Model Structure for Block Chain Technology and Cryptocurrency for the Financial Services Sector in Zimbabwe

Model Structure for Block Chain Technology and Cryptocurrency for the financial services sector in Zimbabwe

Professor Gabriel Kabanda

Secretary General

Zimbabwe Academy of Sciences, TREP Building, University of Zimbabwe Harare, ZIMBABWE

Abstract

The study was purposed to develop the model structure for blockchain technology and cryptocurrency, and determine the factors that influence the adoption of blockchain technology and cryptocurrency in Zimbabwe in order to make value-adding contributions to the cybersecurity risk management of the financial services sector. Cybersecurity is the collection of policies, techniques, technologies, and processes that work together to protect the confidentiality, integrity, and availability of computing resources, networks, software, programs, and data from attack. Cybersecurity threats have thus shifted from the cryptocurrency to attacking platforms using the cryptocurrency such as crypto exchanges. Essentially, there would be no bitcoin without Blockchain but Blockchain exists without bitcoin.The entire system works with a distributed ledger technology that operates on a decentralized pattern. The blockchain is distributed and highly available, exhibits irreversibility and immutability, and eliminates intermediaries in banking sector. For the blockchain to function fully, it requires components such as the Node, Transaction, Block as a data structure, Chain of the blocks, Miners to perform the block verification process, and Consensus (consensus protocol).

The Mixed Method methodology was used. The research utilized focus groups and document analysis to gather knowledge on the subject. A survey was conducted which included distribution of questionnaires and conducting interviews with heads of the banking sector. Findings suggest that, cryptocurrency which is based on blockchain technology is resistant to cybersecurity threats. The research also revealed that Zimbabwe has not yet legally adopted the use of cryptocurrency. We also concluded that cybersecurity systems in Zimbabwe are still under development and a lot of work has to done to ensure that the country is satisfactorily protected from cybersecurity threats. Since locally Bitcoin has been banned most of the traders have resorted to using South African accounts. Central Bank Digital Currency (CBDC) is another form of fiat money, similar to coin and banknote, which can be effectively exchanged for cash in denominations. The network layer is a bridge between the top regulators and ordinary users.The local distributed structure can utilize blockchain to solve the centralized load problem, enrich the financial organization structure, and expedite the payment delivery. Using block-chain technology, settlements can be increasingly optimized reducing the amount of time and money needed. They can allow auditors and government official’s access to the block-chain. Transparency greatly increases by using smart contracts and block-chain technology.

Key Words: Cybersecurity, Blockchain Technology, Cryptography, Cryptocurrency, Bitcoin, Cryptojacking.

1.0 Introduction

1.1. Background

Cybersecurity is the protection of internet-connected systems such as hardware, software, and data from cyber-threats (Kshetri, N., 2017). Cybersecurity is the collection of policies, techniques, technologies, and processes that work together to protect the confidentiality, integrity, and availability of computing resources, networks, software, programs, and data from attack (Berman, D.S. et al, 2019). Cybersecurity can also be defined as protecting systems, networks, and programs from digital attacks. Cybersecurity takes many different forms, which include phishing and social engineering, ransomware and internet of things suspectibilty. Of primary concern is cryptojacking and the susceptibility of internet of things to cyberattacks. Due to the rapid increase in the use of the internet and internet of things, there is need to ensure that all the transactions and information on the internet is secure. The global acceptance and usage of cyptocurrency, raises a lot of cybersecurity uncertainties. Bitcoin is the most common type of cryptocurrency and it has enjoyed overwhelming success since its launch in 2008. Cryptocurrency is being equated to gold hence in some circles it is known as “digital gold.” Zimbabwe like many other nations, slowly joined the whole world in using digital currency. The benefits of utilizing cybersecurity includes:

- Business protection against ransomware, malware, phishing, and social engineering.
- Protection for data and networks.
- Prevention of unauthorized users.
- Improves recovery time after a breach.
- Protection for end-users.
- Improvement of confidence in the product for both developers and customers.

