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Blockchain gained fame as a “permissionless” ledger system whose very immutability made it suitable for the exchange of Bitcoin digital currency. Accenture (New York/Dublin) now reports the development of an “editable” blockchain prototype that it bills as a significant breakthrough for enterprise uses, particularly for insurance, banking and capital markets. The prototype retains the essential trustworthiness of blockchain while allowing editing under “extraordinary circumstances” to resolve human errors, accommodate legal and regulatory requirements, and address mischief and other issues while preserving key cryptographic features.
The prototype transitions from the “permissionless” paradigm to “permissioned” blockchain systems managed by designated administrators under agreed governance rules. Accenture draws a sharp distinction between the new paradigm, and the use of blockchain for the Bitcoin cryptocurrency system, which is open and decentralized, and where the absence of a single governing authority makes permanent or “immutable” record keeping vital.
Absolute Immutability Both a Virtue and a Vice
Blockchains are immutable to users of the system but, when necessary, designated administrators acting on agreed rules of governance can edit, rewrite or remove blocks of information without breaking the chain, an Accenture statement. The prototype does this by using a new variation of what is known as the “chameleon” hash function, which can recreate algorithms that link two separate blocks through the use of secure private keys.
“As we focus on new uses for blockchain technology beyond the realm of cryptocurrency, absolute immutability will become both a virtue and a vice,” comments Richard Lumb, group chief executive, Financial Services at Accenture. “For decentralized cryptocurrency systems, such permanent accounting has been crucial in building trust and faith among participants. But for financial services institutions faced with a myriad of risk and regulatory requirements, absolute immutability is a potential roadblock. Our invention strikes a balance for enterprise use that preserves the fundamental value of the technology while enabling enterprise adoption.”
Domesticating a ‘Free-Range’ Technology
“Making blockchain editable may be an important step in domesticating this free-range technology for financial institutions,” remarks Matthew Josefowicz, CEO of research and advisory firm Novarica (Boston). “While immutability is a key component of cryptocurrency, use cases inside the financial system may require more flexibility. Whether these use cases will materialize in a way that makes blockchain a more compelling solution than existing technologies without the need for total anonymity and immutability is another, still-open question.”
Insurance companies are clearly interested in blockchain technology and have begun the process of exploring the potential use cases, in some cases piloting the technology, according to David Treat, Managing Director, Financial Services, Accenture. However, it’s important that they understand the full potential of the technology and the limitations around immutability in permissioned systems, before they create their strategies and deploy the technology, he cautions.
‘Smart’ Contracts and IoT Applications of Blockchain
One prominent area of interest is “smart” contracts. “The business logic that is codified in an insurance policy generates a lot of operational work when an insurance ‘event’ happens and a payment needs to be made,” Treat explains. “Embedding that business logic into self-executing code on a blockchain in the form of a ‘smart contract’ has great potential to cut costs and improve service.”
Insurers are also beginning to combine blockchain capabilities with Internet of Things capabilities where physical objects (e.g. cars, appliances, houses, etc.) can broadcast information or take actions such as ordering parts/supplies on their own, according to Treat. Capturing that information on a blockchain platform to make it available to multiple parties (owner, manufacturer, servicer, regulatory, insurance company) could simplify what otherwise could be a complicated and fragmented data solution using traditional techniques. “Insurance companies with access to these streams of data for the objects that may be insured will enhance their ability to evaluate risk, offer more exact pricing and track insurance events automatically,” he says.
But there are also broader applications that makes sense, according to Treat. “In any business, mistakes will be made and information will need to be edited or removed; it could be an erroneous contract—‘smart’ or otherwise—personal information and data privacy concerns and broader regulatory compliance requirements,” he elaborates. ‘For insurance companies, this redactable blockchain capability will be instrumental in making the technology more practical and usable for a wide range of applications across the industry.”