The marriage of blockchain and traditional finance is a paradoxical relationship.
The financial, banking and payment services are among the most regulated in the world. As for the blockchain? The web3 space has traditionally been a little more a free space for all When it comes to regulatory executives and their respect.
Financial institutions (IF) process sensitive data which must remain confidential to comply with regulations such as the General Data Protection Regulations (GDPR),, Californian law on the protection of consumer privacy (CCPA) and the rules specific to the banking sector such as Basel III. These rules impose strict confidentiality of data, the adequacy of capital and compliance with the fight against money laundering (AML). Large banks cannot afford to expose their counterparts, transaction details and trading strategies on public blockchains.
At the same time, the operational philosophy of the blockchain is built At a disruptive level of transparency, decentralization and opening. 2009 Bitcoin white paper explicitly sought to remove the need of IF as centralized intermediaries, largely By making the transactions immutable and visible by anyone with internet access.
This tension between the transparency inherent in blockchain and the need for IF to preserve the confidentiality and privacy of customers has a paradox that IF must solve. If they target To release the blockchain transformation potential.
However, as comments Tuesday (January 21) by America Bank CEO Brian Moynihan to show,, The American banking sector will adopt cryptocurrencies if regulators allow. Bank of America holds more than 80 block chain-The linked for it, making it one of the main financial institutions in terms of Blockchain intellectual property.
However, President Donald Trump inauguration Monday (January 20), there was no concrete political announcement concerning cryptocurrencyDespite rumors and contrary promises.
Read also: 5 blockchain projects behind which the biggest banks in the world are behind
A paradox of transparency and confidentiality
For traditional financial institutions, Blockchain technology poses an existential question. How can they use its effectiveness without compromising customers’ privacy or collide with regulators?
On the one handBlockchain’s transparency promises greater responsibility, auditability and efficiency in Domains like cross -border payments, financing of the supply chain and trading of securities.
The otherFinancial institutions must protect sensitive data, such as counterparties, transaction details and negotiation strategies, which public blockchains expose by nature.
The answer perhaps lies in the emerging models of hybrid block chains and in technologies strengthening confidentiality (PET).
Hybrid blockchains combine the best of public and private blockchain frameworks. They allow financial institutions to manage sensitive transactions in a private environment while using the safety and interoperability of public blockchains. For example, JP MorganIt is Onyx Blockchain uses Quorum, a platform based on Ethereum, to facilitate private and secure transactions while maintaining interoperability with public networks Ethereum.
JP Morgan published a white paper Last year, entitled “Epic project: to feed token finance with confidentiality, identity and component of the chain company”, showing the use of blockchain technology to improve confidentialityIdentity and composibility within financial ecosystems are increasingly explored by traditional banks and financial Players.
PETs also respond to the challenge of confidentiality. Evidence without knowledge (ZKP) and the secure multipartite calculation (MPC) also appear. The ZKPs allow a part to prove the validity of a transaction without revealing the underlying datawhile MPC allows several parts to calculate a function in a collaborative manner without exposing their individual entries. The two solutions are increasingly adopted by financial institutions to guarantee compliance with confidentiality laws while adopting the blockchain capacities.
See also: Why should banks want to have a blockchain strategy
Advantages of blockchain in financial services
The Pymnts Intelligence Report “The advantages of blockchain for regulated industries“has discovered that Blockchain technology has many potential advantages to meet the unique needs of regulated sectors, including finance.
“As more and more banks integrate Blockchain capacitiesCustomers will have a greater choice in terms of value transfer ”, FV Bank CEO Miles Paschini told Pymnts this month. “We are paving the way for a future where blockchain will only be a other means of payment.”
However, without robust confidentiality mechanisms, the adoption of blockchain in financial services can be limited to cases of niche use which do not require strict data protection.
“The biggest financial institutions are wishing to explore tokenized assets“, But they require a regulatory certainty to do it on a large scale, Nikola Plecasmarketing manager at Visa Crypto, told Pymnts in October.
In the end, the relationship between blockchain and traditional finance illustrates the broader tension between innovation and regulation. By accepting this paradox and investing in technologies respectful of privacy, collaboration executives and regulatory clarity, the financial sector can transform the transparency of the blockchain of a challenge into a competitive advantage.
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