Blockchain technology is the most important technological innovation in the banking sector. Zimbabwe has been battling with currency issues for over two decades. The situation reached its climax in 2008 when there was a total crush of the Zimbabwean Dollar. Since then, a number of currency regimes have been introduced to rescue our monetary situation, the most popular being the multi-currency regime. However, the regime could not last for a while because the exports became more expensive and thus less competitive on the market. Gradually, the market dried up of the most dominant currency of the regime (the US Dollar). Bonds notes were introduced also to cover the liquidity gap, but the Gresham’s law which states that bad money drives out good money came to play and worsened the situation. However de-dollarization has not been that easy since its inception in 2019. There has been gross money creation in the mobile money platforms like Eco-cash, Tele-cash and One-money. The resultant effects were a hyper-inflation, unstable interest rates and an unstable foreign exchange rate. This however has been temporarily dealt with when the Central Bank banned some other transactions through these mobile money platforms. The purpose of this paper is to develop a model for blockchain technology and cryptocurrency and ascertain how the framework addresses cyber risks and creates value.

Blockchain as a digital, immutable, distributed ledger that chronologically records transactions in near real time (Shan, J., 2018). Nyagumbo, S. (2019) defined blockchain technology as a "block" of information linked together in an immutable, digitally distributed ledger through a process known as method hashing (Nyagumbo, S., 2019). According to Schutzer, D. (2016), blockchain technology is capable of providing an adequate and strong cybersecurity solution and an excellent privacy protection. Blockchain is a datastructure and Distributed Ledger Technology (DLT), which uses decentralization and cryptographic hashing on the transparent and unalterable digital asset. Bailis and Song (2017) defines blockchain as a technology that provides a distributed ledger of transactions on a network that is scalable, secure, tamper-proof and accessible by each peer on the network. It is shared transactions, distributed over a network of members, made up of series of data blocks, each by itself contains a set of transactions. Cryptography is used to chain the blocks together and lock them to establish a public record of every transaction. The more blocks there are, the less the probability that blocks can be altered (Subramanian, R. and Chino, T., 2016). At this point, it is important to elaborate on the relationship between bitcoin and blockchain technology where, bitcoin is an electronic cryptocurrency that can be used to purchase goods and services based on incentivizing the participant miners, to validate the transactions and to render the network as stable as possible. Blockchain is the underlying technology that enables the Bitcoin network to operate in an open, autonomous, decentralized model where trust is enforced through cryptography and not over participants. Essentially, there would be no bitcoin without Blockchain but Blockchain exists without bitcoin (Tymoigne, 2015).

Fraud can be detected in real time in blockchain technology. Because the blockchain keeps records of each transaction, it allows banks to evaluate data for trends in real time. Blockchain and big data allow the security of banking transactions to be maximized. Kshetri, N. (2017) highlighted that the blockchain technology is a not a new introduction to the cyber world since its conceptualization in 1991 but recently gained popularity worldwide following the launch of bitcoin as the cyber currency on its platform. The blockchain technology is simply a melting pot whereby transactions are put in form of a puzzle. Users need to agree on a transaction; by making sure that each cryptographic harsh aligns.The entire system works with a distributed ledger technology that operates on a decentralized pattern.

Cryptocurrencies are a subset of digital currencies, which may either have decentralized institutions or are based on a decentralized network. Cryptocurrency derives its name from two things, crypto which refers to the technology and the base used to establish the currency which is cryptography and reference to the usage part which is the currency. Bryans (2014) defines a cryptocurrency as a digital token produced by cryptographic algorithms. The original cryptocurrency is bitcoin which was introduced in Japan by Satoshi Nakomoto (2008). It was launched as a decentralized electronic payment system, a peer to peer version of electronic cash without intermediaries, constructed with a cryptographic system that enables it to protect the information through a cipher, the encrypted unreadable format. The message can only be deciphered into plain text by the recipient who possess a secret key. Globally, Bitcoin is the most popular cryptocurrency as it represents 54% of the total market capitalization. In Zimbabwe, Bitmari is the most common type of bitcoin.

