Statement of Chris Jaikaran Analyst in Cybersecurity Policy Before Committee on Science Space and Technology Subcommittee on Oversight Subcommittee on Research and Technology U S House of Representatives Hearing on “Beyond Bitcoin Emerging Applications for Blockchain Technology” February 14 2018 Congressional Research Service https crsreports congress gov TE10025 Congressional Research Service 1 Introduction Chairs Abraham and Comstock Ranking Members Beyer and Lipinski and Members of the Committee thank you for the opportunity to testify on blockchain today My name is Chris Jaikaran and I am an Analyst in Cybersecurity Policy at the Congressional Research Service In this role I research and analyze a variety of information technology issues of interest to Congress including emerging technologies like blockchain My testimony today includes an explanation of blockchain technology potential applications for it limitations and concerns in using the technology and potential considerations for Congress My testimony today is based solely on publicly available information and CRS analysis Blockchain is not a new technology rather it is an innovative way of using technologies we already have This is done so that parties who may not trust each other can agree on the current distribution of assets and who has those assets so that they may conduct new business But despite the hype surrounding the technology it has certain pitfalls which can inhibit its utility Blockchain Explained A blockchain is a digital ledger that allows parties to transact without the use of a central authority to validate those transactions The use of a central authority i e a third party can be avoided because in a blockchain as transactions are added the identities of the parties conducting those transactions are verified and transactions are verified as they are added to the ledger as a block of transactions The ledger is auditable because each block of transactions is dependent upon the previous block in such a way that any change would alert other users of a change to the history of transactions The strong relationships between identities transactions and the ledger enable parties that may not trust each other to agree on the state of resources as logged in the ledger With an agreement on that history parties may then conduct a new transaction with a shared understanding of who has which resource and of their ability to trade that resource Technology Blockchain is not a new technology rather it is an innovative way of using existing technologies Four particular technologies are used to enable blockchain technologies asymmetric key encryption hashes Merkle trees and peer-to-peer networks Asymmetric Key Encryption Asymmetric key encryption also known as a public-private key cryptosystem functions to create identities on a blockchain A user creates two elements a public key which helps identify their transactions on the blockchain and a private key which is necessary to conduct a transaction with the public key Asymmetric encryption allows for the authentication of users because only those with the private key can decrypt data encrypted with the public key or encrypt the data for public key decryption thereby creating a signature 1 The public key may be broadcast on the blockchain itself or may be tied to an address which is broadcast instead In some blockchain systems the real-world identity of each address or public key is logged so that individual users may be tracked In others a user may be able to generate public and private keys 1 For more information on encryption see CRS Report R44642 Encryption Frequently Asked Questions by Chris Jaikaran CRS TESTIMONY Prepared for Congress ————————————————————————————————— Congressional Research Service 2 independently and broadcast the public key or address without identifying themselves creating a pseudonymous identity on the blockchain In a blockchain the public key is used to identify a user on the blockchain and verify the resources tied to that user’s public key or address The resource could not be used unless the holder of the public key to which the resource is tied unlocks or decrypts the resource with their private key allowing it to be transferred to another identity on the blockchain a public key or address and locked with that second user’s private key This transaction would be logged on the blockchain so that other users could verify the resource has changed possession An example of asymmetric key encryption other than blockchain is used daily when a user connects to a website via Hypertext Transfer Protocol-Secure HTTPS To enable the secure connection to the website a user starts the process by sending a request to the site The site then sends its public key to the user and the user’s computer then generates a new key to be used in the HTTPS connection encrypts it with the website’s public key and sends that back The user knows that only the website that has the private key could decrypt the information the user just sent With the new user-generated key the website creates the secure connection with the user indicated to the user by the HTTPS icon frequently a lock symbol in the browser window Hash Values A hash uses similar mathematical functions as an encryption method to produce a string of characters as an output given some data as input This is a one-way function meaning a hash value may be created from an input but the input cannot be recreated from the hash In blockchains a number of transactions are tranched together to make a single block which is then hashed Hash values are used to validate the integrity of a block Any alterations to the transactions that make up a block will