Analysis of blockchain industry standardization in 2017

Baozou Comment : The standardization process of any emerging technology requires a lot of complicated procedures. The standardization of the blockchain industry especially needs to consider a variety of potential risks. It is necessary to coordinate supervision and the needs of various industries. Therefore, to successfully achieve this goal, all potential problems must be sorted out, classified and properly resolved. This article summarizes and analyzes these problems from many angles, and based on this, proposes three main implementation methods. I hope it can trigger deep thinking among industry supporters.

Translation: Annie_Xu

Distributed ledger technology needs standards.

Distributed ledger technology has great potential to provide a multi-institutional shared database with a super audit trail. It is therefore called an "immutable distributed ledger".

Therefore, developers see opportunities to transform business processes and provide new services; enterprises also see more opportunities for cooperation.

However, this is not without precedent.

In the 1980s, Electronic Data Interchange (EDI) was on the rise; it became the industry standard for data communications, improving the exchange of business information, such as orders, invoices, and transshipment notices. The United Nations also established the Electronic Data Interchange for Administration, Commerce and Transport (EDIFACT) standard in 1987.

However, in the 1990s, Extensible Markup Language (XML) became popular.

In 1991, the still new Hypertext Markup Language could not meet the needs of corporate file transfer, so the search for file extensions began (XML is a markup language that sets rules for encrypted files so that both human eyes and machines can recognize file contents).

HTML and XML have been around for a long time. In the 1960s, Charles Goldfarb, Edward Mosher, and Raymond Lorie developed IBM's GML (Generalized Markup Language), which became the SGML (Standard Generalized Markup Language) in the ISO standard in 1986, was upgraded to HTML in 1991, and became XML in 1996.

When the World Wide Web emerged, most EDI was upgraded to XML, with SWIFT and ISO 20022 defining XML for financial messaging.

So what does all this have to do with shared distributed ledgers?

Wherever there are a number of XML standards, there is a great need for organizations to communicate. However, aside from technical issues, the main issues that hinder such communication include reliance on third parties.

Third parties may abuse their monopoly position. Distributed ledgers can provide technology that no one can control, eliminating this risk and ensuring that a backup copy of the records is kept when each party encounters technical failures.

Enterprises want to get rid of third parties, and distributed ledgers are the ideal tool to make this possible while also re-upgrading XML.

It can be said that distributed ledgers are suitable for all file formats.

Determine uniform standards

So how is the technology progressing at the moment?

In April 2016, Standards Australia, an Australian non-governmental, non-profit organization, recommended that ISO add blockchain technology as a “new technology field”.

Then in September, ISO authorized the organization to manage the secretariat of an international technical committee to develop blockchain standards. So what does the technology really need?

Widely used distributed ledgers can promote economic growth, but their promotion depends on everyone's determination and people's weighing of their potential benefits and losses.

Its diffusion, not innovation, is what ultimately determines the speed of economic development and productivity changes. Only when many people begin to adopt the technology can it bring real benefits to people.

Only by viewing it as a safe and reliable technology can its popularization be guaranteed.

There are two main levers that regulators can use: regulation and standards. In many cases, regulation is just a reflex for decision makers to prevent risks. Although regulation is fast and authoritative, industry participants cannot participate in the process of regulatory policy making, which may bring unnecessary burdens and unpredictable consequences.

However, if the standards are regarded as part of the autonomous standards market and strict authorization and certification mechanisms are set up, their efficiency will be very high; of course, we all know that strict authorization and certification are necessary.

In 2016, Long Finance continued its distributed ledger standardization survey from 2014 to 2015.

The survey, sponsored by the State of Alderney, PricewaterhouseCoopers (PwC) and the Cardano Foundation, seeks to answer four questions:

What are the potential risks and impacts of widespread use of distributed ledgers in the future?

How do distributed ledgers fit into existing regulatory frameworks? Do existing laws cover activities related to the technology, or are new laws and regulations needed?

Can standards development help the development of distributed ledger technology? Which sectors and services need this technology most?

What are the ways to implement standardization?

The study consulted more than 80 people involved in the industry to understand where the technology might pose risks.

The Joker Enters

The risks that most industry practitioners are most concerned about are concentrated in three areas.

Governance: A lot of inter-institutional structures need to be built to manage distributed ledgers. How errors are corrected, is there a need for a central authority that can modify records, and does the entire system need to be modified for upgrades?

Responsibilities and liabilities: How are high risks such as anti-money laundering and know your customer (AML and KYC) addressed? Who is responsible if something goes wrong? What is the system for managing and resolving disputes?

Taxonomy: What kind of distributed ledgers will regulators accept, permissioned or permissionless, public or private, transparent or opaque, proof-of-work or proof-of-stake? What are their performance and fault tolerance? Users are eager to answer these questions, but this is a rapidly evolving field, so a common language is needed.

A report on missing standards, The Missing Links In The Chains? Mutual Distributed Ledger (aka blockchain) Standards, was released in November 2016, concluding that in most cases, distributed ledgers support existing services, processes and technologies.

Standards and supervision must be unified to achieve the set goals.

The report also points out that simpler areas with less regulatory pressure are more likely to adopt the technology first; especially areas where the technology can solve practical problems, such as KYC, AML, and ultimate beneficial ownership of financial services; and areas where it can replace traditional third parties.

Does distributed ledger technology require new regulations? In most cases, the technology will fit into the existing regulatory environment.

If the regulation does not require a third party, the existing regulation can fully cover the activities related to the technology. And the technology can also use the existing XML foundation.

In a sense, the technology is just another form of communication, replacing the central authority with a “super audit trail.”

The standardization process will not be too fast

Another important conclusion of the report is that certain standards can limit the development of innovation.

Although the existing ISO 9000 and ISO 31000 standards already cover this technology, there are still three significant shortcomings:

Taxonomies and performance standards must be outcome-focused so that regulators and potential purchasers can assess the technology based on their respective outputs rather than on the operating mechanism.

Data governance and accountability standards need to focus on the impact of data collection, sharing, and access on civil liberties.

Commercial governance and liability standards are needed to determine the legality of the connection between organizations and this technology.

So how do we build an independent standards market?

Here are three main approaches that can be recommended:

Establish ISO standards globally, and set up national standard organizations and relevant stakeholders. Standards Australia is considering this approach in blockchain technology standardization. ISO standards are highly credible, but it takes a lot of time.

The PAS (Publicly Available Specifications) with the participation of national standards bodies could become another ISO standard. This approach helps achieve standards close to the core of the industry, thereby improving the cost-effectiveness and simplicity of solutions.

Industry players can offer open process standards, but they may be biased towards licensing and authorization procedures, and the end result may lack credibility.

The “Missing Links in the Chains” report believes that the autonomous standards market may help the development of the technology, providing a certain environment for users and developers, while helping regulators fulfill their responsibilities. The PAS approach seems to be the most feasible, but in terms of “taxonomy and performance”, “data management and responsibility”, and “commercial management and responsibility”, further exploration is needed.

Of course, there is an important question hidden in this, which is who pays for these independent standards.