The history of blockchain technology is as highlighted in the diagram below on Figure 1 (Atlam, H. and Wills, G., 2018).

Figure 1: History of Blockchain Technology (Adopted from Atlam, H. and Wills, G. (2018))

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1.2 Statement of the Problem

Bitcoin is based on blockchain technology that is intended to promote a trust of mechanism in a peer-to-peer network based on the consensus of the majority of nodes. In order to verify a transaction in a cryptocurrency network, a proof of work is demanded from the node that verifies the transaction. The node has to do some heavy computations to prove that they are valid members of the network. Cryptocurrencies are digital currencies. The mere fact that the currency is decentralized and completely digitalized subjects it to the threat of cyberattacks. Cryptocurrency was developed on cyptography which has so far proved to be resistant to cyberattacks. Further, more types of cryptocurrencies are being developed, this subjects the whole world of cryptocurrencies to the risk of cyberattacks. With continuous development of cryptocurrencies and continuous development of cyberattacks, one wonders for how long cryptography will be able to withstand cyberattacks particularly in Zimbabwe where cybersecurity is still in its infancy stages.

The advent of IoT has brought about the need for a secure way of performing transactions on the internet without going thorough cumbersome processes. The use of the decentralised ledger with multistage cryptography provides a solution to the problem being faced by the Zimbabwean community at large.

1.3 Research Objectives

The objectives of the research are to:

a) Evaluate the performance of cryptocurrency and blockchain technology on a Zimbabwean cybersecurity system.
b) Ascertain the relationship between blockchain technology and cryptocurrency.
c) Assess the impact of blockchain technology and cryptocurrency on service delivery.
d) Determine the factors that influence the adoption of blockchain technology in Zimbabwe.

1.4 Research Questions

The research questions were to:

a. How do you rate the performance of blockchain technology and cryptocurrency on a Zimbabwean cybersecurity system?
b. What is the relationship between blockchain technology and cryptocurrency?
c. What is the impact of blockchain technology and cryptocurrency on service delivery?
d. Which factors influence the adoption of blockchain technology in Zimbabwe?

1.5 Significance of the Study

This research can be of considerable importance for companies in the banking sector as it alludes to the important aspects of emerging technology. The majority of banks are migrating to digital banking. This means they need to understand and understand how blockchain and big data analytics can help improve service delivery by banks.

Not only can banks benefit from this, regulators and law enforcement agencies can also use these technologies to enforce regulatory compliance by banking institutions because information can be securely accessed at the push of a button.

2.0 Review of the Literature

Trends in Blockchain and Cryptocurrency

The main issues on the adoption of cryptocurrencies centres on an early track record of liquidity, high volatility and potentially nebulous uses, Harvey, C. (2015). The most difficult part has been the classification of cryptocurrencies as whether they are digital or virtual currencies and how their value should be determined. There has been an increase in virtual currencies globally. These include Facebook credits, Microsoft Pints and Amazon Coins. Harvey, C. (2015) elaborated that, unlike Bitcoins these currencies are issued by blue chip companies and are not linked to any claims on real assets. For instance if a large company launches a currency to compete with traditional currencies, network effects could ensure that the currency is taken-up quite quickly by members of the network. Wagner, A. (2014) postulates that the value and distribution of virtual currencies are typically controlled by a centralized authority, which in most cases is the issuing authority and they are used specifically to process online transactions.

Another significant argument has been the issue of whether cryptocurrency should be considered to be digital currency or digital assets. Given the background already explored, one would expect to view the token as a currency but Glaser, F. et al. (2014) argues that users of cryptocurrency are not interested in an alternate transaction system but seek to participate in an alternative investment vehicle. In America, the US Inland Revenue Services recognizes cryptocurrency as a virtual currency and therefore it should be considered to be an asset (Drawbaugh, K., and Temple-West, P., 2014). Other early adopters such as Norway, Sweden and Canada also recognize cryptocurrency as an asset. Germany which is also an early adopter accepts that cryptocurrency is a unit of account to be used for trading and taxation purposes within the country in the form of “private money” (Clinch, M., 2013). There has been no global unanimity on the recognition of cryptocurrency but distinctions have been made on a jurisdiction bases basing on the capacity to monitor and regulate it.

