Blockchain is an emerging technology with application across multiple sectors. With the ability to transfer data securely and privately, it has been gradually adopted across various industries, including healthcare, finance, and government. The U.S. Department of Homeland Security (DHS) is interested in the potential for the technology to secure cross-border data transactions, including enhanced tracking of trade data through the global supply chain for customs purposes, and other processes. DHS is currently testing different blockchain applications while considering security and privacy aspects of the technology.
The following paper is an overview on Blockchain technology, and culminates with its potential application within DHS. The paper is structured into five sections. First, we discuss the origin of blockchain technology. Second, we distinguish the technology from its first application, Bitcoin. Third, we discuss the benefits and drawbacks known in adopting the technology. Fourth, we discuss current and theorized applications of the technology within the health and financial sectors. We specifically use these two sectors as they are on the forefront in adopting blockchain technology. Finally, we conclude with an explanation of potential applications of the technology within DHS and current pilot programs undertaken by the Department.
Jamie Smith of the BitFury group defines blockchain as the system which allows digital peer-to-peer transactions of any kind of asset.[i] This system was first executed from 2008 to 2009 after 20 years of research and discussion.[ii] It was initially developed to support bitcoin transactions. Bitcoin, according to Bjorn Segendoff, Advisor to the Divison for Financial Infrastructure’s Financial Stability Department, began as an experimental online currency, “devised for anonymous payments made entirely independently of government and banks.” Bitcoin eliminates the need for a bank or financial institution to verify and authenticate online transactions. However, transactions still need some form of verification. Blockchain serves this purpose by encrypting, recording, and verifying Bitcoin payment transactions as part of the blockchain network’s processing system.
Blockchain is the distributed public ledger where all bitcoin transactions are stored anonymously. Each block acts as a representative of transactions and interactions between parties. The blockchain is housed on multiple different computer systems and when a new transaction is recorded, it is converted into a “block” and broadcasted to every entity within the network for authentication and approval, which is why its characterized as a “distributed” digital ledger. After it has gone through a validation process, the block will be added to a chain which provides a permanent and transparent record of transactions and subsequently the transaction is completed.
With each new bitcoin transaction, important stakeholders and network “miners” must verify the transaction. After validation, a block is created with a hashed value, which is the valued created by using a mathematical algorithm that consolidates large amounts of data into small personalized fingerprints, or signatures that represent the data figure or transaction. The block is then added to the chain of pre-existing blocks from the previous transactions within the network.[iii] Ultimately, each block includes: the previous block’s hash value, a placeholder for the hash value of that specific block, and the transaction information.
Additionally, the block carries what’s called the “Proof of Work”. A Proof of Work is hash-based and creates a running record that cannot be changed without recreating the same hashing value, which requires considerable processing power and time. The amount of power and time required to alter the record increases depending on which block within the chain is altered. Older blocks, which are towards the beginning of the chain, require more processing power and time to alter than newer blocks.
To create an online currency that is public, anonymous, and verifiable, the “double spending” issue needed resolving. A double spending attack occurs when a user attempts to spend the same bitcoins for simultaneous transactions.[iv] Blockchain solves this issue by creating a system of “trust.” First, the blockchain’s network users verify transactions through authentication and record keeping tasks, which builds trust in the network. Additionally, all network users are trusted equally by the network when verifying and authenticating transactions. Second, blockchain attaches a digital signature to transactions which comes in the form of a hashed value.[v] Finally, the digital signature is verified by the seller and all other parties who are part of the blockchain’s network. As discussed, these transactions are grouped into blocks and transmitted across the network for validation. As part of the validation process, “miners,” which are network users with high computing power, validate the transactions by solving complex coded problems. The miner that first validates and solves these problems receives a reward from the network. The kind of reward is dependent on the network. By the system’s design, the network is secure if honest miners collectively control more of the processing power required to authenticate and validate transactions.