change the hash value of the block as a whole If a block’s hash value stays the same over time users can be sure that the transactions in that block have not been tampered with This allows users on the blockchain to determine whether or not they can trust the history on the blockchain Merkle Trees Databases and ledgers are large and are constantly being edited as new entries are added and data is modified or deleted If a person wanted to have a hash value for the database they would have to constantly hash it and maintain a way of ensuring they have the right hash value to align with the current state of the system in order to judge its integrity Additionally the larger the database becomes the more computationally intensive hashing it becomes A Merkle tree is a cryptographic concept introduced by Ralph Merkle in 1980 as a way around this problem 2 In a Merkle tree data is segmented apart from a single whole data file There is a root block of data with a hash value then subsequent blocks of data sometimes referred to as child branch or leaf blocks that have their own hash value Each subsequent block of data takes the hash value of their previous block sometimes referred to as a parent block as an input in the creation of the hash value of the new block This creates a chain or tree of hash values cryptographically tying new blocks of data to previous ones in a way that prohibits altering previous data If data in a previous block were to be added modified or deleted the hash value of the subsequent blocks of data would not compute to what they would need to be alerting users that a change was made This also allows hash values to be created for smaller more Ralph C Merkle “Protocols for Public Key Cryptosystems ” conference paper Oakland CA April 1980 at http www merkle com papers Protocols pdf 2 CRS TESTIMONY Prepared for Congress ————————————————————————————————— Congressional Research Service 3 discrete blocks of data which is computationally less resource intensive than rehashing an entire set of data each time an edit is made Blockchains borrow the concept of Merkle trees to make hash chains In a blockchain a first block is created and a hash value is computed for it This is the root block Subsequent blocks then use the hash value of the previous block in the chain as one of the inputs to create that next block This chaining of hash values creates a strong relationship between blocks on the chain and an auditable and immutable record of the transactions on the blockchain Peer-to-Peer Networks A peer-to-peer P2P network allows a disparate system of computers to connect directly with each other without the reference instruction or routing of a central authority P2P networks allow for the sharing of files computational resources and network bandwidth among those in the network In a blockchain a P2P network allows the users of the blockchain to broadcast directly to and among each other the current state of the blockchain so that users may agree on the history of transactions and when a new block is added This also allows for redundancy of the data in the blockchain as any user may download a complete copy of the current ledger of transactions and add a new block so that there will not be a single point of failure for the blockchain if a node on the network goes down In some blockchain implementations users do not host copies of the ledger among themselves Instead users use a cloud service provider CSP to maintain active and back-up copies of the blockchain and compute the transactions and blocks as they happen In these cases peer-to-peer networking is necessary to run the blockchain While the CSP is not a central validating authority in this example it does become a third party to the transaction Transactions in a Blockchain Blockchains consist of a series of blocks of transactions A transaction is an event in which a resource or asset changes possession from one party to another These individual transactions are signed by the users engaging in those transactions through the use of public-private key encryption Because the private key is necessary to release and accept a resource in a transaction on the blockchain the users transacting on the blockchain are in effect signing the transaction to ensure its security Transactions are grouped together and made into a block which is validated upon its creation through the act of mining for the creation of blocks mining is further explained below The integrity of the entire ledger is ensured by each block having a hash value which is dependent on the previous block’s own hash value Each of these three steps relies on strong cryptography which ensures the validity of the ledger Transactions may not post immediately to a blockchain If a lot of transactions are occurring in a short amount of time the blockchain platform may create a pool of pending transactions which are processed in accordance with rules of that blockchain—which may allow for fees user priority or some other method to post certain transactions into a block before others Blockchain Governance A blockchain can be public or private In a public blockchain anyone can create a public-private key pair and download a copy of the blockchain This is usually accomplished through a software package which governs transactions on the blockchain In a private blockchain the membership of users on the blockchain is controlled In private blockchains the users authorized to participate may be bound by contractual relationships with each other their blockchain addresses may be closely tied to their realworld identities or participation on that blockchain may be agreed upon by other members in the CRS TESTIMONY Prepared for