Daily Fintech

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:

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:

OR

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.
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