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Why Banks’ Best Bet is a Public Blockchain (With Bitcoin)

Last Updated March 4, 2021 4:47 PM
Lester Coleman
Last Updated March 4, 2021 4:47 PM

Asking for blockchain without bitcoin struck Marc Andreessen as wanting “online” without the Internet.

Siddharth Kalla, the chief technology officer of Acupay, a technology provider in New York specializing in cross-border finance, believes Andreessen was astute when he tweeted this observation in December.

Kalla, writing in American Banker , is the most recent financial observer to take issue with financial institutions trying to isolate blockchain from bitcoin.

What History Teaches

When the web began making waves in the mid-1990s, private companies began to create proprietary information-sharing networks like AOL and CompuServe. These private networks did not survive the Internet, which won out because it was not restricted to the big players and bogged down by proprietary protocols.

Banks, Kalla noted, are similarly at risk of making the same mistake in backing private distributed ledgers, or private blockchains. They should instead invest their intellectual capital in enhancing the appeal of public blockchains and the virtual currencies – such as bitcoin – that open-source ledger systems enable.

What the Internet and the web have taught us, according to Kalla, is that groundbreaking technology is usually built on open protocols in a level playing field where anyone can innovate regardless of influence. Google and Facebook became possible precisely due to the web’s open nature.

Why Private Ledgers?

The use of private distributed ledgers can bring immediate improvements to some of the financial service industry’s infrastructure, particularly in securities settlement back office. But the idea of proprietary networks for the financial services industry is, as Andreessen put it, like wanting “online without Internet.”

The primary purpose of public blockchain is the transmission of bitcoin, which has limitations that currently limit its use. The number of transactions per block is restricted, and the bitcoin community is currently debating how to best address scalability concerns.

The bitcoin smart-contracts platform, being limited, has given rise to competing public blockchains like Ethereum that can theoretically run more complex contracts.

Also read: Bankers & regulators not keen on public blockchain solutions

Public Blockchain Concerns

In the meantime, the public blockchain’s openness naturally leads to concerns about whether private transactions execute securely without the unwanted scrutiny of an open network. Public blockchains generally take a lot longer to confirm transactions than private networks.

New research, however, indicates bitcoin technology can overcome these limitations and deliver the benefits of greater applicability. Developers are working on a cryptographic tool called Confidential Transactions to improve security. It can verify a public blockchain transaction without having the input amounts of the exchange, delivering greater privacy than what is natively provided by bitcoin. Technology like this enables a user to settle a trade without disclosing its size, or to debit an account without disclosing how much the account holds.

Public blockchain privacy will be further improved through “zero-knowledge proofs,” a verification that doesn’t disclose any other information besides the statement’s validity. Such initiatives include Zcash, an open source cryptocurrency supporting payments on a public blockchain where the transaction’s sender, recipient and amount remain private. As it is now possible to conduct e-commerce transactions securely over the web, it will be possible to conduct private business over a public blockchain.

Bitcoin Scalability Concerns

Developers are also working to address the scalability issues of bitcoin through “sidechains,” which create possibilities for experimentation. Sidechains are similar to Ethereum, but they are backed by the more well-established bitcoin network.

Rootstock is developing a “Turing-complete” smart contracts platform on a bitcoin sidechain. The platform can be used for more complex transactions than exchanging value between two parties. It will enable the creation of highly-complex smart contracts, fundamental to applications such as securities settlement.

With such bitcoin-based efforts, the public blockchain will become more robust and scalable. History indicates open technology wins over closed-garden approaches.