Blockchain Credit Security
In the last 30 years, FICO scores were considered a reliable solution to measure creditworthiness and attach a risk score to each applicant. As the sub-prime mortgage crisis of 2008 proved it, this system was neither accurate or dependable, but it was the best option to date, and it continued to be used, despite numerous warning signs from the financial system.
Half of the US population has a credit score under 650, which makes them unqualifiable for a decent loan provided by a reputable financial institution, leaving them as fair game for predatory lenders. If you are unsure about your current situation, the first step is to document yourself thoroughly by accessing leading resources such as www.aaacreditguide.com. All that could change if the Fintech solutions were adopted as the new standard at the governmental level.
The Equifax breach
An important wakeup call was given by hackers who managed to steal over 143 million records containing sensitive personal information from Equifax. The credit bureau is one of the three institutions responsible for computing the risks for each account they hold and has been doing so without explicit consent from the population.
This unfortunate event should be the trigger of a significant paradigm shift. Until now, credit bureaus have capitalized on information by creating centralized repositories, maintained in a secretive way. The citizens could not verify their data unless they followed a long process and errors occurred frequently. Even more, in the case of a honeypot attack, which for this data architecture is only a matter of time, the losses and image prejudices are enormous.
The blockchain solution
The modern solution to this problem could be adapting the blockchain algorithm to create a decentralized, peer-to-peer network based on cryptographic protocols instead of clumsy paperwork. The first application of the blockchain technology, the Bitcoin has already become mainstream, proving the validity. Right now, the uses in finance, insurance and even oil and gas show its disruptive power.
Reputation & credibility
The underlying protocol of the blockchain removes the central authority in charge of maintaining the database with subscribers and the associated transactions. Instead, a publicly distributed ledger is created. At a designated interval, a new block with verified information is added at the end and sealed to the previous. The reputation of each participant can be verified by any other member, not just the central authority and traced back to their entry date.
This opens up new perspectives for companies to let go of the FICO score and take into consideration new ways of measuring risk and creditworthiness. Also, it makes it easier to gain and verify trust between peers. This could lead to the emergence of new lending actors, besides traditional credit companies.
Through its construction, the blockchain technology allows verification without having data in plain text, but by running it through a computational algorithm. This brings a new level of security to transactions and ensures that even in the event of theft, the data would be useless to the perpetrators. If Equifax had this technology, all the credit scores could have been computed, but even if the information were made public, it would be useful without the client’s key and consent.
Owning your digital identity
The most important issue is not only related to our credit score but our sovereignty and identity. Currently, proof of our identity and all the following rights are not under our control, but that of a trusted central authority. If those files are compromised, there are few ways of getting back what is rightfully ours. The blockchain solves this problem by distributing the logs between network nodes, in such a manner that even if a part of the nodes is compromised, the information lives on and can be re-established quickly.
By Jess Holmes