Why I’m against editable blockchains

Brian Kelly is an investor and financial market commentator, founder and CEO of BKCM, and co-founder of blockchain hedge fund management system PAR.

In the article, Kelly argues that making blockchain editable would allow users to rewrite historical records, thus exposing the financial system to the potential for fraud.

Now a once-in-a-lifetime opportunity to improve our defenses against financial fraud is under attack: the core of Bitcoin and blockchain technology — the immutable ledger that prevents bad actors from changing records.

Accenture has applied for a patent for a type of blockchain that would allow pre-selected institutions to access and edit entries on the ledger, and it claims the prototype is more appealing because it allows information to be modified or deleted.

Bitcoin and its technological innovation — the blockchain — have been seen as the antidote to the problems of our antiquated financial infrastructure. I believe the immutability of the blockchain is a key feature and strength of this technology.

Allowing anyone to modify or delete information on the blockchain ledger threatens our ability to use blockchain technology to combat violations.

The importance of persistence

Since 2009, more than 155 million Bitcoin transactions have been made. Each transaction is permanently recorded in the Bitcoin ledger.

Every pizza purchased or room booked on Expedia using Bitcoin becomes a permanent record of the transaction. Don’t worry, the specific details – how many pizzas were purchased – are not recorded permanently, just that the transaction took place and value was exchanged.

Richard Lumb, CEO of Accenture Financial Services, recently wrote:

“This persistence of blockchain ledgers is critical to building trust in decentralized currencies that are used by millions of people. . . The financial services industry needs to face the challenge of balancing the demands of raw accounting with the demands of the real world, because some things need to be knocked off the record.”

Lumb's two statements are essentially contradictory and highlight the reason why Bitcoin was created. The moment you start allowing someone to change the blockchain ledger, you begin to erode the trust that the blockchain has established. While there may be legitimate reasons for making changes to the ledger, such as human error, it opens the door to destroying trust.

The foreign exchange market provides numerous examples of what can happen when trust is eroded. From 1975 to 2007, the post-Bretton Woods period, when currencies were allowed to float freely with only sovereign commitments as a backstop, there were 201 currency crises around the world.

More concerning is that in a nine-month period between 2008 and 2009, 23 countries experienced currency devaluations of 25% or more—the accepted definition of a currency crisis. The most direct cause of this cluster of crises is a loss of trust.

Bitcoin emerged from the ashes of the great financial crisis as a response to the loss of trust. The innovation of Bitcoin and blockchain is that it is a trustless system.

Upgrading the system

To achieve this level of trustworthiness, the underlying record of transactions must be immutable.

We need this technology to upgrade our aging legacy financial infrastructure. In fact, in a recently released document, the World Economic Forum (WEF) concluded:

“Distributed ledger technology (blockchain) has the potential to increase simplicity and efficiency by enabling new financial services infrastructure and processes.”

The need to upgrade our existing financial plumbing is indisputable. The immutable blockchain is an immutable part of accomplishing this.

A blockchain is a tool - like a hammer - sometimes you need a big iron hammer, sometimes you need a rubber hammer. There are ways to reconcile the prerequisite of durability with the 'needs of reality'.

For example, at BKCM we are using blockchain as a tool to create our PAR system – a disruptive hedge fund management system.

We think blockchain is the perfect tool to track the flow of money in and out of a pool of money. Proper accounting of hedge fund investments is not something you want edited. It was the ability to change the permanent record that allowed Bernie Madoff to commit the greatest fraud in financial history.

In my opinion, for blockchain technology to move beyond ‘lab experiments’, it is crucial that we embrace its immutable nature and use it for its intended purpose.

If you want to have a record that you never want to change — the heart and soul of a trustless system — blockchain is a great way to do it. The immutability of blockchain is a feature, not a bug.