Chris Jaikaran

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”

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 anAnalyst in Cybersecurity Policy at the Congressional Research Service. In this role, I research andanalyze a variety of information technology issues of interest to Congress, including emergingtechnologies 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 testimonytoday 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 thetechnology, 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 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 would then send their public key to the user, and the user’s computer would then generate a new key (to be used in the HTTPS connection), encrypt it with the website’s public key and send 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 would create 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 one wanted to have a hash value for the database, one 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.
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 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 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 creating 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, either through 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 use the longest chain on the block
as 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 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.

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, HIPPA, 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.

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,
Illinois 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.

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 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

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 imbedded 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.

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 their 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,
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.v