The blockchain that everyone is paying attention to actually has a "dark side"? See what this Russian Federal Reserve executive said

I was at China International Blockchain Week with Pavel Khodalev, CTO of Sberbank. Khodalev had just finished a speech in which he showed how employees of Russia’s largest bank were exploring blockchain technology applications. But after a week of constant mention of blockchain, our conversations turned philosophical: Why is blockchain becoming more and more suitable for business development, but some still see it as a hidden danger that causes social problems?

Khodalev said that if blockchain is an “inevitable” revolution, it will also bring a lot of problems to social contracts. From this perspective, he believes that the phenomenon of careless loss of digital files must be properly addressed because it is a major challenge for blockchain in financial custody.

Khodalev told CoinDesk:

Services in the real world must also exist in the virtual world. The P2P model is also a kind of interpersonal relationship. In the real world, I stole your wallet and ran away, but the police would eventually arrest me. The digital world should also include similar settings.

Khodalev seems to be concerned about the challenges posed by the virtual world. More specifically, he is concerned that financial custodians don’t know how to deal with the impact of blockchain, a brand new technology.

He noted that bundling consumers’ personally identifiable information with digital assets comes with a lot of responsibility, and that protections should be continually updated as digital use cases increase.

In the real world, we can handle this situation (identity theft). But in the digital world, no one is responsible for managing this part of the matter. What's even more terrifying is that you don't even know that your identity information has been stolen.

Although he often mentioned the word "scary" during our conversation, he is optimistic about the prospects of blockchain technology. In his speech, he said that more and more banks are trying to reinvent Bitcoin technology, including them.

For me, the blockchain revolution will not destroy the world, but will open up a new development path for the world.

The Dark Side

In many ways, the emergence of Bitcoin and other cryptocurrencies has caused unrest in Russia.

Here, the government has been trying to ban blockchain technology for years, but its plans may be frustrated as banks and other institutions in the country have publicly expressed their support for blockchain.

Khodalev said that before, the Russian Federal Reserve was always silent about its research progress, although they established an internal blockchain expert laboratory as early as two years ago.

Our research work is carried out within the bank. We have established a corporate university and set up standard courses to introduce blockchain technology to everyone. Although blockchain has a great reputation, not many people really understand it.

Khodalev said that at the suggestion of the Russian central bank, the Fed also plans to establish a domestic blockchain alliance aimed at dispelling domestic misunderstandings about the technology.

As for why the Russian government is so averse to blockchain technology, he said one reason is that Russia went through a long period of turmoil, namely the transition of its economic system to capitalism in the 1990s.

There was a panic in the country. We had a pyramid scheme called MMM, where we called the stocks that the victims bought money substitutes. So the government was worried that Bitcoin could be the next MMM. The government wanted to eliminate all instability, so it naturally made laws to prohibit the holding of Bitcoin.

Until now, the domestic attitude towards Bitcoin remains ambiguous. Although Bitcoin can save consumers who are hurt by domestic economic problems, some people still oppose this unofficial currency encouragement policy.

The government is still considering whether to lift the ban on Bitcoin, as it is not just a form of speculation. But Bitcoin has a dark side.

“Co-opetition”

Khodalev believes that "blockchainization" will inevitably bring some negative effects.

For example, he noted that blockchain has facilitated industry collaboration to some extent, but before this, economic participants usually did not share information. Some people have suggested that the main chain should act as a "shared data center", but many existing companies have expressed uneasiness or even fear about this.

Blockchain requires everyone to participate in a single chain of relationships, not just banks, but other companies such as car rental companies must also participate. But why would a car rental company disclose its vehicle information to its competitors?

Therefore, the cooperation between the Russian Federal Reserve and the government focuses mainly on changing the status quo. If blockchain use cases between industries cannot exist independently, the effect of the technology will be very limited.

As for the scalability and privacy issues of blockchain systems, Khodalev believes that banks will not establish public standards for the time being due to competitive interests. In addition, more and more startups are aware of the advantages of blockchain technology, but he does not believe that these companies will make any major changes.

In my opinion, only the government can truly accelerate the development of blockchain technology and tell industry participants that the government is their best partner.

The importance of intermediaries

Khodalev said the Russian Federal Reserve will continue to improve its development strategy by testing blockchain and launching specific projects.

The Russian Federal Reserve is developing a blockchain-based value-added service that is expected to promote the development of P2P transactions.

Khodalev said the Russian Federal Reserve has successfully created a technical prototype based on the Ethereum blockchain that can tie the power of attorney to the client’s bank account.

We built a basic information system that is open to notaries (who verify signatures and document authenticity) to use. Previously, this functionality was not available.

Although this blockchain system has great prospects, Khodalev believes that supervision is necessary because digital power of attorney is not currently regulated by domestic law. In addition, the Russian Federal Reserve is also working with the central bank to develop a distributed ledger communication system.

However, Khodalev said that blockchain is a huge challenge for middlemen. At this stage, stakeholders must first think about why these middlemen have been able to exist for so many years.

In his opinion, it is not important whether it is technically possible to remove the third party. What is important is whether the whole society can reach a consensus that the third-party institutions that ensure consumer safety should continue to exist.

He concluded:

You may think that with blockchain, third parties are unnecessary. I think we will realize their importance only when we rebuild the middlemen or completely destroy the world.