Should regulators use Blockchain?

As you no doubt have heard by now, the Securities and Exchange Regulatory Commission (SEC), the regulatory agency responsible for regulating financial securities in the US jurisdiction and beyond, was hacked.

This hack compromised billions of dollars in transactions, the privacy of millions of accredited investors and had potentially been used for insider trading which is one of the many things that the SEC was established to prevent and hinder. Essentially, the Electronic Data Gathering, Analysis and Retrieval (EDGAR) database is the central repository which stores both public and private financial data about companies including corporate information which many companies would not want to be revealed publicly.

What’s worse is that the hack was reportedly not revealed until several months after it occurred in contradiction to their own rules for companies who must publicly declare when they have been hacked. It’s a serious blow to the US financial market and one that couldn’t come at a worst time — with growing uncertainty due to China’s ban on token sales and bitcoin trading as well as the growing security concerns raised by the Equifax hack. Needless to say, investors are extremely concerned about the security with which their private information is being stored. To their credit, the SEC said that once discovered, the issue was quickly resolved.

We live in a world where cybercrime has rapidly gone from science fiction to stark reality and it is becoming harder to expect that all hackers can be thwarted or as commonly declared “It’s not a matter of ‘if’ you’ve been hacked but a matter of ‘when’”. What then could the SEC do differently in the future to be better prepared for such an attack? Enter cryptographically secured transactions via the blockchain.

According to the book titled Blockchain Revolution (2016), “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” The blockchain is the underlying technology of popular cryptocurrencies such as Bitcoin, Ethereum and more.

Using the blockchain, it may become significantly simpler for the SEC to focus on its operational mandate instead of developing their own technological innovations. With the SEC EDGAR using the blockchain to store corporate disclosures and filings then the impact of the hack could have been limited in the following ways:

Transparency is a default feature of permission-less blockchains such as bitcoin and ethereum where the digital ledger is available for all to peruse. This would remove one of the key motivations for hackers who wish to access valuable market data prior to official release so that they may benefit on the open trading exchanges.
What about detecting the fraudulent behaviour that DOES happen? Fortunately the blockchain’s digital ledger is also immutable hence its list of transactions only be appended which when added with its availability to all means that it will be easier to spot suspicious trading activity. The SEC’s fraud prevention systems can therefore be more efficiently deployed to combat and identify these kinds of incidents (and perpetrators) quickly before significant damage is done — perhaps even alerting investors or regulators of the true scale of attempted intrusion.
There has been an understandable amount of concern regarding the potential misuse of revolutionary technologies such as blockchain which has unfortunately led to the shutdown of many token sales and trading exchanges however this concern must be matched with curiosity about how it may also be utilized to strengthen existing regulatory systems. By building atop the blockchain, the SEC and other regulators may utilize the above benefits of a decentralized system while also adding safeguards and privacy controls to protect investor interest

Fortunately, the regulatory agencies are well aware of the potential benefits of blockchain technology and are actively partnering with startups who can assist them with implementation of new systems while they continue their existing operations. One such startup working in this field is Polymath which is bringing existing financial securities regulations to tokenized sales on the blockchain. Polymath’s approach is unique since it is a one-stop shop for launching and issuing financial securities tokens.

Curious to know more about Polymath? Polymath is a one-stop shop for financial securities tokens launching in Q4 2017. You can find out even more about Polymath at their website and view the white paper as well