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Publication

DE REBUS

Page

11+12

Date

Wed 01 Aug 2018

AVE (ZAR)

50299.6

Can blockchain technologyhelp prevent fraud?

erksmans Attorneys hosted aseminar on blockchain tech-nology. The seminar was heldin Johannesburg on 7 June.

Consultant at the Blockchain Academy,Carel de Jager, said blockchain is a ledgerthat is broken into hundreds and thou-sands of blocks. He added that each blockcontained transactions and a new blockis updated every ten minutes. He pointedout that it is important to note that eachblock is mathematically connected to theblock behind it and in front of it and if aperson tried to change a transaction, theentire structure of the blockchain wouldchange.

Mr de Jager added that when a certainblockchain is tampered with, it will notlook similar to the correct structure ofthe blockchain. He said it is easy to spot ablockchain that had been tampered with,because they are mathematically con-nected to one another. He pointed outthat a person needed to be able to provethat they are the owner of a blockchainthrough cryptography, which meant thatan owner had to have a private key tothat blockchain. He noted that most pri-vate keys were 32 bytes in number andwhat that meant was the owner couldderive a private key from any input theywanted to.

Mr de Jager said, for example, the own-er could take their fingerprint and sendit through a mathematical algorithm andthen receive a private key, or the ownercould provide DNA or, even provide 12unique words that they would use astheir private key blockchain. He notedthat blockchain can be a piece of digitaldata, such as a titled deed to a property,medical records, share certificates oreven electricity units, he said it could beanything that can be described in a digi-tal manner. He added that for businessuse, businesses could build all function-alities of smart contracts on blockchain.However, he pointed out that business-es or investors should rather opt for aprivate blockchain, rather than a publicblockchain, because with a public block-chain, anyone with an Internet connec-tion will be able to see what is happeningunlike on a private blockchain, where itworks like a database.

Managing Director at AJR CorporateFinancial Services, Alain Jacques Renard,said that blockchain is very impressivetechnology, however, he added thatthere are challenges attached to it. Hepointed out that some of the risks linkedto blockchain included: Infrastructure;

Consultant at the BlockchainAcademy, Carel de Jager, spoke atthe blockchain seminar hosted by

Werksmans Attorneys, inJohannesburg on 7 June.

hardware; software malfunction, either,accidental or malicious; and the possi-bility to create a fake copy of the block-chain website to scam investors. He not-ed that automation with blockchain isnot always fast, and when financial ser-vices have to contract on behalf of multi-ple clients, they cannot use the platform,instead making phone calls is fasterthan an automated system. He addedthat another challenge with blockchainwas that the administrator of blockchainwas unknown and that if investors wereto experience a problem with blockchain,where would they go?

Mr Renard said blockchain can be in-troduced in financial transactions. Headded that payments between partiescan be made through blockchain, how-ever, he pointed out that he was worriedthat blockchain administrators wouldthen have to be the banker and a custo-dian of the fund. He added that on finan-cial markets, blockchain could be classi-fied as an over the counter transaction.Mr Renard said blockchain could be usedin financial transactions, provided therewas transparency and the administr atorwas known to the user. He added thatcommunication between parties must al-ways be possible.

Director at Werksmans Attorneys, Na-talie Scott, said there are three types ofblockchains, namely -e public blockchains;e private/enterprise blockchains; and©consortium blockchains.

She added that a public blockchain isan Internet protocol that manages thedistribution of unique data that -

* acted as a unit of account for transac-tions on that ledger;* transactions are immutable;e it was an open source protocol;e it enabled innovation such as side-chains or scripting;e it was easy to audit; and* there are incentives for early adop-ters and developers to use, support andverify the ledger without the need for atrusted third party /intermediar y.

Ms Scott pointed out that a publicblockchain- contained- authenticationand verification technology . She saidit is claimed to be less open to corrup-tion and borderless. She added that it isfrictionless, and that there is anonymityand most widely understood applicationfor money transfers and payment in Bit-coin. She noted that public blockchainsprevented a 'double-spend' by a proof-of-work validation system, which disal-lowed the electronic units of value to becopied. Ms Scott gave examples of publicblockchains, which include -e Bitcoin;* Ethereum;e Google; and* Amazon.

