Weighting the Geopolitical Risks of Building a Business on a Permissioned Network

by Francesco Galati
Mar. 11, 2020
6 minutes

Blockchain is slowly moving beyond the hype to concrete applications. It is being slowly legitimized by both regulators and incumbents, after the initial and justified reluctance. As such, we have seen the emergence of several initiatives including the European Blockchain Partnership, China Central Bank’s plan to introduce a Central Bank issued Digital Currency, as well as several initiatives led by private actors. Every business that is exploring the possibility of introducing a blockchain will undergo a process to weigh the necessary** investments andeventual trade-offs.** Most of them relate to technological needs and monetary investments necessary to have a working product on blockchain and can be simplistically summarized by the question:

Should I build my business on a permissionless or on a permissioned blockchain?

This involves features such as security, openness, speed, scalability, and interoperability.

Ideally, companies should go past this simple dualism and develop more comprehensive frameworks to incorporate further elements within their choices.

I recently attended theBlockchain for Europe Summit in Brussels, where one of the panels there, led by MEP Eva Kaili, was discussing the issue from a political point of view, bringing the contributions of Mr. Matthew Roszack from BloqGloria Wo **from Ontology and **Manmeet Singh, the Vice President of the_ Cardano foundation, each of them bringing their professional expertise as well as personal experiences. The discussion was stimulating and highlighted the different approaches with respect to blockchain technology, depending on the country. Furthermore, it highlighted the significance of the political _(and geopolitical/strategic element) in the tech choice.

Arguably, the main feature of a blockchain is that of being a distributed system able to coordinate a variety of actors, that do not trust each other and whose interests are not completely aligned. Its inherent features guarantee that governance is not biased or skewed towards a specific party, ensuring the neutrality of the network. Contrary to state-owned solutions, consensus on a blockchain is_ math enforced, rather than law enforced._

Removing the element of neutrality from a blockchain brings about several risks, that will be discussed throughout this piece. The main purpose of this short article is to highlight the importance of assessing the geopolitical risks of choosing a network over the other and the fact that it is not only a technological choice. It will provide several examples of similar situations in the current system as well as political issues that might arise with time and their potential consequences on businesses.

The current system is centralized and headed by a few, centralized actors, acting as gatekeepers. However, their role is guaranteed by a pact with the state. They are its monetary arm and as such must respect laws and play by the rules decided by each country in exchange for their prominent position in the current financial system. They are required to comply with KYC, AML regulations and further on. It is not unlikely that banks and other operators of the financial system are also required to carry out explicit controls, provide information about users or transactions and eventually freeze accounts or rollback transactions that might be deemed to be dangerous for a reason or another, a practical example would be the recent sanctions imposed on **Iran **by the US.

The development of a geopolitical dispute between two countries and in particular the decision of one of them had a huge impact on the worldwide economy. While of little damage to US companies, this foreign policy decision impacted especially those countries trading and dealing economically with Iran. Among them China, Turkey, South Korea, India, and Germany.

They could not continue to trade with Iran because of the risk of being excluded from the global economy. Therefore, via direct and intermediate threat, the US was able to stop businesses from trading with Iran.

Another quote from the event in Brussels was that regarding the CBDC China should soon issue; European politicians are worried due to the not-so-democratic-attitude characterizing China’s political system, arguing that a blockchain should always have a_ “democratic state”_ behind.

This is due to the fear of state surveillance that could arise in a full blockchain society. We are already seeing the pervasive introduction of drone surveillance and face recognition. Many raised their concern with respect to the potential use of technology for surveillance purposes. Nonetheless, where do we draw the line between a democratic state and a non-democratic one? Is it fine if Europe uses it but China cannot? And why so?

The whole point of a blockchain is that of not having anyone behind as doing so effectively** replicates the same trade-offs and problems of the current system.**

This can be explicated with a practical example.

Bear in mind that this article only takes into account the geopolitical risks associated with the implementation of a blockchain that is backed either by a private or a state actor. The technological features and tradeoffs of these systems are not discussed —_ if you wish to learn more about it you can read about it here_. _Nowadays, the two most prominent frameworks to develop a permissioned blockchain are Corda and Hyperledger, the former being a product of the _R3 Consortium and the latter of IBMboth US companies.

While these might be deemed to be unguided fears for us Europeans, we have already seen the fragility of the current system and the beginning of protectionist and national-interest-focused policies by individual countries.
Trump has already declared its intention to place tariffs on cheese, wine, and whiskey. What happens if our trade relationships further escalate and he imposes a 20% tax on all companies using US tech? He could impose R3 and IBM to freeze all networks where enemy companies conduct their businesses, thus leading to huge economic, technological and financial damages.

In the context of further technological integration and deepening international trade relations introducing a blockchain that can be linked to a state actor, especially one as capricious as the US, can represent a significant risk as it might hinder the scalability of the businesses to other geographical areas.

Let us have a practical example. Issues might arise if the scope of the business is global and it frequently deals with international actors. Other businesses, coming from countries such as Russia and China, considerably threatened and wary of the geopolitical developments on the US side, might be reluctant **to conduct businesses on these platforms, or to build their business on top of them. **Mr. Matthew RoszakCEO at Bloq, a company whose mission is to _“accelerate the tokenization of things” _building blockchain infrastructure mentioned that, in order to avoid possible turbulences, their company is and provides **blockchain-agnostic structures, **whereby in case of issues, the infrastructure is built in such a way that allows them to migrate to another chain without the risk of compromising their network.

Therefore, businesses should be wary of the implications of their choices.
The whole idea of a blockchain is being not only decentralized but also distributed, meaning that the processing of the system is shared across multiple nodes and there is** no single point of failure, increasing **resilience and **avoiding centralization **of power and information in the hands of a single actor.

Ideally, a business should defend its company from possible geopolitical turbulence. The best way to do so would be that of building its business on top of a permissionless blockchain, such as Bitcoin or Ethereum. These networks are distributed and free from state and private actors interferences in terms of governance or censorship.

The purpose of this article was to highlight the relevance of the political elements when weighing the decision of building one’s business on top of a permissioned blockchain. It is not only a tech choice, as further developments in politics and economics might have a negative impact on the nature of your business and your scalability.

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