Most people only know about Bitcoin because of the “Coin,” while the “Bit” is so much more interesting. Let me explain. Bitcoin is basically a high-end data storage system. And data is the new…..
What is Bitcoin?
Bitcoin is, much like the internet, a global network of computers. This network has a mechanism specifically designed to ensure that at all times all the computers in the network have an identical copy of a single database. In other words, Bitcoin is a distributed synchronized database with a single version of the truth (SVOT). But that’s not all.
This database isn’t just any database. It has some unique properties. See, once you have stored information on this database, you can no longer delete it or alter it. Ever. All data entries are linked together in a chain of digital signatures and checksums. Any alteration of data would disrupt the chain of digital signatures and would alter the checksum. This mechanism ensures the integrity of all data stored on Bitcoin. So Bitcoin allows for data storage on a distributed synchronized database with a single version of the truth that doesn’t allow data to be altered or deleted. But that’s not all.
Bitcoin is a Timestamp server. For each data entry, by its transaction id, it can be determined when the data entry took place, and thus, it can be demonstrated that the data existed at a specific moment in time. So Bitcoin allows for data storage on a distributed synchronized database with a single version of the truth that doesn’t allow data to be altered or deleted. But that’s not all.
Bitcoin uses a key system needed to add data to the database. All data entries are linked to a unique key set used to store the data. This key set can be used as proof of the origin of that data. So Bitcoin allows for data storage on a distributed synchronized database with a single version of the truth that doesn’t allow data to be altered or deleted and origin or records can be proven.
Again, that’s not all. But for now, that is more than enough explanation about the unique data storage properties of Bitcoin.
Who would need such a Database?
Business needs this — specifically the Finance Industry and Health care.
Simply. Because they have to!
In the U.S., the SEC outlined in Rule 17a-4(f) of the Securities and Exchanges Act (SEA) requirement that business-related electronic records must be kept in WORM format (also referred to as “Write-Once, Read-Many”) to prevent alteration. According to the SEC, these requirements are an essential part of the investor protection function because a firm’s books and records are the “primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards.”
In the European Union, they have the Markets in Financial Instruments Directive II or “MiFID II.” This directive is a legislative framework designed to strengthen investor protection and improve the orderly functioning of financial markets, making them more efficient, resilient, and transparent. Any organization that has to comply with the requirements of MiFID II must keep records on Orders, Trades (whether scheduled or completed), Communication, including phone calls, faxes, messages, emails or physical mail and Documentation, including research, minutes of meetings, sales or marketing communications. Since data relating to trade and communications is extremely sensitive, data storage must be fully tamper-proof. Therefore it is required that the records are stored in non-rewritable, non-erasable format (WORM) so that records cannot be manipulated or altered.
The Payment Card Industry has something called the Payment Card Industry Data Security Standard (PCI DSS). This is designed to prevent tampering with credit card data and ensure strong security for financial transactions. To protect such data, the use of WORM storage is required.
Similar requirements can be found in other industries that handle sensitive information. Requirements for managing health information privacy and security can be found in the Health Insurance Portability and Accountability Act (HIPAA).
Costly to implement
Unfortunately, for a business or organization, it is expensive to implement a WORM data storage system. The trade association for broker-dealers, investment banks, and asset managers operating in the U.S. and global capital markets, SIFMA has surveyed in April 2018 amongst a group of member firms about the costs of WORM compliance.
According to SIFMA survey respondents, the average cost of WORM compliance implementation was over $6 million. Several firms reported costs in excess of $25 million and one firm even reported that their WORM-compliant record storage system cost them $39 million to implement. The ongoing costs of WORM compliance are nearly $4 million, and several firms reported annual costs in excess of $20 million. Non-compliance can result in severe penalties and the risk that operating permits are withdrawn.
SIFMA, the Futures Industry Association (FIA), International Swaps and Derivatives Association ISDA, and the Financial Services Institute filed a petition to amend Rule 17a-4(f) to no longer require broker-dealers to implement a “non-rewriteable, non-erasable” or “write once, read many” standard.
Bitcoin as the alternative
Making the rules less strict seems reasonable from a financial point of view, but Rule 17a-4(f) and other similar regulations have not been made into a law for no reason. We have seen our fair share of scandals within the financial industry over the years. Maybe it’s time to look for alternatives that provide the same level of security for financial records but are much cheaper to implement and maintain. Bitcoin could do this!
Bitcoin allows for data storage on a distributed synchronized database with a single version of the truth that doesn’t allow data to be altered or deleted, and origin or records can be proven. But only the Bitcoin system that still adheres to the original protocol as described in the Bitcoin Whitepaper, currently known as BitCoin S.V.
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