Blockchain technology has the ability to revolutionize the finance industry. There are many potential benefits: simplified, less redundant record keeping; increased speed and efficiency of transactions; enhanced security via no single point of attack or failure; and a reduction of risks stemming from discrepancies in records held by different parties. Specifically regarding mitigating record discrepancies, blockchain offers a solution, as well as a potential roadblock.
The transparency of a public database, like blockchain’s distributed ledger, may actually stand in the way of adoption by many finance companies. Transparency can be an issue because transactions will no longer be secret. This is a problem when dealing with propriety data, or information that could affect stock markets. Digital Asset Holdings, a blockchain technology company that provides settlement and ledger services for financial assets, thinks it has a solution. Its new blockchain platform, the Digital Asset Platform, would enable confidential transactions that only trusted parties could decipher.
Digital Asset describes its goals on its website, saying:
“Digital Asset is designing constructive solutions that materially improve the existing financial infrastructure. In many cases, this means partnering with industry leaders and incumbent service providers to upgrade rather than displace the existing services they provide.”
The Digital Asset Platform would allow finance firms to utilize blockchain technology without airing out their metaphorical dirty laundry. How does the platform achieve this? By dividing its distributed ledger of transactions into two components. One component stores confidential transaction data, and the other stores an entity’s public “fingerprint.” The system works by allowing everyone on the network to see everyone else’s “fingerprint,” but only trusted parties can access a specific fingerprint’s transactions. Blythe Masters, a former JPMorgan Chase & Co. banker who now runs Digital Asset, said:
“Our view is that sensitive, contractual, market-moving, private data should be kept private. Let’s think about what regulators and regulated financial institutions care about. First of all, it’s privacy.”
What Digital Asset has created is its own version of a permissioned distributed database, basically a semi-private blockchain. It is already using the platform to build technology that should be ready for use by the end of 2017. The company is working on projects for ASX, the Australian stock exchange, and Depository Trust and Clearing Corporation, a U.S. post-trade services provider.
Confidentiality is an ever-present issue in the Fintech field. Research firm Greenwich Associates polled over 130 executives working on blockchain in capital markets, and found that transaction confidentiality was a top security concern with 56% of respondents. Digital Asset seeks to alleviate those concerns with its system of fingerprints. Its platform also boasts interoperability to help attract more potential adopters of its technology. If Digital Asset’s blockchain can interact with existing financial protocols, the platform could launch in a market without the entire industry needing to run on blockchain technology as well.
While a permissioned blockchain is a good solution to the confidentiality problem, Ethereum could potentially do it better. Currently, Ethereum transactions are entirely public, but not for long. The Ethereum Foundation is actively working to integrate zero knowledge proofs into the Ethereum protocol. That would allow for optional anonymous transactions across the Ethereum network. As far as interoperability is concerned, if everyone used Ethereum, there’d be no issues, but that would require a massive adoption of Ethereum technology. Why choose Ethereum? Because its public blockchain has been up and running for longer, with more programmers actively developing on it. This makes it safer, and more reliable, because most bugs in the system have already been found, and it gets more secure every day.
Regardless of the platform used, any integration of blockchain technology into existing systems is a boost to the ecosystem as a whole. It may seem like a race to see who can create the most reliable, interoperable, confidential transactions system, but it’s really up to the industry incumbents to decide when and which technology gets embraced.