Recently, the Securities and Exchange Commission (SEC) initiated a lawsuit against Ripple, one of the major cryptocurrency companies. Why? Apparently for the crime of raising money without registering with the government. The suit doesn’t even allege that Ripple committed any kind of fraud or misled its clients in any way. It seems that the SEC is mad that Ripple (and other crypto currency companies) are using the blockchain system to handle transfer of money and goods outside of the normal system. Why would that make them mad? Because they don’t get to control it, and if they can’t control it, they can’t get any money from it.
It could be argued that in suing Ripple, the SEC is betraying a lack of understanding of what blockchain really is. After all, in a system in which people all around the world are part of the network that maintains the blockchain system, how can you hope to change that system by suing just one company? Blockchain and various crypto currencies will continue to exist without Ripple. Or any other single company.
However, an alternative reading is that the SEC does understand blockchain and is threatened by it. If so, they are making an example of Ripple, sending a message that they are determined to get control over digital currency one way or another. That begs the question – why would they find it threatening?
Unfortunately, that is all too easy to understand. The very nature of the blockchain system makes it unfriendly to the legacy banking and government bureaucracies. How so? There are three main pillars of the blockchain system that make it the threat that it is. Let’s take a look at them.
Pillar 1: Decentralization – One of the main features of blockchain is the fact that it is decentralized. What does that mean? It means that all of the information stored in the system, whether it’s currency, transaction records or shared information, it isn’t just on a bunch of guarded servers in a single location, as with a bank. Instead, every node in the chain has a complete record of the system within it. A transaction occurs and within seconds, a record of that transaction is stored on nodes around the world. This means that people don’t need to rely on those legacy institutions whenever they make a transaction. The decentralization grants freedom.
Pillar 2: Transparency – Now, someone might well be thinking this doesn’t make any sense. Isn’t a major feature of blockchain that it is anonymous? How can it possibly be anonymous if it’s transparent? Yes, this seems a little contradictory. However, the transparency comes from the fact that the information is in all of those different nodes. Since so many have access to the information, it is very transparent. Which has the added bonus of making it virtually impossible to commit any fraud. You can’t really cook the books behind closed doors when anyone can come in at any time and check the books. The anonymity comes from the fact that your identity itself is encoded and anonymous. Can the system still be hacked? Yes. However, it’s much harder to do and thus much less frequent than it is when it comes to legacy systems.
Pillar 3: Immutability – This one also relies on the nature of the blockchain. The records of your transactions within the system are always there, in many nodes around the world. That means if someone tries to hack a node or two to engage in some blackhat activity it will be detected and flagged by the other nodes that will see the disparity between their records and that of the hacked nodes. In short, the records can’t be fraudulently changed.
All of this makes the blockchain system of Ripple and other crypto companies more secure and freer than that of our legacy systems. No wonder they find it a threat and want to find a way to control it.
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