Some experts believe there are important security issues inherent to a blockchain’s design. Because most of the chain needs to be validated and authenticated from honest miners, some experts have envisioned a scenario where a malicious entity or group takes hold of most of these miners. This problem is known as the 51% attack. Allison Berke, from the Harvard Business Review, further argues private blockchain networks are at greater risk of this kind of attack because users control which systems are responsible for validation and authentication.[vi]
Additionally, Martijin Bastiaan from the University of Twente in his thesis paper discusses how the 51% becomes more likely as miners form mining pools, which are groups of miners. In his paper, he uses as a case study the event where 54% of the bitcoin’s blockchain network was controlled by a single mining pool. Fortunately, bitcoin had protocols in place that redistributed the miners within this mining pool, but Bastiaan argues that incentives for forming these large mining pools remain. While mining pools help miners increase the likelihood of successfully solving transactions first, and as a result gain a reward from the network, increasing a party’s computation power can ultimately result in a single entity controlling an entire network.[vii]
According to Melanie Swan, author of Blockchain: Blueprint for a New Economy:
"Blockchain technology could become the seamless embedded economic layer the Web has never had, serving as the technological underlay for payments, decentralized exchange, token earning and spending, digital asset invocation and transfer, and smart contract issuance and execution."
Distinguishing between bitcoin and blockchain
It is imperative that the distinction between cryptocurrency (bitcoin) and blockchain is clear. Cryptocurrency is the digital data or asset that is encrypted and used as online “currency”. The recording and validation of payment is decentralized, which removes the need of a third party to verify and validate. Blockchain on the other hand is the technology that supports the cryptocurrency transaction. Therefore, if we are to remove the idea of a digital currency and replace it with any data set or other set of information, then blockchain technology could prove to be beneficial in industries which routinely make data transactions.
IBM’s Matt Lucas, member of IBM’s Global Blockchain Enablement Team, writes that although they are separate technologies they were developed together, Bitcoin is an application of blockchain. “Blockchain is the underpinning technology that maintains the Bitcoin transaction ledger.” More importantly, Lucas highlights that while blockchain was developed for cryptocurrencies, it can be applied in different industries. This is important because it has direct ties to blockchain technology’s potential integration into industries and federal government organizations outside of the financial sector.[viii]
Pros and Cons to Blockchain TechnologyBlockchain technology’s identifiable characteristic is making parties within the blockchain’s network responsible for validation and verification of digital transactions, which makes third parties unnecessary. Transactions between parties are verified by multiple different users making it that much more secure. Oliver Wyman and the Anthemis Group wrote, “in contrast to today’s transaction networks, distributed ledgers eliminate the need for central authorities to certify ownership and clear transactions. Distributed ledgers can be open, verifying anonymous actors in the network, or they can be closed and require actors in the network to be already identified.”[ix]
As part of an initiative to better understand blockchain technology’s benefits and challenges, Deloitte’s Risk Services team conducted a study regarding the risk of the technology’s application within various industries. Jacob Boersma, Deloitte’s Risk Services Manager, and Jereon Bulters, Junior Risk Services Manager, highlighted blockchain’s benefits and challenges as the following:
- Durability, reliability, and longevity: due to blockchain decentralization, there is no point of central failure and can, therefore, withstand a cyber based attack
- Transparency and immutability: changes to public blockchains are available for the entire network to see ensuring an inability to breach the network without multiple different users getting alerts of a breach
- Simplification/streamline: all transactions are added to a distributed public ledger reducing the clutter and complication of multiple ledgers
- Faster transactions: interbank transactions tend to take a few days for clearing but with the use of blockchain, the transaction time can be reduced by a significant amount
- Lower transaction costs: by eliminating third party intermediaries and overhead costs for exchanging assets, blockchains have the potential to greatly reduce transaction costs
- Uncertain regulatory status: bitcoins and blockchain transactions face the obstacle of being adopted by pre-existing financial institutions without the acknowledgement of legitimacy from the government
- Large energy consumption: the bitcoin blockchain uses a substantial amount of computing processing power because of how new blocks are processed and added onto the chain
- Control, security, and privacy: there are still cyber security concerns that need to be addressed before the public will entrust their personal data to a blockchain
- Integration concerns: blockchain applications offer solutions that require significant changes to existing systems
- Cultural adoption: blockchain represents a shift to a decentralized network which requires the buy-in of users and operators
- Cost: the initial capital costs of setting up a blockchain system may discourage users and operators[x]
Additionally, one of blockchain’s challenges is its relative unfamiliarity, which makes people hesitant to trust and implement it. Since its inception, blockchain has seen limited traction across industries because other industries, financial intermediaries, and government entities are not familiar with, lack understanding of, or are not comfortable enough to implement it. Furthermore, some have chosen not to implement the technology because there is a fear individuals will be less likely to invest their time or money in any organization, private or public, that operates with unfamiliar technology.
