A Very Public Conflict Over Private Blockchains

Banking experts are starting to look into cryptocurrency tech, and they are hedging their bets by finding uses for both the public blockchain models – like Bitcoin – and private models.

The word "blockchain" gets thrown around quite a bit as it's become a buzzword for the fintech and payments industry. But recently, Bitcoin theists have taken issue with associating blockchain to the private distributed ledger systems, such as Eris Industries and Hyperledger.

Instead, to this contingent, the blockchain refers to the public distributed ledger the Bitcoin protocol uses to record the growing list of bitcoin transaction data. The core concept for a digital cash system has been around for some time, but until the release of Bitcoin, many of these systems which relied on reputation suffered from Sybil attacks, where certain participants forge identities to subvert peer-to-peer systems.

Bitcoin's implementation is resistant from such attacks because it uses a proof of work algorithm where anonymous participants, called miners, that verify blocks must put forth a certain amount of computational processing power. Further incentive against harming the network or being deceptive, comes in the form of newly "issued" bitcoin that miners are rewarded when they verify a block using specialized computer hardware; plus individuals who invest tens of thousands of dollars into Bitcoin mining equipment are unlikely to try and destroy the network.

This distributed ledger concept has been privatized, although the companies that are developing these systems use a consensus algorithm instead of proof of work. These systems are controllable, repeatable, reversible and accountable, all features the financial services industry needs, harps Preston Byrne, chief operating officer and general counsel at Eris Industries.

But there is an ongoing debate among cryptocurrency enthusiasts over whether a private blockchain is a sustainable model and anything more than a traditional database.

Digital Asset Holdings, which launched in March headed by former JPMorgan Chase exec Blythe Masters, uses cryptocurrency technology to enhance the settlement and recording of financial assets. Masters is seen as a force to be reckoned with in the financial services industry and isn't taking bets on either cryptocurrency infrastructure play. Digital Asset Holdings acquired two companies in its few short months of existence: Bits of Proof, which built an enterprise-ready implementation of the Bitcoin protocol; and Hyperledger, which developed distributed ledger technology that allows financial institutions to run multiple private networks for managing assets.

"Banks are looking at multiple different systems...to offer in-house," said Dan O'Prey, founder and CEO of Hyperledger.

The teams at Digital Asset Holdings and Hyperledger have a very similar approach to the market, O'Prey said. Both companies want a platform-agnostic system that targets financial institutions and is pragmatic about where the distributed ledger technology is useful (unlike the initial Bitcoin craze that sought to put everything on a blockchain), he said.

While Bitcoin and private distributed ledger network providers seem to be in competition, O'Prey says the groups are addressing different problems and can coexist. 

Bitcoin's censorship-resistant digital money model is well-suited for purposes such as funding a free press in countries where the government limits free speech. But it has also been used for illegal activities such as the purchase of drugs and weapons on black marketplaces, like Silk Road. These use cases aren't particularly appealing to the risk-averse financial services industry, which has been quick to pull support from controversial or legally questionable services.

"So far, venture capitalists aren't funding [censorship resistant models]," said Tim Swanson, an industry pundit that is currently a researcher at SKBI in Singapore and advises Hyperledger and a number of other blockchain startups.

Instead VCs have thrown a remarkable amount of money at Bitcoin-based startups building "censored" or regulated services for allowing consumers, merchants and financial institutions to interact with the Bitcoin blockchain. These include Coinbase, a Silicon Valley-based exchange, which has raised $105 million in venture capital since it's launch in 2012 and Circle Internet Financial, a consumer mobile wallet and merchant services platform, which has altogether raised $76 million.

"Private blockchain" companies haven't received funding close to the hundreds of millions of dollars raised by Bitcoin companies in the past few years, but the concept is still new. And many Bitcoin companies, such as Peernova hope to attract more VC interest by shifting their message to emphasize blockchain technology over specific uses of Bitcoin.

But these recent rebrands seem more like marketing and less like technological shifts at this point.

But Eris' Byrne insists that the Bitcoin community's narrow view of what a blockchain is limits the technology's potential.




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