Jordan Underhill, J.D., CFE
ACFE Research Specialist
One of the most exciting technological innovations to emerge from the development of cryptocurrencies is blockchain — or distributed ledger — technology. Blockchain is essentially a decentralized ledger or database maintained across a network of computers. Anyone with access to the network can view the database, which is updated across all connected devices, rather than being maintained at a central location.
Information is stored in the shared database in files called blocks. Each block references the previous block, creating a chain that functions as a timeline of every transaction that has taken place in the network. While any users with access to the network can view the information contained in the blockchain, it is designed to be highly resistant to alteration. Because the blocks are linked, altering one would require the alteration of all subsequent blocks.
The development of blockchain
The first blockchain was put into practical use by Satoshi Nakamoto — the pseudonymous creator or creators behind Bitcoin. Blockchain technology solved a key problem related to online peer-to-peer transactions — namely, how to prevent double-spending without using an intermediary.
Most online transactions are mediated by a third-party, such as a bank or payment systems operator (e.g. Paypal). Bitcoin was designed to eliminate these third-parties. To do so, Nakamoto needed a way to secure transactions so that a user could not spend the same bitcoins multiple times.
In essence, blockchain allows Bitcoin to emulate the peer-to-peer nature of cash transactions. Cash transactions don’t require an intermediary because the payor physically gives money to the payee. Nakamoto was able to create a virtual representation of cash transactions by developing a network that automatically records every transaction in a public ledger (the blockchain). Likewise, the Bitcoin network only processes new transactions after it verifies them against this ledger.
While Nakamoto developed blockchain to facilitate Bitcoin transactions, its potential uses extend well beyond the realm of cryptocurrencies. For example, both Cisco and IBM are exploring the possibilities of incorporating blockchain technology across supply chains. A shared database among all parties along a supply chain could increase transparency and reduce fraud and waste. This shared database could also make it easier to identify and investigate financial or logistical issues that arise along the supply route.
One of the most exciting blockchain experiments is taking place in Estonia, where the government is using it to create a streamlined bureaucratic system. Estonians can vote, view their medical records, pay fines and fees, and access most public services via a unified network maintained by the Estonian government. Estonia uses blockchain in some of the registries on this network (e.g. national health, judicial, and legislative systems) and the government plans to continue to expand its use.
Stay tuned; I guarantee there will be more to come. And, read even more about the future of fraud in a blockchain world in Fraud Magazine.