There are many experts who believe the lack of a complete societal push towards blockchain technology can also be attributed to its wealthier target audience. Bill Gates told The Verge, “the effort to make sure your bitcoin provider isn’t going to lose your money and your understanding of the volatility of bitcoin – I’d hardly say that it’s ready for, you know, poor people to have it go up and down by a factor of two…”. He also expressed his concern with blockchain’s inability to undo transactions. More specifically, Gates believes that, although there are pros and cons to having irreversible transactions, there is nothing stopping the development of an additional protocol that allows for transaction reversal. Gates believes, if there is a need to reverse a transaction, an individual or party should be able to pay an extra amount for the option. [xi]
Finally, some simply believe that blockchains have oversold their promises. William Mougayar, author of The Business Blockchain, believes blockchain’s capabilities have been overestimated and the only problem it resolves is that of double spending by having multiple people on a ledger verify transactions.[xii] Many other critics have similar hesitations, but most blockchain experts believe the advantages of implementing blockchain in certain industries may be greater than the disadvantageous.
Blockchain’s involvement in Healthcare, Finance, and Other Industries
Blockchain’s early industry applications were within the health and financial sectors. Both industries were receptive of the new technology because of the incredible amounts of sensitive data that are needed to be stored and analyzed. The health sector is interested in the technology’s ability to analyze data while maintaining patient anonymity. Within the health sector variants of blockchain, access to patient health records are limited to doctors, pharmacies, and insurance companies using a “private key.” Blockchain also makes health information privately and anonymously available. As an example of a health sector application of blockchain, Swan cites the startup, DNA.bits, which encodes patient DNA records to a blockchain network and makes it available to researchers by private key.
Aside from the direct effect that blockchain can have on the health sector, it can also be used to ensure “efficient, immediate, targeted delivery of aid funds for supplies in the case of the crises like Ebola and other contagious disease breakouts.” iii This is done by streamlining the process by which money is sent and collected for international aid.
Regarding the financial sector, blockchain’s application serves in its ability to compile, store, analyze, and sort through data (monetary or otherwise). The anonymity of buyers and sellers is also inherent within the blockchain’s global network. Additionally, it can digitize bank operations and, again, maintain anonymity with data such as account information and balance amounts. Thomson Reuters, a mass media and information firm, developed a graphic that clearly outlines the effect that blockchain can have on banks and further explains how it varies from the current system that is in place.
Within the financial sector, Deloitte is already using blockchain technology in their digital banking solutions, which enabled peer-to-peer cross-border payments. They have done this by restructuring their online services. The have also utilized the technology to secure customer accounts, and subsequently ensure the privacy of its customer identities. Deloitte has also established a US Blockchain Lab in New York City.[xiii] Stellar, a common financial platform that is designed to expand access to financial literacy worldwide, confirmed that Deloitte has integrated with the Stellar network to build a revolutionary cross-border payment application.[xiv] IBM also promotes blockchain as an industry-adaptable technology. According to their website, they also believe blockchain’s adaptability to multiple different fields of work is highly feasible.[xv]
Blockchain experts released the following statement: “Blockchain shows great promise across a wide range of business applications. For example, financial institutions can settle securities in minutes instead of days. Manufacturers can reduce product recalls by sharing production logs with original equipment manufacturers (OEMs) and regulators. Businesses of all types can more closely manage the flow of goods and related payments with greater speed and less risk.” [xvi] IBM, Deloitte, and other large consulting firms are starting to adopt blockchain technology because of its adaptability to other industries.
DHS and Blockchain Technology
Blockchain technology has many security characteristics that are of interest to the Department of Homeland Security (DHS), but it may also have negative drawbacks associated with the technology’s design and functions. While these security characteristics are of interest, DHS is skeptical blockchain’s implementation will come without operational challenges.
DHS is interested in blockchain’s potential to: remove the need of a central authority to reconcile transactions, enable transactions without the need of trust between transacting parties, and allow for the “immutability of records after reconciliation.”[xvii] "A technology such as blockchain, if it can be validated to support the appropriate level of security and privacy, has potential applicability to multiple information sharing use cases within the homeland security enterprise," S&T Program Manager Anil John said.[xviii] To this end, DHS is eyeing potential uses of blockchain in the following areas:
- Sharing of emergency responder credentials across federal, state, local, tribal and international borders by authoritative parties with no single point of failure.