Ms Scott spoke about the enterpriseblockchain, she said it was a privateblockchain and was consensus drivenvia trusted intermediaries who are iden-tified. She pointed out that the networkwas permissioned, and that digital cur-rency was not necessarily required. Sheadded that enterprise blockchain offeredsolutions to persons who wanted to use acryptographic database, which was man-aged and stored by trusted third partiesand their intermediaries. However, shenoted that the data subject identity de-

Managing Director at AJR CorporateFinancial Services, Alain Renard,

spoke about the challenges of block-chain in the financial sector.

DE REBUS - AUGUST 2018

tails are disclosed, so there are reducedprivacies. She said examples of enter-prise blockchain, included -* Ripple;* Chain;* Hyperledger;* Oracle; and* IBM.

Ms Scott said consortium blockchainwas built on the public blockchain archi-tecture and was partially decentralised.She added that a consortium blockchainprovides technology for permissionednetworks (pre-selected nodes), for ex-ample, ten financial institutions jointlyoperate a blockchain and each controls anode, but at least eight financial institu-tions are required to sign a block, for theblock to be valid. She added that the rightto read transaction data may be privateor public and can be permissioned,on acase-by-case basis. Ms Scott identifiedthe regulatory role players role of block-chain, which include the -* South African Reserve Bank (SARB);* Prudential Authority;* National Treasury;* Financial Intelligent Centre;* National Credit Regulator;* South African Revenue Service;e Strate;* Johannesburg Stock Exchange;* Commissioner at the Companies andIntellectual Property Commission; and+ Financial Sector Conduct Authority.

Ms Scott added that one of the big is-sues in terms of blockchain technologyand contracting via blockchain is deter-mining jurisdiction. She said regulationlooks at the governing laws that speakto blockchain. She pointed out that interms of issues of offer and acceptance,there is a law and contracts that speakto where the offer is made and whenacceptance can be received, which var-ies from jurisdiction to jurisdiction. She

"nan I

inti, -

Director at Werkmans Attorneys,Natalie Scott spoke on regulations in

regard to blockchain on 7 June.

said with regards to the ostensible au-thority some countries do not recogniseostensible authorities of the contractingparties, she then asked how do you knowyou have a valid contract?

Ms Scott pointed out that there aredecentralised autonomous organisations(DAOs) that automatically execute smartcontracts, however, she added thatDAQs have no legal persona and run onpredetermined scripts as there is a pro-tocol for them to act as they automatethe process. She said the enforcementof rights is one of the contractual issuesthat an investor should bear in mind. Ifsomething goes wrong, where do you go,who do you sue and under what laws andwhat happens if you have conflicts oflaws? She added that confidentiality wasanother thing an investor should look at.Ms Scott pointed out that confidential-ity does not work in an open blockchainwhere a banker and client's confidential-ity can be compromised as it is availablefor determination by all nodes on thenetwork.

Ms Scott touched on some of the regu-lations in regard to blockchain such as:* The SARB has said that cryptocurrencyis a 'cyber-token', and not a legal ten-der. Merchants are not obliged to accept'cyber-tokens' but are legally obliged toaccept legal tender. Payments made viacryptocurrency may not be consideredto discharge monetar y obligations, be-cause it is not recognised as 'money' inlaw.* Income Tax Act 58 of 1962: Cryptocur-rency is not considered to be a currency,but as an intangible asset, which is to beincluded in the income tax return.* Currency and Exchanges Act 9 of 1933:Capital outflows are regulated and allow-ance is made for an annual single discre-tionary allowance or an annual foreigninvestment allowance. The SARB mayrequire approval and tax clearance cer-tificates. Investors should be careful ofoffshore /international exchanges.* Protection of Personal Information Act4 of 2013: The effective date is still pend-ing. The intention is to safeguard the'personal' information of a 'data subject'when information is 'processed' by a 're-sponsible person'. Lawful 'processing'of 'personal information' requires eightconditions of the European General DataProtection Regulation (GDPR) to be ful-filled (see feature article 'Unscramblingdata Protection Regulation' at p 32).* Consumer Protection Act 68 of 2008:Describes any scheme that offers returnof 20% above the repo rate as a 'multi-plication scheme', for example, a Ponzischeme.

Kgomotso Ramotsho,Kgomotso@der ebus.org.za