Virtual currencies are associated with five potential risks which are of interest to central banks and these are price stability, financial stability, payment system stability, lack of regulation and reputation (ECB, 2012). Virtual currencies could make the goal of price stability somewhat difficult if they are not primarily controlled by the central banks through fiscal and monetary policy. The reduced control over money supply can also impact on financial stability through the central bank’s ability to intervene in the foreign exchange rate market. However, speculation with respect to the virtual currency may occur due to the history of cyberattacks. The value of virtual currencies depends largely on whether or not a second party is willing to accept the unit as a means of final payment, hence there is no guarantee of payment (ECB, 2012). There is no clear definition of the rights and obligations of each party, since there is no legal basis for virtual currencies.

The Bitcoin network of nodes is not maintained by a single entity in a single country but there are more than 7,000 reachable nodes spread over 100 countries. Bitcoin’s biggest innovations are the absence of central entity or authority, which minimizes single point of failure, and distributed ledger which provides immutability to reduce fraud and hacking (Mims, C., 2018). The system is essentially “trustless”. Users can trust the system of the public ledger stored worldwide on many different decentralized nodes as opposed to having to establish and maintain trust with third party intermediary. The blockchain technology as an electronic wallet provides pseudo anonymity as it is created from the user’s private and public key which do not not require personally identifiable information to be encoded in a transaction. Bitcoin exchanges and electronic wallets have been hacked many times but not the underlying blockchain. It is virtually possible to hack the underlying blockchain but that would require tremendous computing resources such no individual has or a government entity might possess (Fahad, S., 2018). Ownership of Bitcoins can be transferred, over peer-to-peer network and they can be purchased, sold, and exchanged for other currencies at Bitcoin exchanges such as Coinbase and Kraken. In 2013 there was an increase in the transactions that were being processed over Silk Road with Bitcoin being the preferred currency. Silk Road was a platform for anonymously buying and selling illegal drugs and guns and the Federal Bureau of Investigations in the United States of America ended closing Silk Road (Wikipedia, 2018). In global news Bitcoin had already made headlines because it was being associated with the dark market. Bitcoin has continued to grow in popularity with its lower transaction costs and absence of third party institutions, despite the bad publicity, especially in international money transfer, small businesses and among the unbanked population. Investors are also speculating on Bitcoins by holding them with hopes that their intrinsic value will increase (Joon, I., 2018).

Cryptojacking is the unauthorized use of a device’s resources to mine cryptocurrencies (European Union Agency for Cybersecurity, 2020). In simple terms it is the theft of a company’s computing power. Targets includes any connected device, such as computers and mobile phones. Cryptojacking is one of the greatest, consistent and renewable persistent threats in the cryptocurrency and blockchain technology era. Recent trends in cyberattacks has shifted as more malware code writers are improving on their malware to include cryptojacking and crytomining capability to their methodologies. The new generation of malware is using cryptojacking code to hunt for digital crypto wallet addresses and target specific machines/devices and crypto victims. Chiu, J., et al (2017) argues that cryptojacking has become a profitable business since the threat and sophistication of malware based mining has increased and that clearly shows that the interest has shifted into mining cryptocurrency. The developers and designers of new cryptocurrency have identified the possibility of utilizing Application Specific Intergrated Circuit (ASIC), to mine. Measures have also been taken to make sure that mining can be done on a personal computer, rather than detected machines, therefore the new generation of cryptocurrency is ASAIC resistance, therefore subsequent miners of such crypto will have to do it on a regular PC, which has unintentionally allowed the spread of malicious mining malware and now all standard PC around the globe has become a target for crypto jacking and malware mining.