- Creating immutable records and audit logs of data that cannot be spoofed and can be publicly verified without revealing personally identifiable information.
- Improving traveler experience in airports by reducing redundant checks.
- Reducing fraud in the transfer of goods across international boundaries that touch multiple entities who do not trust each other.
To evaluate these technologies, DHS launched a multi-phase program that tests the suitability of the technology.[xx] As part of phase 1, DHS awarded contracts that implement blockchain within U.S. border camera infrastructure. The project was designed to “prove or disprove” blockchain’s ability to secure storage and transfer of data from sensor-equipped devices.[xxi] Of the companies awarded the contract, 13 were awarded phase 2 contracts to continue research and development for their operationally successful solutions. To this end, a larger pilot to test blockchain’s ability to handle extensive data feeds from many devices was launched in January 2017.[xxii] According to the Wall Street Journal, the pilots demonstrated blockchain’s ability to store identifying details about a transaction “permanently”.
As of January 2017, DHS began testing blockchain technology within U.S. ports of entry. The project is intended to demonstrate the technology’s ability to prevent “spoofing,” that is falsifying or submitting fake data to a system. Simply put, the blockchain would cryptographically store device data that could include visual and other types of information about travelers and goods crossing the U.S. border, per Peter Kirby, Chief Executive Officer of Factom – a startup working on implementing blockchain at U.S. ports of entry. He hopes that blockchain could be used to ensure the integrity of cross-border data so that it can be used later as evidence in investigations and prosecutions.
Additionally, Acting Commissioner Kevin McAleenan, believes the blockchain could see wider use in verifying the origin of goods entering the United States, identifying high-risk flyers, and speeding up security checks for common travelers.[xxiii] Currently, Acting Commissioner McAleenan is looking to blockchain implementation across private industries within their supply chains. “When they’re looking at something to make their supply chain more efficient, that’s something that gets our attention,” he said.[xxiv]
[i] Hadzilacos, Rigas, “Podcast: Are we prepared for the blockchain revolution”, World Economic Forum (28 June 2017), Accessed 12 July 2017, https://www.weforum.org/agenda/2017/06/podcast-are-we-prepared-for-the-blockchain-revolution
[ii] "The great chain of being sure about things." The Economist. October 31, 2015. Accessed June 21, 2017. http://www.economist.com/news/briefing/21677228-technology-behind-bitcoin-lets-people-who-do-not-know-or-trust-each-other-build-dependable.
[iii] Swan, Melanie. Blockchain: Blueprint for a New Economy. (2015). 1st ed. [ebook] O'Reilly Media, Inc., p.vii. Available at: http://bit.ly/2sIfxdE [Accessed 19 Jun. 2017].
[iv] Karame, G., Androulaki, E. and Capkun, S. (2017). Two Bitcoins at the Price of One? Double-Spending Attacks on Fast Payments in Bitcoin. [ebook] p.1. Available at: http://users.encs.concordia.ca/~clark/biblio/bitcoin/Karame%202012.pdf [Accessed 22 Jun. 2017].
[v] Zheng, Yuliang, Josef Pieprzyk, and Jennifer Seberry. "HAVAL - A one-way hashing algorithm with variable length of output (extended abstract)." SpringerLink. December 13, 1992. Accessed June 22, 2017. https://link.springer.com/chapter/10.1007%2F3-540-57220-1_54?LI=true.
[vi] Berke, Allison. "How Safe Are Blockchains? It Depends." Harvard Business Review. March 07, 2017. Accessed June 22, 2017. https://hbr.org/2017/03/how-safe-are-blockchains-it-depends.
[vii] Bastiaan, M. (2017). Preventing the 51%-Attack: a Stochastic Analysis of Two Phase Proof of Work in Bitcoin. [ebook] University of Twente, p.2. Available at: http://fmt.cs.utwente.nl/files/sprojects/268.pdf [Accessed 23 Jun. 2017].
[viii] "The difference between Bitcoin and blockchain for business." Blockchain Unleashed: IBM Blockchain Blog. May 16, 2017. Accessed June 22, 2017. https://www.ibm.com/blogs/blockchain/2017/05/the-difference-between-bitcoin-and-blockchain-for-business/.
