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Blockchain and Data Privacy

  • Difficulty Level : Expert
  • Last Updated : 26 Mar, 2022

Blockchain has been defined as a digital, decentralized ledger that keeps a record of all transactions that take place across a peer-to-peer network. It enables the secure transfer of assets without an intermediary. It also provides a record of transactions that is fully transparent and displayed in real-time for benefit of participants.

A Blockchain Network is Characterized By:

  • Decentralized, Distribution Networks: There is no central authority to regulate and it is spread over a wide network.
  • Immutable Ledger: Once any block is developed in the network it cannot be changed.
  • Consensus-Based Mechanism: An agreement that data is correct, by network participants.
  • Better Data Quality: It reduces error as the transaction is verified by all members.
  • Increased Trust: Its immutable nature increases verifiability.

Basic Terminology:

  1. Nodes: It could be a laptop or server, where each node over a blockchain network stores entire information over a network.
  2. Miners: A minor is a node in the network that works towards the authentication of a transaction.
  3. Public and Private Key: Every node over a network is comprised of the public having a private key paired together. The public key is visible while the private key is possessed by the node only.

Note: All minors are nodes while all nodes may or may not be minor

Example of Adding a Block to the Network:

Adding the block to the network

Adding a block to the network

Data Privacy

It is sometimes referred to as information privacy, which deals with the proper handling of sensitive data including personal data. Data privacy has regulated the manner in which personal data is collected, processed, stored to ensure proper handling of data.

Data Privacy Importance: Data is the most important asset in a business. We live in an era where companies find value in collecting and sharing data.

  1. The business had to meet legal responsibilities about the collection, storage, and process of personal data.
  2. Companies who work in sensitive data should consider the legal parameters to ensure that data privacy is outlined in legislation.
  3. The identification of distinct stakeholders is important for fixing liability, obligation, and determination of rights. The stakeholders have been divided into:
    • Data Controller: When a business collects data directly from the user then that business is referred to as data controller.
    • Data Fiduciaries: The person who collects the data or identifies the purpose for which data is collected.
    • Data Principal: Decentralized nature of the network there is no authority to seek consent or to whom consent is to be addressed, so anonymization could be used to secure data on  a network
    • Data Processors: A natural or legal person, public authority, agency, or other body which processes personal data on behalf of the controller.

Applying regulation in a private blockchain is less complex as the participants are restricted and there is a central authority that can provide and regulate protocol itself. However, in the public blockchain, it comes very difficult for the person who is participating in public blockchain as there is no central authority.

Pruning: This is used in the situation where historical blocks of data beyond a certain timeline can be deleted, but in blockchain deletion of some data will require the change of a number of every node in the network which is difficult to achieve.

Forking: It basically starts its own parallel line of transaction where from which tampering or data has been deleted, then forking will starts its line of transaction absolutely new without having that one block in place.

Application of Data Privacy to Blockchain: If there is no personal data involved with the issue then there is no privacy issue and if yes, then one might be under the General Data Protection Regulation, and data privacy is forbidden unless you have the legal basis to proceed with the data. Most data is prohibited unless certain exceptions make it permissible.

Recent Trends in Data Privacy Laws

The following are some of the recent trends in data privacy laws:

  1. The growing threat of disinformation: During the pandemic stay at home and people look for the internet as a primary source of information, which provides a fertile ground for the spread of fake news.
  2. Employee monitoring exposes employers to legal risks: When work from home started the employer got uncomfortable as they have no idea and they were not able to monitor the work of the employee.
  3. End-to-End encryption legal battle will continue: The department of justice says by making a point that end-to-end encryption poses a significant challenge to public keys.
  4. Legal liability will lead to companies collecting less data: Most profitable businesses stores maximum data for understanding the target markets. Stronger data collection laws ensure the organization limits data collection.
  5. Privacy executives will report to the CEO: According to the Forbes report, 84% of the executives were targeted by cyberattacks in the past years. So, there is to be an increase in the awareness of the risk and potential liability.

Tensions Between Blockchain Technology and Data Privacy Requirements

Member of the laws when drafting recent data privacy laws and frameworks do not appear to have focused on blockchain technology and its unique features. Blockchain technology has peer-to-peer network architecture for centralized control-based data processing.

Data privacy issues and properly applying laws has increasingly contributed to the business for success:

  • Perspective on objectivity and they affect the applicability of various data protection and privacy laws
    • Assessing specific blockchain implementation details.
    • Potential to identify (someone or something) again methods and risks.
  • It creates an issue to identify data controllers and data processors in various blockchain implementations.
    • Control over the blockchain system.
    • Determine the purposes, of personal data processing.
  • In distributed blockchain networks there is the territorial implication.
    • A great deal of variety set of regulations can incur significant overhead costs.
    • Public-private key pairing for encryption brings them in many helpful scopes.
  • The potential restriction when cross-border data transfer takes place.
    • They require some centralized program to implement them.
    • Difficult to implement in public blockchain with undefined groups.
  • Applying criteria for processing personal data to the blockchain.
    • To store personal data in a way that is extremely difficult to remove making later processing.
    • Individuals can withdraw consent at any time without reason.

Potential Mitigation Step

Several risk management strategies can be developed when considering blockchain technology:

  • Use permissioned blockchain to support governance models:
    • Authorize selected number of approved participants.
    • Technical measures to reduce the amount of personal data that participants process.
    • Allocating data processing responsibly.
    • Responding to individual requests.
    • Deploying data processing agreement.
    • View differences between public and private blockchain implementation.
  • Limit personal data stored in the blockchain:
    • Avoid putting personal data on a blockchain.
    • The financial system does not involve a natural person.
    • Avoid payload for storing personal data on the blockchain.
    • Use one-time addresses to secure data in the blockchain.
    • Supply management chain to limit data on the blockchain.

