At the American Bankers Association event in June, the acting head of the US Office of the Controller of the Currency acknowledged the potential of blockchain technology in improving settlement through the tokenization of real-world assets, potentially reducing costs by up to 65 percent. However, he expressed skepticism about the viability of public blockchains for secure and scalable asset tokenization.
The argument presented emphasized the risks and immaturity of the crypto industry, with losses exceeding $5 billion in 2022 due to frauds, hacks, and scams. While it is true that there are significant issues within the public blockchain space, conflating these problems with the underlying technology can be misleading. Most failures come from human failings in operations and use, rather than technological shortcomings.
The proposed solution is to turn to centrally operated, trusted blockchains, or private blockchains, which purportedly don’t require as much critical calculation, innovation, or game theory to function. Private blockchains are seen as more easily permissioned, making full compliance with anti-money laundering rules achievable and capable of deterring illicit finance. But are private blockchains the answer for institutions seeking the benefits of blockchain technology?
The key distinction should not be between public or private blockchains but rather between permissioned and non-permissioned systems. Asset tokenization requires a permissioned blockchain that can protect against security and compliance threats while preserving decentralization and transparency.
Enter the concept of public permissioned blockchains – decentralized, open-source networks with a control layer that gates access to certain roles and functionality. This permission layer involves identity and authorization as a minimum entry prerequisite, ensuring known identities behind network participants, a common requirement in many regulated markets.
Permissioned validators can also alleviate concerns about possible compromises to consensus or funding of sanctioned groups. Publicly known validators provide extra security due to the reputational risk they face, in addition to economic risk. Public permissioned blockchains are beneficial for financial markets seeking operational improvements and efficiency, minimized trust, and transparent governance.
The right blockchain infrastructure can support onboarding to decentralized finance (DeFi) and access to other digital native ecosystems while maintaining compliance. The identification process required for network access can provide confidence that know-your-customer and anti-money laundering obligations are fulfilled, and interactions are not with blacklisted or sanctioned entities.
The debate should not be framed around public or private blockchains but rather around permissioned and non-permissioned systems. Public permissioned blockchains provide a viable alternative that can deliver security, scalability, transparency, and regulatory compliance. As the world’s largest asset manager, BlackRock, filed for a spot bitcoin ETF, it is a sign of growing confidence in the potential of public blockchain-based financial products, and perhaps a watershed moment in the overall perception of the technology.
Source: Blockworks