Blockchain technology is normally used with cryptocurrencies such as Bitcoin. It is a database of records of transactions that is distributed and validated and managed by a computer network around the world. Instead of a single central authority like a bank, the records are overseen by a large community and no single person is in control and no one can go back and change or delete a transaction history (Manyenyere, J., 2020) . Blockchain technology is considered one of the most dynamic technologies in the financial market and enables the creation of decentralized currencies. Execution of digital contracts and intelligent assets that can be controlled via the Internet. Recent research on blockchain has mainly focused on financial transactions and distributed ledger systems. The blockchain technology uses the shared data infrastructure which updates is in real time and transactions can be processed in seconds with sophisticated calculations.

The advantages of using blockchain technology in the banking sector are as follows (Jani, S., 2018):

- Near real-time: Blockchain enables the real-time processing of recorded transactions, the elimination of friction losses and the reduction of risks.
- No intermediary: With the decentralization of the blockchain, anyone around the world can send transactions to peers without a third party. Blockchain technology is based on cryptographic proof rather than trust, so that two parties can do business directly with one another without the need for a trusted third party.
- Distributed Ledger: The distributed peer-to-peer network records a public transaction history. The blockchain is distributed and highly available. The blockchain usually does not preserve the identity of the parties or the transaction data, only proof of the existence of the transaction.
- Irreversibility and Immutability: The blockchain contains a specific and verifiable record of every single transaction ever made. This prevents previous blocks from being changed and, in turn, prevents duplicate spending, fraud, abuse and tampering with transactions.
- Smart contracts: The loans, leasing contracts, contracts of the entire banking industry can be integrated into smart contracts, which paves the way for conflict-free transactions. Stored procedures executed on a Blockchain to process predefined business steps and execute a legally enforceable / business transaction without the involvement of an intermediary.

Blockchain technology and the banking sector in Zimbabwe

Blockchain technology in Zimbabwe is still in its infancy stages, and adoption of this type of technology has been slow with some banks like Steward Bank adopting it. Zimbabwe's banking industry today faces issues such as rising operating costs, increasing susceptibility to fraudulent attacks on centralized servers, and challenges in ensuring transparency. All of this, primarily because most of Bank transactions, from customer account opening to globalization payments can require an intensive manual processing and documentation involve costly and time-consuming intermediaries, as these transactions must be validated by multiple participants at various times, which causes the delay, resulting in a near lack of real-time, fraud-proof solution (Manyenyere, J., 2020).

Banks are continually exploring new ways to transact faster for better customer service, while ensuring cost efficiency in their operations and ensuring transparency for customers and regulators. For this, Blockchain potentially provides a solution for banks as inherently, it helps to eliminate intermediaries, maintains an immutable record of transactions and also facilitates the execution of transactions in real time. This could potentially reduce the costs of manual labour and lead to better service and customer satisfaction (Jani, S., 2018). Sharma, A.(2019) postulates that blockchain enables banking institutions to detect attempted fraud in real time. Because the blockchain contains records for every transaction, banks can examine data looking for patterns in real time.

Conceptual Framework

Tschorsch, F., and Scheuermann, B. (2016) postulate that blockchain technology cryptographically captures and stores a consistent, immutable, linear event log of transactions between networked actors in a fully distributed system. This distributed ledger technology is physically stored, updated, and validated by the parties involved in all the transactions within a network. In such a blockchain technology network, transparency is enforced and system-wide consensus on the validity of the transaction is guaranteed (Tschorsch, F., and Scheuermann,B., 2016). The current blockchain technology processes monetary transactions and ensures compliance of the transaction with programmable rules in the form of “smart contracts” all without a third party even with little trust among the parties. Beck, R., and Müller-Bloch, C. (2017) echoed that implementations differ regarding their mechanisms to enforce consensus, the power of included programming languages, their capabilities to define who can participate in a network, and the type of cryptocurrency they include.

