Page 158 - ITU-T Focus Group Digital Financial Services – Technology, innovation and competition

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

Nonetheless, the underlying code in any blockchain may be a security issue: The exploitation of a flaw in the
Ethereum blockchain led to the immutability paradigm of blockchain being necessarily violated by its creators
to restore (potentially) lost funds. 90
Despite the use of strong cryptography, DLTs are not necessarily a panacea for security concerns people
may have. Indeed, there is a tradeoff between replacing costly – and often risky ‒ intermediaries with
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cryptographic key-only access distributed across nodes. For example, for permissioned ledgers replacing
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centralized intermediaries, the cost-benefit in using blockchain is somewhat ameliorated by the need to trust
permissioned authors rather than relying solely on the nodes who offer the guarantee of ledger integrity. 93
The issues are said to be thus: The more trusted parties per node that are needed, so too does the compromisable
'surface area' of a distributed network increase. Also, requiring a third party private key management function
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is contradictory ‒ and possibly even nugatory ‒ to the core ‘disintermediation’ principles of DLTs. In all, these
tradeoffs may arguably reduce the utility of DLTs.

Authorized access is also an issue: Nodes on the blockchain are – using current protocols – said to be unable
to distinguish between a transaction by an authorized, actual user and a fake transaction by someone who
somehow has gained access to the blockchain trusted party’s private key. This means that if a bad actor gains
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access to a comprehensive banking blockchain that itself accesses all or of part of a core banking network
blockchain ‒ or a real-time gross settlement system – then this breach would in effect be compromising all
banks’ databases simultaneously.
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Risk for loss of funds where credentials are controlled by a single entity was demonstrated in the recent
compromise of the credentials used in the transfer of funds through the (non-DLT) SWIFT network from the
Federal Reserve Bank of New York to the central bank of Bangladesh, Bangladesh Bank. To circumvent
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or mitigate this type of risk, private key management functions or biometric linked private keys have been
suggested. 99
The issue of longevity of the security of blockchain-based data may also be an issue. For example, the possibility
of ‘old’ transactions on a particular blockchain may be vulnerable to advances in cryptography over a period
of years or decades such that ‘old’ transactions can be undetectably changed.
A type of equivalence to this issue would be security compromises of the circa-1980s GSM ‒ and later
generations of ‒ mobile communications encryption specifications affecting feature (non-smart) phones
whose firmware cannot easily be updated with a fix for any vulnerabilities. The ability then to upgrade the
cryptographic techniques used for ‘old’ transactions should be considered in DLT designs.

5.4 Fragmentation in DLTs

DLT-based solutions intrinsically rely upon multiple users for achieving critical mass: Nodes need more nodes to
distribute the data, to do the validations of the blocks in the process of being added, and to do the processing

90 Hertig, A (2016) The Blockchain Created by Ethereum's Fork is Forking Now, available at http:// www. coindesk. com/ ethereum-
classic- blockchain- fork- ddos- attacks/ .
91 For public, permissionless (trustless) blockchains like Bitcoin where the use of nodes on the blockchain are publicly used to verify
transactions is a core feature, security of its blockchain – and not the vaults bitcoins are stored in - is ensured by syntactic rules
and computational barriers to mining. See also Greenspan (2016b) ibid.
92 There is arguably also a trade-off in DLTs between security and transaction processing speeds. For a technical discussion thereof,
see Kiayias, A and Panagiotakos, G (2015) Speed-Security Tradeoffs in Blockchain Protocols, available at https:// goo. gl/ bgsTR8.
93 The counterargument could be that a properly designed ‘permissioned’ network would be designed so that there is no sin-
gle-point of failure or central administrator who can unilaterally change the state. See Swanson (2015) ibid.
94 Credit Suisse (2016) ibid; and Kaminska, I (2016) How I Learned to Stop Blockchain Obsessing and Love the Barry Manilow, avail-
able at https:// goo. gl/ mv3Lcy.
95 Vermont (2016) ibid
96 Greenspan (2016a) ibid
97 The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States.
98 Reuters (2016) Exclusive: New York Fed Asks Philippines to Recover Bangladesh Money, available at https:// goo. gl/ yqaJh7 .
99 Vermont (2016) ibid

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