Congress ————————————————————————————————— Congressional Research Service 4 blockchain In any case members of a private blockchain may be more trusting of each other than in a public blockchain A blockchain can be permissioned or permissionless which is independent of whether the blockchain is public or private A permissioned blockchain is one in which the permission of a user is assigned to them Some users may only be able to view a whole or portion of the blockchain others may be able to add new blocks In this system the administrator s do not serve as a central authority since they do not govern the creation of blocks on the blockchain just the rights of users on the blockchain In a permissionless blockchain all users have equal rights with any one able to download the full blockchain and have an opportunity to potentially add additional blocks Discussing a blockchain as public or private refers to the level of freedom users have to create identities on that blockchain Discussing a blockchain as permissioned or permissionless refers to the level of access the user would have on that blockchain Users on the blockchain must reach consensus on the rules for creating and publishing new blocks and resolving disagreements Blockchains have users and nodes on the blockchain platform The users on a blockchain could be the individuals businesses or other identities which have a public-private key pair and conduct transactions A node is a computing system on that blockchain A user may have a node e g an individual’s computer or a business’s computing network or a group of users could pool resources to create a single node e g users who share their computing power to mine for new blocks on the blockchain In a blockchain platform that uses a CSP the CSP is a node on the blockchain but may also be a user The creation and publication of a new block in the blockchain is called mining In mining blocks users seek to add the next block to the chain Mining is incentivized by improving the user’s standing in that blockchain through either a monetary reputational or stake award for adding new blocks New blocks may be added to a blockchain through a variety of methods Three such methods are proof of work proof of stake and round robin In a proof of work scheme those seeking to add a block to the blockchain are presented a difficult computational problem By solving the problem they win the opportunity to post the next block and possibly a reward for doing so Their solution is broadcast to others users who can validate it immediately without going through the same resource intensive computation required to solve the problem In this scheme the problem is frequently a direction that the hash value contains certain elements e g the value begins with four zeros In order to produce a hash value with those elements additional information is added as an input along with the previous block’s hash value the transactions in the block data and time information etc This additional information is called a nonce and could be as simple as a number which would alter the hash value Finding the nonce value that solves the problem wins for that miner the right to publish the next block In a proof of stake scheme the next block may be awarded to the user who has an appropriate stake in that block This may be because the block contains transactions regarding that user Or the user has an X percentage of stake in that blockchain so they are awarded the right to publish X percent of blocks to that blockchain Proof of stake schemes are computationally less resource intensive than proof of work In the round robin scheme users on the network take turns adding new blocks Because some level of trust is necessary for round robin schemes to work they are used in permissioned blockchains If there is a disagreement in the blockchain most users on the node will consider the longest chain on the block to be the valid ledger and use that one as the basis for future transactions In the event that two different miners publish blocks at the same time and those blocks contain different information blockchains may allow both blocks to be published for that round then allow the system to resolve itself upon the publication of the next block which would then create the largest chain of transactions and therefore the most trusted ledger Another way of resolving disagreements is through using byzantine CRS TESTIMONY Prepared for Congress ————————————————————————————————— Congressional Research Service 5 fault tolerance whereby users on the blockchain platform will vote on which block they choose to accept and the plurality of votes determines the next block to be published 3 Blockchain Uses Blockchain is not a panacea technology A blockchain records events as transactions when they happen in the order they happen in an add-on only manner Previous data on the blockchain cannot be altered and users of the blockchain have access to the data on the blockchain in order to validate the distribution of resources If an entity has critical data that it wants to share a combination of current database cloud and identity management technologies will likely be adequate for its needs However if the entity seeks to have its data be immutable and auditable then a blockchain may be appropriate While an entity may find immutable and auditable transactions enticing the inability to edit those transactions even in cases of error when an additional invalidating transaction will be necessary may still make blockchain a suboptimal record keeping technology Examples of blockchain uses that are in use are being piloted or have been discussed are listed below in alphabetical order Cryptocurrencies Bitcoin