The key features and uses of Blockchain are as follows:

A. Immutability

Immuta be changed or altered. Blockchain technology is a a permanent, unalterable network. Schutzer, D. (2016) argued that Blockchain technology works slightly different than the typical banking system. The blockchain does not depend on centralized authorities but uses a collection of nodes where each node on the system has a copy of the digital ledger and checks the validity of each transaction. The transaction is only added to the ledger if the majority agrees that it is valid. This promotes transparency and makes it corruption-proof. So, without the consent from most nodes, no one can add any transaction blocks to the ledger (Schutzer, D., 2016). Another fact, which backs up the list of key blockchain features is that, once the transaction blocks get added on the ledger, no one can just go back and change it. Thus, any user on the network will not be able to edit, delete or update it.

B. Decentralized

The network is decentralized, meaning it does not have any governing authority or a single person looking after the framework.The network is decentralized as a group of nodes maintains the network. Blockchain enables the users to store anything starting from cryptocurrencies, important documents, contracts, or other valuable digital assets.

B. Enhanced Security

In addition to decentralization, another layer of protection for users is provided by cryptography. Cryptography acts as a firewall for attacks besides being a complex mathematical algorithm. Kshetri, N. (2017) posit that every information on the blockchain is hashed cryptographically. In this way, the true nature of the data is hidden. A mathematical algorithm produces a different kind of value for each input data whilst maintaining a fixed length. Kshetri, N. (2017) further explained that you could think of it as a unique identification for every data. A unique hash is generated for each of the blocks in the ledger and each block contains the hash of the previous block. Hence, changing or trying to tamper with the data will mean changing all the hash IDs. Blockchain Security provides premium protection for enterprises (Kshetri, N., 2017). Hashing is quite complex, and it is impossible to alter or reverse it. No one can take a public key and produce a private key. The system does not tolerate slight changes as a single change in the input could lead to a completely different ID (https://101blockchains.com). Corruption of the network can only be achieved by altering every data stored on every node in the network. Its costly and not possible to access and hack millions of computers (https://101blockchains.com).

C. Distributed Ledgers

A public ledger usually provides every information about a transaction and the participant. There is transparency on the contents of the ledger as the ledger on the network is maintained by all other users on the system. This is the reason it is considered one of the blockchain essential features.

D. Consensus

According to Kshetri, N. (2017) every blockchain thrives because of the consensus algorithms. Every blockchain makes use of a consensus to help the network make decisions as a group of nodes active on the network as they agree quickly and faster on a matter. In a consenus, the majority wins and the minority must then support it, hence the network is thrustless. Consequently, every decision on the network is a winning scenario for the blockchain, which provides a high degree of fairness on the web (https://101blockchains.com).

Blockchain Architecture

Like conventional public ledger, a blockchain is a sequence of blocks which holds a complete list of transaction records and Figure 2 illustrates an example of a blockchain with the previous block hash contained in the block header. The genesis block is the founding block in a blockchain which has no parent block.

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Figure 2 An example of Blockchain which consists of a continuous sequence (Hameed, B.I., 2020)

Block body

The block body consists of a transaction counter and transactions. The block size and size of each transaction determines the maximum number of transactions that a block can contain (Hameed, B. I.,2020). The figure below illustrates the block structure showing the header and body.

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Figure 3 Block structure (Hameed, B. I., 2020)

How the Blockchain works

To add a block into the blockchain, the following criteria should be fulfilled first:

a) A transaction must be made as agreement between the users in order to initiate the addition of a new block into the block chain.
b) The transaction that is made must be verified and this verification is done by a computer network that comprise millions of computers (nodes) across the globe. This network validates the transaction details.
c) The transaction is to be stored in a block. Upon verification of the transaction and accuracy confirmed, the information is stored in the block with its unique hash. This block is then stored in the blockchain along with thousands of other blocks.
d) The last steps include the assignment of Hash. As soon as the block chain is hashed, it can be added in the blockchain.

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