Security, accounting, and product identity on the blockchain

Craig Wright Bitcoin Masterclass (London) – May: Day 1 Session 4

Dr Craig S. Wright, Chief Scientist at nChain, held another edition of his Masterclass series at an exclusive venue in London in May 2023.

The Masterclass course forms part of a monthly series aimed at helping attendees understand the fundamentals of Bitcoin and the technology behind it. The series will give you a comprehensive overview of Bitcoin’s history, theory and design. Wright discusses the future of Bitcoin and the unbounded scalability of nChain’s blockchain solutions, with potential use cases across several industries.

In the final session of Day 1 of the Bitcoin Masterclass in May, Wright and the participants discussed enhancing security in deterministic key systems and balancing privacy and transparency in financial transactions. In a brainstorming session, the participants discuss blockchain applications for accounting and explore the use of keys for product identity and security.

Enhancing security in deterministic key systems

Wright starts the first workshop by discussing the concept of enhancing security in deterministic key systems. He mentions various ways to achieve this, including using PBE (Password-Based Encryption) and exchanging keys A and B using a public key XOR operation. The discussion touches on the length of resulting secret X or transaction IDs.

Wright and a participant in the workshop discuss how the bits combine and the resulting key can still be used for verification. They mention that individuals A and B would know at least two of these keys, and this knowledge could be used to prove ownership of a particular address.

The conversation delves into the idea of constructing a zero-knowledge proof for certain key-related calculations, which could be useful for audits. He mentions potential applications in financial transactions and tax-related matters.

Balancing privacy and transparency

In the following section of the workshop, Wright discusses the balance between privacy and transparency in financial transactions, the potential applications of blockchain technology in accounting, and how cryptographic techniques can be used to enhance security and interconnect different systems.

Privacy considerations: Wright highlights that privacy is essential, but it only becomes a significant concern when dealing with larger amounts of money. He uses the example of going to a restaurant and how Know Your Customer (KYC) requirements are not necessary for small transactions. However, even in a restaurant some KYC checks can be put in place for large amounts of money.

Checks for large transactions: For significant purchases like buying a car, he mentions that there are various checks involved. These checks ensure that transactions are legitimate and transparent. These checks can be integrated into blockchain-based systems.

Interlinking key systems: Wright suggests that even if different entities use different key systems (e.g., A1 and K1), it’s possible to link them using complex cryptographic techniques, including zero-knowledge proofs. This linkage can enhance security and interoperability.

Address templates: Wright discusses the idea of using address templates to enhance privacy. He mentions a method of creating payment addresses with blank areas for invoice numbers, allowing for payments to be made before the invoice is finalised. However, he acknowledges that this method may not be highly secure on its own.

Accounting on the blockchain: Wright shifts the discussion to accounting on the blockchain, highlighting the potential benefits of recording purchase orders, invoices, backorders, bills of exchange, etc., on a blockchain. He emphasises the advantages of having a transparent and immutable ledger for tracking financial transactions and reducing errors.

Automation and validation: He suggests that blockchain-based systems can automate various accounting processes, such as generating accounting records based on purchase orders. This automation can reduce the chances of human errors and ensure data accuracy.

Garbage in, garbage out: Wright points out that one of the significant challenges in accounting is the risk of “garbage in, garbage out,” where incorrect data can lead to inaccurate financial records. Blockchain technology can help mitigate this risk by providing a tamper-proof and auditable ledger

Brainstorm session: Linking accounting applications to blockchain

Dr. Wright then encourages the participants to brainstorm ideas for linking accounting applications with blockchain technology. He suggests the potential for watermarking invoices, creating invoices, and enabling others to pay them, even exploring the concept of saleable debt.

Sales tax at source: One participant proposes the concept of sales tax at the source, which would not only provide immediate funds to the treasury but also streamline administrative processes for companies and tax authorities. This approach involves location-based taxation to prevent companies from evading taxes by choosing locations with lower tax rates.

Blockchain for audit and accounting: Participants discuss the use of blockchain technology to reduce audit fees in the auditing market. They emphasise how blockchain can provide a high-quality auditing report by recording transactions and invoices on the blockchain, making it easier for regulators and auditors to access trustworthy data.

Factoring and receivables: The discussion touches upon factoring, a financial practice where companies sell their receivables to third parties for cash flow purposes. They explore how blockchain can provide transparency and immutability in recording and verifying factoring agreements, potentially reducing the need for costly intermediaries.

Triple-entry accounting: Participants discuss the implementation of triple-entry accounting on the blockchain. In this approach, every ledger entry has a corresponding entry on the blockchain, creating a transparent and tamper-proof accounting system.

Automated tax reporting: The concept of automated tax reporting is mentioned as an add-on to triple-entry accounting. This automation can simplify tax reporting and compliance, especially for small businesses.

Catch-all wallets: The idea of catch-all wallets is proposed to identify and aggregate all transactions related to a specific entity, regardless of the number of wallets they control. This could streamline financial tracking.

Selling future VAT returns: Participants discuss the possibility of selling future VAT returns on the blockchain. Businesses with liquidity problems could receive immediate funds based on their expected VAT returns, providing a financial lifeline.

Fraud prevention: The discussion emphasises the potential to use blockchain to prevent fraud and ensure the availability of all assets and goods data for auditing purposes.

Product identity and security

In the following workshop segment, Wright discusses the use of keys for product identity and related topics. Companies can use these keys to control and manage product-specific information, such as profit figures and related data, or to resolve disputes or to manage the inventory.

He introduces the idea of assigning unique keys to products, emphasising that there can be numerous keys for different products. The privacy level of these keys can vary, from private to semi-private, or shared within specific groups.

Wright addresses the scenario of someone trying to fake a product using hashing equipment and emphasises the importance of economic security. He mentions the integration of Merkle tree structures and templates for validating Electronic Data Interchange (EDI) data and suggests ways to make it complex to prevent unauthorised copying.

The discussion concludes with the idea of validating data on the blockchain and companies registering products with hash values for version control.