Future of Blockchain Privacy Management

From the perspective of privacy compliance blockchain technology appear to be at least ambiguous. Processing data on a public blockchain may involve significant business risks.

Suggestion from technologist:

  • Managing and verifying consent.
  • Minimizing sharing of data between the data controller and data processor.
  • Providing individuals with clear notification.

Taking one step further, self-governing blockchain-enabled identity and data management solution to maintain data and privacy policy.

Comparison of blockchain Privacy Systems

The two primary types of blockchain are:

1. Public blockchain: like Bitcoin, anyone can download the software and become a network participant. Example- Ethereum. It is a fully decentralized network system. The best part about it is they make sure all the participants have equal rights. To maintain transparency everyone can see the ledger.

Features:

  • Open Environment: It is open for all only a good internet connection is required. One can transact in a safe environment. Not all public platforms offer mining features.
  • Anonymous Nature: Here real names are not used, due to this no one can trace who the other participant really is.
  • No Regulation: It does not have any regulation that nodes have to follow, there is no restriction on how the enterprise uses the platform.

Why use it:

  • True decentralization: It is totally decentralized and everyone has a copy of the ledger, this creates it distributed as well.
  • Full Transparency: Public blockchain companies tend to design platforms for anyone on the ledger.
  • Immutability: Once a block is getting on the chain there is no way to delete or change it.
  • Full User Empowerment: All the users are empowered as there is no authority to manage the transaction.
  • Private blockchain: It decides a certain set of authorized nodes who will participate in a given network, it is not open to the public at large. Only a single user has the authority over a network, it is not open for public people. It is not fully decentralized. In certain cases, companies need to give privacy greatly.

2. Private Blockchain: 

Features:

  • High Efficiency: Since it is accessed by a handful of users it does not take many resources and the platform does not slow down either.
  • Full Privacy: If an enterprise is looking for a high level of privacy then it is perfect for it.
  • Empowering Enterprises: Companies do need great technology to back up their process. It is highly capable of offering security.
  • Stability: There are not any transaction requests but it does not take time to complete them.

Why use it:

  • Low Fees: Since the transaction is not much, transaction fees are also low as fees depend on the number of requests.
  • Saves Money: Maintaining a private blockchain is easier rather than a public blockchain.
  • No Illegal Activity: Only verified individuals get entry into the system.
  • Regulations: Private Blockchain might be the right pick as you have to follow lots of rules and regulations.

Use Cases For Blockchain in Security

The following are some of the use cases of blockchain in security:

  • Securing edge devices with authentication: IT deals with data and connectivity and shifts with smart edge devices. Using blockchain to secure Industrial devices, as the technology strengthens authentication, the main goal is to provide a secure foundation for decentralized interaction and exchange.
  • Improved confidentiality and data integrity: Blockchain is created without specific access, some blockchains implement data to access control challenges. The full encryption of blockchain data helps critical challenges to secure data manipulation. Since data will not be accessible to unauthorized parties.
  • Secure private messaging: Blockchain secures private information through social media, With blockchain, one can secure, authenticate, communicate, and expect that this area will grow in the future.
  • Boosting or even replacing PKI: Public Key Infrastructure(PKI) is a method that secures email and messaging applications, websites. Publishing keys on blockchain eliminate the risk of false key propagations. With blockchain methods, one can sign the transaction using citizen-generated identities.
  • Safer DNS: Domain name system(DNS) the attacker was able to cut off the services access to other services, with the help of blockchain. It helps in removing the single, attackable target.

Challenges on Applying Blockchain Technology

The following are the challenges faced in applying blockchain technology:

  • System design: The level of involvement and number of roles in each level of the process is needed to be determined by the organization.
  • Technological Requirement: It requires a large storage system for backup transactions with greater computational power.
  • Adoption time frame and rate: It requires resources to implement and lacks awareness of the rate of adoption.
  • Training: Skilled professionals are required to design smart contracts and build data analytics skills.
  • Privacy concerns: Security protocols are required to secure data.

Legality of Blockchain and Privacy

As the companies begin to implement blockchain they tried to implement some contracts related to the use of blockchain. The governance parties will decide with certain conditions that are fulfilled for a particular transaction that is to occur in blockchain or not.

  • As blockchain technology is evolved it will become a more powerful way to go for the organization to use transactions on the blockchain. For a buyer, it is beneficial if the suppliers also agree to deal with the blockchain transaction.
  • For a decentralized platform, it is tricky to apply blockchain laws as the information is distributed around the world.
  • Although blockchain is considered highly secure it poses some regulation barriers to data privacy as the California Consumer Privacy Act of 2018 (“CCPA”) and the EU’s General Data Protection Regulation (“GDPR”).
  • Both GDPR and CCPA require that personal data is to be removed under any circumstances.

Cases of Privacy Failure

  • MtGox: It is the world’s largest bitcoin exchange located in Japan. This exchange suffers the largest hack of the time. The robbers attack the exchange and steal Millions of Bitcoin. This was the first major hack to occur in space.
  • DAO Hack: DAO has opened a funding window for the project. The system got hacked and Millions of Cryptocurrencies were lost from the ether fund.
  • Coinbase: It is also the largest cryptocurrencies exchange that allows the buy, sell, and storing of cryptocurrency. In the login process, telephone numbers and email addresses are hacked in the blockchain space.

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