Among a wide range of blockchain applications, “smart contracts” are the ones with great potential.
Smart contracts are essentially computer programs that are saved on the blockchain and execute their own terms and conditions automatically.
For example, sellers are paid when buyers confirm they have received the goods on time.
This process is currently executed by a third party. With smart contracts, middlemen or third parties may become obsolete.
The infinite possibilities of blockchain have sparked interest and investment from many top dogs in the technology sector.
Yet blockchain is a very young technology still in its research and exploration phase.
There are still many problems to overcome. For example, it is much less efficient in terms of the consumption of computational resources as it requires thousands of computers to maintain one single ledger rather than letting one single server do the job.
One potential solution would be to adopt a permissioned ledger, which only allows certain nodes to manage the network.
Blockchain can only achieve optimal utility if multiple parties (if not the whole society) use the same ledger to record information.
Yet most of the major capital owners such as banks have their own vested interest to protect: the banking industry earns quite a hefty amount from processing fees between transactions and transfers.
While the banking industry has recently taken great interest in the development of blockchain technology, it is unclear if the passion will sustain.
The Hong Kong Monetary Authority recently commissioned Hong Kong Applied Science and Technology Research Institute (ASTRI) to study the technology.
ASTRI has published a Whitepaper on Distributed Ledger Technology, in which it has raised a number of problems to be solved, such as:
- Interoperability between different blockchain platforms as well as between blockchain and traditional platforms;
- Various network security issues, such as the network being manipulated by those with the majority of computing power, Distributed Denial of Service (DDoS) attacks, identity theft, etc.;
- Balance between privacy and transparency/ accountability;
- Legal issues: Is the legal industry ready to deal with smart contracts? If any party of a transaction suffers losses due to bugs in the programs, who should be held responsible? With the lack of a central administrator, who would be responsible for making sure these transactions comply with existing regulations?
Blockchain applications are not risk-free, but technological progress is unstoppable.
That is why public policy makers and the legal industry, along with the financial sector, should all prepare themselves for the inevitable.
Financial Secretary John Tsang spoke of promoting the development of blockchain technology in his budget speech this year.
We hope Hong Kong can stay on the cutting edge of technology, or perhaps even get ahead of it.
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