is the most popular cryptocurrency garnering the largest market share and arguably initiated the interest in blockchain technology Cryptocurrencies like Bitcoin are built to allow the exchange of some digital asset of value the cryptocurrency for a good or service 4 They are frequently permissionless and use a proof of work model to add blocks In these systems anyone can create a wallet which includes their private key their public key and an address which is derived from their public key They then acquire through mining or purchase the cryptocurrency and add that as a transaction to the blockchain so that their address is linked to their value If they purchase something they will then unlock the cryptocurrency with their private key transfer it to the seller who then locks it with their private key This transaction is published to the blockchain so all users are able to validate that the buying user has that much less of the cryptocurrency and the selling user has that much more of it Each cryptocurrency has its own blockchain Healthcare There have been a variety of proposals for using blockchain in the healthcare sector many of which involve the management of electronic health records EHRs One such proposal is to use the blockchain to authenticate patients and health providers on a blockchain in order to enable the sharing of EHRs 5 In this proposal the EHR is held on a system hosted by the provider but existence of the record is published to the blockchain and the patient may use the blockchain to authorize who may have access to that record However applications of blockchain for healthcare implicate both federal laws i e the Health Insurance Portability and Accountability Act of 1996 HIPAA P L 104-191 and the Health Information Technology for Economic and Clinical Health Act HITECH Title XIII of Division A of P L 111-5 and state health record privacy laws which may inhibit its use Leslie Lamport Robert Shostak and Marshall Pease “The Byzantine Generals Problem ” ACM Transactions on Programming Languages and Systems vol 4 no 3 July 1982 4 Satoshi Nakamoto “Bitcoin A Peer-to-Peer Electronic Cash System ” paper October 2008 at https bitcoin org bitcoin pdf 5 Ariel Ekblaw Asaph Azaria John Halamka and Andrew Lippman “A Case Study for Blockchain in Healthcare ‘MedRec’ Prototype for Electronic Health Records and Medical Research Data ” paper August 2016 at https www healthit gov sites default files 5-56-onc_blockchainchallenge_mitwhitepaper pdf 3 CRS TESTIMONY Prepared for Congress ————————————————————————————————— Congressional Research Service 6 Identity Management Identity management use of blockchain draws upon asymmetric encryption and immutable transactions as strengths In this use a user has a private key to validate transactions made with their public key which are then published or data about the transaction are published to the blockchain This ensures that only the user with the private key is able to conduct transactions and resolves the double-spend problem because the transaction is published so other users can validate the distribution of resources to that public key or address 6 However this form of identity management requires both a computing device and an Internet connection to work Private entities may be able to require users to maintain a compatible device for their blockchains and the Internet connection required to execute a transaction on the blockchain but other entities like the public sector may face difficulty in moving to a blockchain-only identity management model because some of their customer base lack the computing elements necessary to conduct the transaction—creating a cost-sharing problem Provenance Because asymmetric encryption allows for the authentication of users blockchain has been suggested as a solution to the provenance of items Provenance refers to the ability to know the history of an item so that users can be assured that they may be legitimate consumers of the item By using blockchain proponents seek to enable the transfer of property rights or goods without the clearance of a third-party intermediary thereby reducing costs In this model a user would publish to the blockchain that they have the right to an asset—the user’s claim to that right would still need to be verified which may be governed by the rules of the blockchain—and others may purchase or license that asset which would then be published to the blockchain for other users to verify There are examples of using blockchain for both physical and digital item provenance Cook County IL has investigated using blockchain to track the transfer of land 7 In its pilot it sought to track the conveyance of real property on a blockchain This could have the potential to affect the titling industry as anyone could verify that a seller is legally in possession of the property they seek to sell and are in a position to conduct a valid sale For digital items Kodak has announced that it will endorse blockchain technology to track the rights of digital images and provide a way for content users to pay for the license to use an image However implementation concerns have generated significant criticism among industry analysts on Kodak’s plans 8 Smart Contracts The digital nature of blockchain has led to it being associated with smart contracts A contract in the physical world is an agreement among parties that upon execution of certain conditions a transfer of assets will occur A smart contact codifies these attributes in code so that machines can validate that conditions are met and initiate the transfer of assets In addition to the parties engaging in the transaction other users of the blockchain platform may provide