The implicit promise of quiet relaxation that comes with retirement has been far from the reality for former Equifax CEO Richard Smith.
The fallen executive’s career came to an abrupt end in September following a security breach that implicated the personal data of more than 145 million Americans.
During the first of four Congressional hearings in early October, Smith blamed the massive attack on human and technological error. Failure to install a software patch, brought to the attention of the company in March by the Department of Homeland Security, ultimately left millions of consumers vulnerable.
“As we all painfully learned, data security is a national security problem,” Smith told lawmakers.
He argued no single company can solve data protection problems. Smith proposed instead a system that would return control of personal data to consumers.
The ability to do just such a thing – return control of personal data to the individual – has been top of mind for financial services professionals in the Cayman Islands.
As the territory works to implement its new Data Protection Law – and with it, penalties for noncompliance – the Equifax case provides a startling look at the potential fallout for business leaders.
“The Equifax scandal is terrifying because here you have a central depository filled with highly sensitive data, which is hackable and it doesn’t matter how good the data protection laws are,” said Peter Colegate, senior associate for law firm Appleby.
“You can have fines and prison sentences and enforcement penalties to get people to (comply) but ultimately, if somebody is so determined to acquire this data, they can.”
Colegate and his colleagues believe blockchain technology could provide a revolutionary solution for data protection.
Through a distributed ledger system, blockchain eliminates the need for a central database or central administrator, substantially diminishing the risk and impact of a hacking event.
“I think one of the beauties of blockchain is the Equifax thing becomes impossible. There is no central database. Everyone potentially can retain their own documents or the documents themselves can be hashed so they are being shared between the people who need to see them,” Colegate said.
Appleby counsel Samuel Banks envisions a three-stop process to put the Cayman Islands on track to lead the region and offshore centers in blockchain services for financial and personal use.
The first step, a digital identity registry, is already under way. If successful, the initiative would transform the way personal documents are processed and accessed in the Cayman Islands.
Forms such as birth certificates and business registrations would be digitized by the registrar and added to an individual’s “digital wallet.”
“Why not, simultaneous with them issuing physical versions of these documents, have them issue a digital identity as well? That digital identity, because it is issued by the authority, it is irrefutable proof of existence of identity. That can be incorporated into the individual’s digital identity and be carried with them throughout their life, much like a birth certificate would be,” Banks said.
Notarized, personal documents would be stored on a token, a sort of digital widget, with the protection of private and public key codes.
“They are access devices to obtain services on a network. If you, for example, need to prove your identity, you may purchase a token that you can use as a way of communicating digital information about your identity. It can also be used to exchange for services on the network,” Banks explained.
Appleby is currently working with Cayman Finance and other relevant parties to establish the system, which could launch as early as mid-October.
Cayman Finance CEO Jude Scott said a cross-sector working group including the Ministry of Financial Services and the Cayman Islands Monetary Authority has been active in developing FinTech that will complement Cayman’s business model.
CIMA declined to comment on blockchain development. A spokesperson, however, confirmed that it is currently evaluating its regulatory approach to such innovations.
“While the Authority appreciates the various potentials associated with FinTech, we need to ensure that the risks to our various stakeholders are understood, managed and appropriately mitigated,” a CIMA statement said.
Establishing CIMA’s regulatory role over the system – and the broader digital economy – will be the next step.
The authority must recognize digital tokens as a valid proof of identity in the context of anti-money laundering compliance for the initiative to work, Banks explained.
“Once CIMA is comfortable with that, it’s licensees can get comfortable with that because now the licensees have an incentive to try to go out and incorporate these processes into their business plans because they know the country’s central regulator lends credence to it,” he said.
The final step will depend on government to establish a regulatory framework flexible enough to adapt to a rapidly evolving technology while still implementing sufficient oversight.
While the legislative future remains unclear, Colegate said Cayman sits in an ideal position to spearhead blockchain innovation.
“Cayman has got the will and it’s certainly got the people here who want to push FinTech. It would make perfect sense for Cayman to be a FinTech hub. It’s very attractive, not just to be a hub, but also as place where tech companies and entrepreneurs can base themselves to develop some of this stuff,” Colegate said.
“My fear is that if Cayman doesn’t take advantage of it, there are plenty of other people vying to be the FinTech hub in the region. Whoever gets there first is going to get the advantage.”
Establishing Cayman as a FinTech leader
If Cayman moves quickly enough to lead such innovations, blockchain technology could be a boon for the financial sector by improving speed and efficiency of services.
Setting up a bank account, an often long and complicated process in the Cayman Islands, could be streamlined, for example, by eliminating wait times to process paper documents. Cayman could also get a leg up on implementing smart contracts, governed by preset conditions established and enforced through a blockchain network.
“Smart contracts need a governing law. That governing law should be the Cayman Islands because it has the most robust framework and regulatory environment for the interpretation and recognition of smart contracts,” Banks said.
“That is going to bring comfort to the market participants because they know when they choose Cayman Islands law, they are choosing a body of law that is well-developed, established and hopefully has the proper framework in place to facilitate blockchain commerce and a court system that is well-appointed, competent and familiar with financial services cases and that can gain familiarity with blockchain.”
While blockchain’s reputation as the “Wild West” of the internet may give pause to some regulators, Colegate argues this is a misperception that can be overcome through proper education about how the networks operate.
“Actually, you can have a closed, permissioned network, if you like, with a set of governing rules and all the things you would expect to see in a normal, regulatory environment can be built into that network and into that chain,” he said.
“On blockchain, you’re not subject to some of the unknowns that you have in the real, paper world. I think a big part of it, in terms of getting regulators on board, is getting them to understand its capabilities in a safe environment.”
Banks described the networks as similar to a corporate intranet, connected only among authorized users.
“I think a good, analogous way of looking at that is looking at the internet as a whole and then small, individual corporate intranets. They work in generally the same way. It’s just a question of who can access them and what can be done on them,” he said.
Much like the internet, Banks foresees blockchain disrupting the tech world for the better.
“I don’t think there’s fear. I think there’s excitement, like anytime you have a disruptive technology. The internet was one such technology. No one could have imagined Facebook or even Google when the internet was first developed,” he said.
“[Blockchain] gives you the opportunity to actually use the power of the Internet to its full commercial potential. So when you look at the technology that has that potential and then ask where it will be in the future, it’s like looking into the sun because who can know such a thing.