Blockchain, a system first adopted in the financial world that allows cryptocurrencies like Bitcoin to operate, is taking the healthcare industry by storm (in a good way). Many believe it could be the answer to numerous security challenges that have plagued the healthcare industry in the past few years.

As blockchain continues to grow in popularity, both in the financial and healthcare industries, our team at LBMC Information Security is committed to staying on top of this emerging technology solution and providing our clients with relevant information about blockchain and the difference it could make in the cybersecurity industry, and for healthcare in particular. Let’s address some of the most common questions we’ve received regarding blockchain and its impact on the healthcare industry.

What is a Cryptocurrency?

Regulators of all stripes have looked at blockchain technology – and the cryptocurrencies that have proliferated in recent years – and come to their own conclusions about whether and/or how to regulate the industry. Here is a rundown of the current state of play:

  • Securities and Exchange Commission – Cryptocurrencies issued via Initial Coin Offering (ICO) or Initial Token Offering (ITO) are securities.
  • Commodity Futures Trading Commission – Cryptocurrencies are commodities.
  • Department of Treasury – Cryptocurrencies are currencies and ICOs are subject to FinCEN money transmitter rules and reporting.
  • Internal Revenue Service – Cryptocurrencies are property and their sale is taxable.

In short, four separate regulators think they have dominion over cryptocurrencies in some way.

What is blockchain?

Blockchain technology has been around for almost 10 years. From the launch of Bitcoin – the first blockchain application – in 2009, a lot has changed in the regulatory landscape. Companies operating in this space have begun to rethink and reshape their funding model in response to regulatory pressures. To say there is regulatory uncertainty in this area is an understatement.

At its core, blockchain is a distributed system for recording and storing transaction records. More specifically, blockchain is a shared, unchangeable record of peer-to-peer transactions built from linked transaction blocks and stored in a digital ledger.

Blockchain users can only update the “block” (transaction record) to which they have access.  Once a user submits an update request, the participating parties run algorithms to evaluate the proposed record update, and, once approved, those updates get replicated across the network, so that all other parties are aware of the transaction update that was just made. In this way, interactions with the blockchain are known to all participants and require verification by the network before information is added or replicated. All entries are time and date stamped, which provides a detailed audit trail of all interactions. The data is encrypted, unchangeable, and is up-to-date on all participants’ systems.

How could blockchain revolutionize the healthcare industry?

Because records are spread across a network of replicated databases, blockchain provides a new degree of potential security benefits for the massive amounts of data healthcare organizations are responsible for managing.

While blockchain provides the healthcare industry with a variety of opportunities for enhanced medical research and simplified financial management, here are a few specific ways it may be leveraged for improved data management and security:

  • Enhanced Data Interoperability and Security — In the absence of a national patient identifier, blockchain could be a great mechanism for keeping individuals and their records together. Because Blockchain validates and stores data in patterns that can’t be modified, it has potential to be a key component of the infrastructure that is needed to keep health data up-to-date, private and secure while facilitating the ability to share information with appropriate parties (as in a health information exchange) and further enable the benefits of connected medical devices. This new level of interoperability could help providers eliminate some IT challenges associated with providing exceptional patient care across the healthcare ecosystem in a cost-effective manner.
  • Fraud Prevention — Blockchain-based systems could help minimize Medicare Fraud, which suffered more than $30 million in losses due to fraud in 2016. For example, proactive monitoring of the patterns that cybercriminals use could inform fraud detection systems that rely on machine learning to continually improve their sensitivity.

Income Taxes Matter - Rethinking the Structure of the ICO Model

Blockchain companies have often relied on the issuance of tokens or coins to raise money. Essentially, the ICO/ITO model is crowdfunding for blockchain start-ups. Companies took great pains to structure their offerings, with the help of their legal counsel, to ensure that SEC regulations did not apply. This was typically done by designing the token or coin to have utility on the network rather than having features of a regulated security.

However, companies are increasingly thinking about leaning into SEC regulations and structuring the offerings as registered securities. The tokens or coins can be offered in private placements to accredited investors and registered with the SEC. The acceptance of SEC oversight during the ICO process can help alleviate uncertainty down the road.

The IRS treats cryptocurrency as property and the sale of tokens or coins is subject to federal income tax. For companies issuing utility tokens, this presents a host of challenges for early-stage blockchain start-ups as a substantial portion of the money raised via ICO is earmarked for taxes.

For companies issuing securities via the blockchain, special attention must be paid to the structure of the offering. There is potential for a worst-of-both-worlds outcome where an offering is subject to SEC regulations while also being subject to income tax according to the IRS.

Under either model, it is essential to have your tax advisor involved from the beginning of the ICO process to help reduce and plan for the potential tax burden.

Learn more about our ICO/ITO Advisory Services.

What are the challenges of blockchain technology?

Although blockchain technology could be a catalyst of change in the healthcare industry, there are a couple of challenges to keep in mind:

  • Transitioning from Current Systems. One of the main obstacles to implementing blockchain technology to manage patient data is the fact that data is already being managed by current systems. Blockchain technology would require a complete change, going from centralized, highly-entity-controlled systems to distributed, open, and, potentially worldwide systems.
  • Lack of Buy-in from Doctors and Nurses. Transitioning to any new system (regardless of whether blockchain is involved) requires buy-in from the stakeholders. However, a doctor’s first response to a new product is often very cautious. For good reason, providers are hesitant to make any changes that could have a negative impact on the efficiency or effectiveness of patient care. Educating stakeholders on the benefits of the new system and the blockchain capabilities (beyond the obvious security enhancements) will be key to getting their buy-in when the time comes.

Blockchain is fast becoming a familiar word in business vernacular. It will be interesting to watch as companies collaborate to develop blockchain-based systems and jockey to position them within the healthcare industry as potential solutions. Savvy leaders will keep a close eye on this technology and its impact on the IT world, and they should seek to stay on “top” of the chain.

As the leader in healthcare IT security, LBMC Information Security is attuned to the security and compliance issues of entities throughout the healthcare ecosystem. If you want to know more about blockchain technology, and the potential benefits it could provide your organization, connect with our team today.