computational resources necessary to process or 6 The double spend problem refers to transactions which may not immediately post allowing a party to spend that resource many times before it is reflected in ledgers For more information see David Mills et al “Distributed Ledger Technology in Payments Clearing and Settlement ” The Federal Reserve Board 2016 at https www federalreserve gov econresdata feds 2016 files 2016095pap pdf 7 John Mirkovic “Blockchain Pilot Program Final Report ” report May 30 2017 at http cookrecorder com wp-content uploads 2016 11 Final-Report-CCRD-Blockchain-Pilot-Program-for-web pdf 8 Kevin Roose “Kodak’s Dubious Cryptocurrency Gamble ” New York Times January 30 2018 at https www nytimes com 2018 01 30 technology kodak-blockchain-bitcoin html CRS TESTIMONY Prepared for Congress ————————————————————————————————— Congressional Research Service 7 validate the contractual transaction thereby gaining a stake in the transaction or contributing to the verification of the transaction on the ledger An example of a smart contract platform is Ethereum which allows users to build smart contracts on a blockchain platform In Ethereum users build their smart contract and pay fees so that other users contribute computational resources to enable the smart contracts and validate the transactions Supply Chain Management Supply chain management of physical and digital goods on blockchain is similar to the smart contract application In this application goods are tagged with a digital value e g a scannable code for physical goods or a tracker for digital goods and as it passes from one entity to the next that entity accepts it and then transfers it to another using its public-private key These transactions are added to the blockchain so various participants are able to track the disposition of the good from creation through distribution to retail and potentially to the end user 9 However this system will only allow for accountability of which party had control of the real-world item at which point As the item itself does not contain traceable code it must be affixed with a tracker such as a scannable code or a sensor which enables its tracking Someone in this chain may still manipulate the item alter trackers or otherwise adulterate items in the supply chain which may not be logged on the blockchain An example of supply chain management on a blockchain platform is tracking of minerals from the Democratic Republic of the Congo that will be used to build batteries 10 Blockchain Concerns The cryptographic attributes of blockchain present a compelling reason for its use over other technologies But there are persistent pitfalls and unsolved conditions which may inhibit wide use of blockchain Some of those concerns are discussed below Data Portability As with other record keeping systems once data is logged in one system transferring that data to a new system may be problematic This problem persists in many blockchain applications Once a user chooses to use one blockchain they are unable to remove their previous records of transactions and transfer them to a new system as those transactions are part of the blockchain and any alteration to the chain would result in users being unable to generate legitimate hash values for new blocks The existence of that data is permanent on the blockchain Additionally if a user seeks to copy their data from one blockchain to another there are no standards for data construction from one blockchain to the next so all the elements of data from one blockchain may not be embedded in another nor will how they process public-private keys or hash values The lack of standards in blockchain technologies extends beyond how data is stored to how public-private keys are generated how hash values are generated and how data is broadcast across peers The lack of standards effectively means that once a user chooses one blockchain for their use they may be unable to transfer to another blockchain While they may be able to recreate their current allotment of resources on a new chain and conduct transactions from that point their history will be encapsulated on the previous chain 9 For more information in supply chain issues and blockchain see CRS In Focus IF10810 Blockchain and International Trade by Rachel F Fefer 10 Barbara Lewis “Blockchain to Track Congo’s Cobalt from Mine to Mobile ” Reuters February 2 2018 at https www reuters com article us-mining-blockchain-cobalt blockchain-to-track-congos-cobalt-from-mine-to-mobileidUSKBN1FM0Y2 CRS TESTIMONY Prepared for Congress ————————————————————————————————— Congressional Research Service 8 Ill-Defined Requirements As with adopting any technology adopters must examine the business legal and technical aspects of adopting blockchain 11 Because blockchain is in the early stages of its development and adoption users are likely to face a set of questions that do not have clear answers What is the business case for the technology Do customers demand attributes that the new technology provides Will employees benefit from them What are the legal implications for using the new technology Will adhering to compliance regimes be easier or more difficult Will data held in the new technology be accessible to auditors for review Will it inhibit regulated transparency Finally what particular technology will be adopted What are the attributes to that technology e g using one hashing algorithm instead of another How will it affect current practices and how might it adapt over time Key Security As with other forms of encryption the creation storage and loss of control of the private key creates problems that are unsolved If a user were to have the device that stores their