The permissioned blockchain mirage beguiling both Banks and IT Vendors

By Bernard Lunn


Image courtesy of Bitcoin Magazine.

The idea of a private permissioned Blockchain appeals to both vendor and buyer. So we will see a few of these deals. However I don’t think they will result in much meaningful innovation and won’t scale beyond Pilots.

A private permissioned Blockchain system is a totally decentralized database – a distributed ledger – that does not use Bitcoin and that is controlled by a single institution. That is what makes it private and permissioned.

I certainly understand why the idea appeals to a vendor of Blockchain technology. You sell to the IT department which has always prized control. Your pitch is along these lines:

“You know this hot Blockchain technology that is changing the world? We can provide that to you in a way that puts you in the drivers seat. Keep all those crazy Bitcoin guys away and build moat against those Fintech upstarts that want to eat your lunch”.

It is a good pitch that will generate some experimentation and pilots.

This is a complex story because there are three concepts about permissioned Blockchain systems that are often conflated but which need to be pulled apart:
  • A Blockchain without Bitcoin. For example you can build a permissionless Ethereum network using Ether. Ether is the “currency” unit within Ethereum that is only usable within Ethereum. Think of it as if Amazon allowed you to use Amazon currency units to buy AWS server capacity or Facebook allowed you to use Facebook currency units to buy Facebook ads; you cannot buy pizza with these currency units. I am not a Bitcoin maximalist (people who believe that the only viable cryptocurrency is Bitcoin). Ethereum is still not proven but is becoming less vaporware with each passing day. A Blockchain without Bitcoin is not yet proven, but nor is it conceptually unrealistic – it could work. We await their Proof of Stake consensus algorithm.
  • A Blockchain controlled by one entity. This is what is called a “permissioned” Blockchain. You can build a permissioned Blockchain using Ethereum. It is technically feasible. The issue is what value does it add? It is a conceptual tautology. The whole point of distributed ledger technology is that it is immutable and verified by the network, meaning that all the participants can totally trust that no participant can change the data for nefarious purposes. If Mega Bank A controls a private Blockchain that is no more trustworthy than if Mega Bank A created a distributed database that has been available for decades.
  • Anonymous. Banks are rightly saying “our customers don’t want their records and transactions public”. There are ways to make permissionless Bitcoin transactions anonymous. You don’t need a permissioned Blockchain to achieve anonymity.

I believe that permissionless Blockchain systems will play a major role in inter-party processes such as settlement and clearing where all the participants need to trust EITHER a single Intermediary Corporation OR a cryptographically secured network running Smart Contracts that are managed by Distributed Autonomous Corporarions. The prize is moving to real time settlement and clearing, which eliminates credit and market risk (and thus dramatically reduces the cost of settlement and clearing). The problem for a vendor of Blockchain technology is who do you sell to? No single bank will control these settlement and clearing processes (if they did the other banks won’t trust the system). The existing Intermediaries won’t want to cannibalize their existing revenues. So you are left selling to startups who will simply use the open source platform (all Blockchain systems are based on open source) which won’t drive any revenue to the vendor.

Most of the media attention has been on how banks will be disrupted by blockchain technology. However big IT vendors will be disrupted as well. Just when they are transforming from on premise to cloud to deal with one wave of disruption…along comes decentralization to disrupt again.

The difference is that IT vendors are used to being disrupted and so are quicker to act when disruption starts to hit.

This is where the news about Microsoft and Ethereum is relevant.

The news is hard to decipher because there are two possible stories here:

  • Microsoft is being stupid, Deploying Ethereum on a centralized cloud data center such as Azure makes absolutely no sense at all. Unlikely: Microsoft is not stupid.


  • Microsoft is being smart. They understand that Ethereum is a decentralized network that could disrupt a centralized cloud data center such as Azure. This announcement introduces Ethereum to corporate IT, making Ethereum the de facto platform for enterprise IT experimentation in Blockchain. Microsoft gets to be part of the conversation and see the threat of disruption from a front row seat. If decentraliation takes off they can launch s decentralized version of Azure.

Story # 2 seems more likely.

However I still don’t see the breakthrough blockchain innovation coming from banks or other inncumbents – they have too much invested in the current way of doing things

It is more likely that the breakthrough blockchain innovation will come from startups with nothing invested in the current way of doing things – and those startups will simply use the Ethereum open source directly.

So we can expect to see a lot more Blockchain laboratories but it is a long journey from laboratory to market traction and I don’t believe that private permissioned Blockchains are equipped for that journey.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s