Page 146 - ITU-T Focus Group Digital Financial Services – Technology, innovation and competition

ITU-T Focus Group Digital Financial Services
Technology, Innovation and Competition

1 Introduction to Distributed ledger technology (DLT) 1

1.1 What is a DLT?

DLT is a new type of secure database or ledger that is replicated across multiple sites, countries, or institutions
with no centralized controller. In essence, this is a new way of keeping track of who owns a financial, physical,
or electronic asset.

The concept of DLTs emerged from the introduction of the ‘blockchain’ in 2008 through the launch of the
cryptocurrency Bitcoin.
3
2
Bitcoin’s decentralized transaction authentication rests on blockchain approaches: It records in a digital ledger
every transaction made in that currency in identical copies of a ledger which are replicated – distributed -
amongst the currency’s users - nodes - on a chain of data blocks. There are similar technologies to blockchain,
4
but since all these definitions and concepts relating to these technologies ultimately refer to databases which
are distributed, the term DLT is commonly used as a term of art by those in the technology development
community as the generic descriptor for any distributed, encrypted database and application that is shared
by an industry or private consortium, or which is open to the public.
5
This report embraces and uses the technical term DLT to describe all distributed ledgers, no matter what
underlying sharing technology or protocol is used.
6

1.2 The concepts of blockchains and ‘distributed ledgers’

DLTs generally integrate a number of innovations which include: Database (ledger) entries that cannot be
reversed or otherwise modified, the ability to grant granular permissions, automated data synchronization,
rigorous privacy and security capabilities, process automation, and transparency, such that any attempts at
changes to entries will notify others. Its main disruptive attribute is that it is decentralized and therefore not
dependent on a central controller or storer of the data.

Blockchain technology, as an example of a DLT, has as its most disruptive innovation the elimination of the need
for third party intermediaries in favor of distribution of the data across participant nodes. This means that every
participant – a node ‒ in a blockchain can keep ‒ share ‒ a copy of the blockchain. The blockchain updates the
nodes automatically every time a new ‘transaction’ occurs. Accuracy of the information is maintained through
7
synchronization of the nodes, so that the information on each node precisely matches each other node.
8

1 Drawn from Perlman, L (2016) Aspects of the Legal and Regulatory Issues in Blockchain Technology. Many of the technical details
around Distributed Ledger Technology can be found in the endnotes of this paper.
2 The concept ‘cryptocurrency’ was first described in 1998 in an essay by Wei Dai on the Cypherpunks mailing list, suggesting
the idea of a new form of money he called ‘b-money.’ Rather than a central authority, it would use cryptography to control its
creation and transactions. See Dai, W (1998) b-money, available at http:// www. weidai. com/ bmoney. txt.
3 Bitcoin is a consensus network that enables a new payment system and a completely digital money or ‘cryptocurrency.’ It is
thought to be the first decentralized peer-to-peer payment network that is powered by its users with no central authority or
middlemen. The first Bitcoin specification and proof of concept (POC) was published in 2008 in a cryptography mailing list by one
‘Satoshi Nakamoto.’ It is not known if this is a pseudonym, The Bitcoin community has since grown exponentially, but without
Nakamato. See Bitcoin (2016) FAQs, available at https:// bitcoin. org/ en/ faq#what- is- bitcoin.
4 The technology, in the words of Bitcoin’s apparent creator, is: ‘[A] system based on cryptographic proof instead of trust, allowing
any two willing parties to transact directly with each other without the need for a trusted third party.’ See Nakamoto, S (2008)
Bitcoin: A Peer-to-Peer Electronic Cash System, available at https:// bitcoin. org/ bitcoin. pdf.
5 See Mills, DC et al (2016) Distributed Ledger Technology in Payments, Clearing, and Settlement FEDS Working Paper No.
2016-095, available at https:// ssrn. com/ abstract= 2881204; and UK Government Office for Science (2016) Distributed Ledger
Technology: Beyond Block Chain, available at https:// goo. gl/ bVg0Vq . The term Distributed Ledger Technology is often used inter-
changeably with ‘Shared Ledger Technology.’ DLT though will be used throughout this study. SLT was coined by Richard Brown,
CTO of blockchain company R3. See thereto, https:// goo. gl/ gaeDRU ; and Hoskinson, C (2016) Goodbye Mike and Some Thoughts
About Bitcoin, available at https:// goo. gl/ bGVN0R .
6 There is also the Ripple DLT, which is not viewed as ‘blockchain’ technology. See Section 2.3 on Ripple.
7 Annex A demonstrates the architecture of a blockchain and how data is added and verified.
8 See further UK Government Office for Science (2016) ibid.

126