plan based on the work of this report and very early stage activity already underway in departments, and deliver this in a timely fashion; and continue to oversee the recommendations made in the rest of this report, to maintain momentum and rapid action. In undertaking this work, they should work closely with other government departments and with industry and academia and should consider setting up a time-limited expert advisory group in support.
9

Technology
Distributed ledger technology is still at a very early stage of development. The development of block chain technology is but the first, though very important step towards a disruptive revolution in ledger technology that could transform the conduct of public and private sector organisations. The technology can be adopted so that ‘legitimate’ changes to ledgers can be made in principle by anyone (an ‘unpermissioned’ ledger), or by a limited number of individuals or even a single authorised person (in a ‘permissioned’ ledger). For government applications, ‘permissioned’ ledgers are likely to be more appealing than Bitcoin’s unpermissioned model, because they allow the owner, or owners, of the data to enforce rules on who is and is not allowed to use the system. Distributed ledgers have the added advantage of moving a lot of the complexity of managing security into the background, making systems easier and cheaper to use.
There are many unsolved problems to tackle before the full potential of this and related technologies can be realised, including the resolution of issues of privacy, security, performance and scalability. There is also an extraordinary array of opportunities to develop algorithms that will add sophistication to ledgers by supporting ‘smart’ contracts, signatures and other applications. These will enhance and diversify the value and range of uses of ledgers. This field is developing rapidly and many of these problems are already being investigated and, in some cases, solved. If government waits for ‘perfect’ solutions, it will miss the opportunity to shape and procure implementations of the technology that will provide maximum benefit to the public sector, and the UK may lose opportunities for economic benefit as well.
As well as ensuring that the technology is robust and scalable, we need to understand the ethical and social implications of different potential uses and the financial costs and benefits of adoption. With respect to research and development, the UK is in a good position, though we cannot take this for granted as there is interest and competition in development of distributed ledger technology around the world.
The research councils are playing an important role, led by the EPSRC and ESRC, supporting research in universities and in the newly-created Alan Turing Institute. There is also an important role for business to invest in research and development, and key opportunities for joint public and private investment to tackle generic problems around security, privacy and the development of standards — all areas where industrial advantage will be gained by co-operation rather than competition.
Existing digital investments by the government and private sector include the Digital Catapult, Future Cities Catapult and Open Data Institute. Added to this are groupings such as the Whitechapel Think Tank which can provide a focal point for discussion and sharing ideas. This means that the UK is in a good position from which to build a solid distributed ledger research and testing capability. But there is a danger that we will not get the most from this potentially fragmented activity and there is a strong case that the research and development community in the public and private sectors should ‘self-organise’ in a way that encourages co-operation where appropriate and competition where it will stimulate the most creative research.
10