[ix] The Fintech Paper 2.0: rebooting financial services. (2017). 2nd ed. [ebook] Santander, p.14. Available at: http://www.santander.com/fintech2/ [Accessed 20 Jun. 2017].
[x] "Blockchain technology: 9 benefits & 7 challenges | Deloitte." Deloitte Nederland. April 05, 2017. Accessed June 20, 2017. https://www2.deloitte.com/nl/nl/pages/innovatie/artikelen/blockchain-technology-9-benefits-and-7-challenges.html.
[xi] "Bill Gates: 3 Criticisms of Bitcoin." Blockchain Agenda with Inside Bitcoins - News, Price, Events. January 29, 2015. Accessed June 21, 2017. http://insidebitcoins.com/news/bill-gates-3-criticisms-of-bitcoin/29139.
[xii] Wilson, Steve. "Blockchain Visionaries and Blockchain Awareness - Critiquing The Critics." Constellation Research Inc. January 10, 2017. Accessed June 21, 2017. https://www.constellationr.com/blog-news/blockchain-visionaries-and-blockchain-awareness-critiquing-critics.
[xiii] "Break through with blockchain | Deloitte US." Deloitte United States. June 14, 2017. Accessed June 20, 2017. https://www2.deloitte.com/us/en/pages/financial-services/articles/blockchain-series-deloitte-center-for-financial-services.html.
[xiv] McCaleb, J. (2017). Deloitte Partners with Stellar for Affordable Payments. [online] Stellar. Available at: https://www.stellar.org/blog/deloitte-launch/ [Accessed 23 Jun. 2017].
[xv] "Understand the fundamentals of IBM Blockchain." IBM Blockchain - What is IBM Blockchain? June 16, 2017. Accessed June 22, 2017. https://www.ibm.com/blockchain/what-is-blockchain.html.
[xvi] "Understand the fundamentals of IBM Blockchain." IBM Blockchain - What is IBM Blockchain? June 16, 2017. Accessed June 21, 2017. https://www.ibm.com/blockchain/what-is-blockchain.html.
[xvii] “Snapshot: Blockchain Technology Explored for Homeland Security”, Department of Homeland Security (10 January 2017), Accessed 22 June 2017, https://www.dhs.gov/science-and-technology/news/2017/01/10/snapshot-blockchain-technology-explored-homeland-security
[xviii] Rockwell, Mark, “DHS Turns to Small Business to tap blockchain tech”, FCW (15 August 2016), Accessed 22 June 2017, https://gcn.com/GIG/fcw/Articles/2016/08/15/DHS-small-businesses-blockchain.aspx
[xix] Rizzo, Pete, “Department of Homeland Security Calls for Blockchain Research”, Coindesk (15 December 2015), Accessed 22 June 2017, http://www.coindesk.com/department-of-homeland-security-calls-for-blockchain-research/
[xx] Daniel, Jordan, “US Department of Homeland Security Continues Blockchain Funding”, ETHNews (15 May 2017), Accessed 22 June 2017, https://www.ethnews.com/us-department-of-homeland-security-continues-blockchain-funding
[xxi] Rizzo, Pete, “U.S. Department of Homeland Security Talks Blockchain R&D”, Coindesk (10 July 2016), Accessed 22 June 2017, http://www.coindesk.com/department-of-homeland-security-blockchain/
[xxii] Nash, Kim, “Homeland Security Looks to Blockchain to Track People, Goods Across Borders”, Wall Street Journal (10 January 2017), Accessed 22 June 2017, https://blogs.wsj.com/cio/2017/01/10/homeland-security-looks-to-blockchain-to-track-people-goods-across-borders/
[xxiii] “U.S. DHS Tests Blockchain to Track Cross-border Activities”, EconoTimes (11 January 2017), Accessed 22 June 2017, http://www.econotimes.com/US-DHS-tests-blockchain-to-track-cross-border-activities-482955
[xxiv] Nash, Kim, “Homeland Security Looks to Blockchain to Track People, Goods Across Borders”, Wall Street Journal (10 January 2017), Accessed 22 June 2017, https://blogs.wsj.com/cio/2017/01/10/homeland-security-looks-to-blockchain-to-track-people-goods-across-borders/