February 4th, the IRS reported that its systems were experiencing a hardware failure that was halting tax-processing systems. Their systems are technologically obsolete since their centralized architecture offers inferior security and a single point of failure compared to Bitcoin’s decentralized nature.
The IRS & Banking Technologies are Obsolete
After experiencing some downtime, the IRS announced that the computer systems were operational again. The IRS status update included the following explanation: “It’s important to note that at this time this situation appears to be a hardware failure.”
The IRS computer networks seem to break down often. In fact, the IRS information systems were included in the infamous list of the Top 15 Worst Computer Software Blunders, in July 2013. According to the article, “These top 15 worst computer software blunders led to embarrassment, massive financial losses, and even death.”
The latest IRS computers failure could cause tax returns to be delayed. However, “At this time, the IRS does not anticipate major refund disruptions,” the IRS reassures taxpayers. “We continue to expect that 9 out of 10 taxpayers will receive their refunds within 21 days.”
This is not the first time that taxpayers waiting for their refunds are affected by the IRS’ poor technology infrastructure. In February 2012, a glitch also affected the tool Where Is My Refund? In response, the IRS announced: “This is a temporary situation, and we expect to resolve the matter in a few days. At that time, taxpayers will be able to get an expected refund date when they visit Where’s My Refund.”
Interestingly, these computer glitches disrupted only the system that is related to the processing of tax returns. But that is not all. In July 2006, another IRS computer network failure cost taxpayers millions of dollars, “because a computer program that screens tax returns for fraudulent refunds wasn’t operating,” reported Chron.com.
Similarly, banks and other financial institutions are also prone to network failures, putting at risk millions of dollars. Financial institutions’ critical data can sometimes also be inaccurate. For instance, in August 2015, many financial institutions were unable to calculate the NAV (net asset values), because of a computer glitch of the Bank of New York Mellon’s network. In a centralized, trusted network topology, affected financial institutions were using the Bank of New York Mellon systems to calculate the NAV, CNBC reported.
“The resulting confusion could take many days to clear up, said people at several of the companies affected, and it was unclear whether investors may have ended up buying or selling funds at inaccurate prices during the high-volume trading of the past few days.],” the report added.
Across the Atlantic, the situation is no better. Due to a series of system failures, the UK Parliament’s Treasury Committee has had to urge banks to invest in information technology resources to prevent failures. In effect, “Britain’s retail banks have been hit by a number of technology failures in recent years, causing inconvenience to hundreds of thousands of customers and prompting lawmakers to call for more investment in financial technology,” reported the New York Times.
Moreover, because bank systems rely on “trusted” authorities, the risk of fraud is greater. Specifically, managers and bank tellers who are trusted with instant access to clients’ personal data and cash have become a concern. According to the New York Times, prosecutors, government officials, and security experts advise clients to worry more about the “rogue teller” behind the window than about sophisticated hackers.
Banking on Bitcoin & Its Blockchain Tech
What can we learn from these various IT system failures and security risks? It is important to develop and maintain decentralized peer-to-peer networks, in which the data is shared and validated by all the nodes participating in the network.
Unfortunately, today’s financial institutions’ networks operate within a centralized, veiled, undistributed, permissioned, and trusted paradigm.
In the decentralized and trustless Bitcoin world, miners, about every ten minutes, collect pending transactions and after verifying their correctness, they add the transaction data into a block. Miners then append this block to the blockchain. The blockchain is a permissionless (i.e. anyone can participate), distributed database. It is a digital ledger, which continuously records and stores all the Bitcoin transactions that have ever occurred since the first block was created (the genesis block). Without a central authority, miners are economically incentivized by a reward in bitcoins to ensure the validity of each transaction.
Thus, to maintain a network that is transparent, secure, and immune to a single point of failure, financial institutions should consider using Bitcoin and its blockchain technology. Indeed, Bitcoin and its blockchain have the key attributes needed to provide financial institutions with a robust, secure, transparent, and with no single point of failure network.
Bank consortiums and others financial institutions are becoming increasingly attracted to Bitcoin’s blockchain technology. Several projects are currently underway to study and introduce blockchain technology.
For example, the R3 CEV Consortium, which comprises over 50 financial institutions, including top banks, like Bank of America, J.P. Morgan, and Commerzbank, is undertaking one of the biggest efforts in this regard. However, in this instance, the R3 blockchain scheme does not include Bitcoin. Therefore, by having a Blockchain without Bitcoin, the R3 blockchain will exclude the security and data reliability provided by Bitcoin miners, as well as other critical attributes like decentralization, security, and transparency.
What are your thoughts on the technological vulnerabilities of the IRS and financial institutions? Let us know in the comments below!
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