Russia's Largest Bank is Worried About Blockchain's Dark Side

After a flight through the air, my driver's license bounces a few feet from our table, coming to a stop on the plush carpet of a Shanghai hotel.

Pavel Khodalev, the chief technology officer at Sberbank, smiles. Despite the language gap, the point seems to register. As consumers, we're free to lose our personal items in the physical world – or in my case, throw them across a hotel lobby – if we choose.

The two of us are in China for International Blockchain Week, and Khodalev has just finished highlighting how his employer, the largest bank in Russia, is exploring applications of the technology. But after six days of non-stop blockchain, our conversation becomes more philosophical, settling on the idea that while the tech is increasingly "open for business", some still see it as a cipher for societal concerns.

If Khodalev looks at blockchain as "inevitable", then he argues that so too are the complications its design could have for our societal contract. In this light, the ability to carelessly lose hold of a digital document, he argues, is a development that needs to be managed – and is one that raises questions as blockchain challenges deeply held concepts of financial custodianship.

Khodalev told CoinDesk:

"Our physical world has all these services that must appear in the virtual world. Peer-to-peer relationships are still relationships. I can take your wallet and I can run quickly, but police can stop me. This should appear in the digital world."

Concerned by my ID, which is still resting on the carpet near the passing feet of hotel guests, Khodalev seems to worry about the sort of change this virtual shift will bring. Perhaps more specifically, his concerns rest on how financial custodians will respond, or be expected to respond, to new kinds of behaviors.

He points to the responsibility that tying a digital asset to identity could bring for consumers, asserting that new safeguards will be needed should the use case proliferate.

"In the physical world, we’re managing these situations, but in the digital world no one knows how to manage this. The scary thing is you would not even know that your identity is stolen," he continues.

But while he uses the word “scary” often in our conversation, he seems excited by the promise as well, his statements highlighting how, while banks are increasingly keen to try to redesign bitcoin's technology, they are also having to come to terms with what it enables.

"Blockchain for me is not a revolution that will kill the world, it will break new ground for the world," he said.

The dark side

In many ways, the appearance of bitcoin and cryptocurrencies have caused a similar discomfort in Russia.

There, government officials have pushed for years to ban the technology, though these efforts now appear to be faltering as domestic banks and institutions become more vocal about blockchain.

Khodalev notes that, until recently, Sberbank had been rather silent about its work, despite the fact that it has played home to an internal lab of specialists focused on blockchain for two years.

"We do this internally at the bank, we have the corporate university, standard courses and we're describing this to everyone. There's a lot of buzz about this word, but people don’t really understand," he said.

Khodalev noted that Sberbank is also participating in efforts to launch a domestic blockchain consortium, spurred by the country’s central bank, and it’s here that the bank is trying to change and challenge misperceptions about the technology.

Yet, he said that to understand why Russian officials have been resistant, one has to consider how the country has seen (and overcome) periods of turbulent change, namely the transition to capitalism in the 1990s.

"It was a scary thing for the country. We got a huge pyramid scheme, MMM, as a result of what we called money surrogates. So, they made this phantom fear [bitcoin] could be the MMM. The government wants to defend against unpredictable stuff, and the first reaction for bitcoin was it should be legal impossibly to own," he said.

Now, he said, the conversation isn't so black and white. At the same time, concerns still linger about encouraging or condoning a non-governmental currency despite the benefits it could provide to consumers as well as those suffering from domestic economic issues.

"The switch to bitcoin is still under consideration, because it’s not only investment hype," he said. "There’s a dark side of that."

'Coopetition'

But, that's not to say that Khodalev doesn’t believe the switch to blockchain will be without complication.

For example, he noted that blockchain is in some ways forcing industry collaboration, despite the fact that economic actors generally resist disclosing information to their peers. (He noted that the idea that a master blockchain could serve as "one common data center" has emerged as a point of fear or discomfort from incumbents).

“Blockchain creates a requirement that everyone needs to be in one relation, not only banks, all other participants, the companies that give a car for rent. Why should this company share the information about its cars with other similar companies?” he asked.

In this way, Khodalev sees Sberbank's work with the government as something that could ultimately prove to be a driver of change that might not occur so organically if the industry was plotting its course independently.

Given concerns about the scalability and privacy of blockchain systems, Khodalev suggested that banks are unlikely to be forthcoming on standards due to competitive interests. Further, while startups have raised awareness of the technology, he struck an uncertain tone about the idea that any of these companies would be able to bring about serious incumbent change.

"The only way from my point of view to expedite this is to push it from the government level. Tell industry participants, this is the way it should be working," he said.

Work continues

Until then, Khodalev said Sberbank will continue to refine its strategy around blockchain through tests and special projects.

Notably, Khodalev said Sberbank is already experimenting with how banks could offer value-added services in a blockchain-enabled future that would see more transactions carried out via peer-to-peer interactions.

For example, Khodalev said that Sberbank has created a prototype based on the ethereum blockchain that explores how the power of attorney could be allocated to customer bank accounts.

"We prototyped a system that could bring a common backbone and allow a notary to use it, which is now restricted," he said.

Khodalev said that, while promising, regulatory work will likely impede the offering because digital power of attorney, he said, "does not exist" under domestic law. Elsewhere, he said the bank is working with the central bank to explore messaging via distributed ledger.

However, Khodalev is forward with that fact that he believes the technology will pose challenges for intermediaries, but that in this change, stakeholders should think broadly about why such systems exist in the first place.

In his eyes, the question that needs to be asked is not whether it's technologically possible to eliminate third-parties, it's whether we as a society will come to agree they can – and should – continue to provide a service as a safeguard for consumers.

He concluded:

"Blockchain, from my point of view, you don’t need intermediaries. We need to recreate these intermediaries or we need to ruin the world and see if it will realize [we do]."

Images via Pete Rizzo for CoinDesk; BestPhotoPlus / Shutterstock.com