private key compromised an attacker would have access to their private key and be able to transfer resources from their public key to another public key or address controlled by the attacker If the user’s hard drive fails or they forget or otherwise lose their private key they effectively lock the resource tied to their public key forever inhibiting any other transaction with that asset User Collusion and Control Groups of users on the blockchain may combine computing resources and collude to mine blocks In some blockchain implementations this is allowed and encouraged However it does present a situation where groups of users may wield unintended influence over which transactions make it into a block and the blocks that are posted Additionally a user or group of users the attacker with sufficient computational power may be able to recreate the blockchain thereby altering previous transactions and broadcasting to blockchain users that the attacker’s chain is valid As it would be the longest chain others may automatically accept it even though it was in error This is called the 51% attack While it is computationally difficult to carry out against established blockchains it may allow an opportunity for nefarious users to corrupt a new or up-start blockchain platform which have shorter ledgers thereby ensconcing them as controllers of block creation User Savviness and Safety Another issue that affects other technologies and one that applies to blockchain is the level of comfort and knowledge a user must have with the technology in order to properly and safely use it For instance many drivers do not know how a car works but can still safely drive a car Or many users do not know how computers and networking work but can still type out and send an email Lay-user participation is possible because certain design decisions were made by government e g seatbelt requirements and the need for a driver’s license and engineers e g simple user interfaces that enable users to use those technologies As blockchain technology is developed adopted and used similar design requirements may be necessary to ensure proper use and safe adoption of the technology In addition to the use of blockchain technology itself users may also need to be aware of its pitfalls and tradeoffs before adopting it For instance stories have circulated that users who own Bitcoin have lost access to their private keys 11 Manu Sporny “DHS Blockchain Distributed Ledger Conference ” October 10 2017 CRS TESTIMONY Prepared for Congress ————————————————————————————————— Congressional Research Service 9 thereby prohibiting the use of that asset in the future—they effectively lost the asset and without a central authority have no recourse to restore that asset Potential Considerations for Congress Although blockchain is already being used as a financial instrument it is relatively nascent in other sectors of the economy Because of its novelty blockchain is being piloted by industry but at this time does not appear to be a replacement for existing systems Given these conditions the technology does not contain the same level of adoption that previous technology had when facing potential legislative action However Congress can still provide oversight of federal agencies seeking to 1 use it for government business and 2 regulate industries using blockchain The General Services Administration and the Department of Homeland Security are examining blockchain as a way to achieve efficiencies in the current business of government 12 In these examinations the federal government is seeking ways to better manage identities assets data and contracts Agencies such as the Securities and Exchange Commission and the Commodities Futures Trading Commission are issuing advisories to industry concerning blockchain technology In some cases these actions are to positively declare that the current legal framework governing other transactions also apply to transactions on a blockchain 13 In both of these areas Congress may want to evaluate whether agencies are achieving Congress’s policy goals These goals may be technology agnostic and thus already established or Congress may develop new policy goals for the adoption of emerging technology across a variety of sectors Conclusion Thank you again for the opportunity to testify today I look forward to your questions If you require further research or analysis on this topic or other policy issues before Congress my colleagues and I at CRS are ready to assist you Disclaimer This document was prepared by the Congressional Research Service CRS CRS serves as nonpartisan shared staff to congressional committees and Members of Congress It operates solely at the behest of and under the direction of Congress Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role CRS Reports as a work of the United States Government are not subject to copyright protection in the United States Any CRS Report may be reproduced and distributed in its entirety without permission from CRS However as a CRS Report may include copyrighted images or material from a third party you may need to obtain the permission of the copyright holder if you wish to copy or otherwise use copyrighted material 12 For examples see https emerging digital gov blockchain-forum https emerging digital gov blockchain-programs and https www dhs gov science-and-technology news 2017 09 25 news-release-dhs-st-awards-750k-virginia-tech-company 13 U S Securities and Exchange Commission “Investor Bulletin Initial Coin Offerings ” alert and bulletin July 25 2017 at https www sec gov oiea investor-alerts-and-bulletins ib_coinofferings CRS TESTIMONY Prepared for Congress ————————————————————————————————— TE10025