The argument for private blockchains

March 22, 2016



Gideon Greenspan is CEO of Coin Sciences.

Gideon Greenspan is CEO of Coin Sciences.

Gideon Greenspan of Coin Sciences explores the legal ramifications of public blockchains and why companies are seeking alternatives.


PwC: Where are financial institutions right now in terms of their understanding of blockchain technology?

Gideon Greenspan: Inside the innovation groups in financial institutions, there is already a lot of awareness. Outside those groups, an increasing number of people understand that blockchains, the technology that powers bitcoin, may be highly relevant for banks. But I’m also seeing a lot of head scratching about if and where this technology can genuinely be deployed to simplify processes and save cost. I don’t think many banks have a comprehensive answer to that question yet.

As a result, a time window of two to three years for some level of bona fide adoption is possible, but the first phase of adoption could well take longer. Even if the technology is much better than what they have now, banks still face serious transition costs in terms of IT, training, organizational structure, regulatory and legal considerations. And we don’t know yet what’s going to trigger a mass transition to blockchains or other distributed ledgers. Even if the transition is inevitable, it’s not going to be easy, smooth or automatic.

PwC: Emerging technologies sometimes disrupt or undercut the established ways that industries operate. The music industry is a prime example. How are financial sector startups trying to use blockchains to have a disruptive or disintermediating impact on the financial sector?

GG: There are a whole bunch of centralized entities right now—clearing houses, custodians, settlement houses, messaging entities and the like—which enable transactions to take place without people physically shipping bars of gold or stock certificates from one end of the world to another. Those entities are threatened by the power of a single ledger which is shared between all the parties in a marketplace, and whose control is distributed between those parties. In essence, blockchains are a technology for disintermediation, weakening any entity whose primary purpose is maintaining an authoritative ledger of transactions.

PwC: People who haven’t studied these technologies are often confused. What’s the essential difference between the bitcoin blockchain and the blockchain-inspired shared ledgers banks are talking about? One seems to have a purely currency orientation and peer-to-peer payment, while the other has a focus on contracts and transfer of ownership and that sort of thing. Is that how to make the distinction?

GG: There’s a lot of debate and confusion over the terminology. When we talk about public blockchains versus private blockchains or shared ledgers, we’re talking about two very distinct things. While they share a technological base, they’re very, very different in terms of use cases and economics. It’s a bit like your home computer network and the internet, which share many technical similarities, but have completely different dynamics and purposes. While I believe the bitcoin blockchain has very some interesting applications, these are distinct from the applications of private blockchains or other types of shared ledger that are being considered in the financial sector.

For example, before we started working on MultiChain, we developed a protocol for using bitcoin transactions to move any asset around, alongside units of bitcoin. When we talk about a non-cryptocurrency asset, we always mean an asset that was issued by some entity. And one of the problems with that idea is that when an entity issues an asset which can be moved over the bitcoin protocol, that asset becomes a pure bearer instrument. But there’s a reason why bearer shares and bearer bonds are more or less extinct—they can be used for nefarious purposes.

“Blockchains only really work legally if they’re also controlled and permissioned. Otherwise the entity issuing an asset is exposing itself to the wrong side of the law.”

PwC: What are the main reasons to use a private blockchain, rather than just a distributed database?

GG: Some people have inflated expectations of private blockchains. They’re not going to transform the legal aspects of the assets being transacted, at least for the foreseeable future. What they are is a very efficient technology for managing a shared ledger to keep track of who owns those assets. Another way to describe blockchains is that they enable a database to be shared in an environment of limited trust, without requiring a gatekeeper to manage that database. Compared to existing distributed databases, private blockchains have a bunch of innovative characteristics. This is what makes them suitable for peer-to-peer financial transactions between institutions.

Some aspects of blockchains echo existing database technologies. For example there’s a technology called “multiversion concurrency control” (MVCC) which is a popular way to enable multiple transactions to access a single database simultaneously without those transactions conflicting or slowing each other down. Without realizing it, bitcoin’s creators reinvented the same technique but in a distributed way over a network, rather than within a single centralized database.

Blockchains have two additional important features which are not available in today’s distributed databases. The first is transaction-level constraints, meaning that each transaction is validated by looking at that transaction as a whole.
 Right now permissions systems in databases control who has the permission to modify particular tables, and allow constraints on the information that those tables can contain. But they don’t have rules which say, “Only transactions which fulfill conditions X, Y, and Z are valid.” Blockchains have this rule-based capability, which is crucial if a database is being shared between non-trusting entities.

The second feature is the use of public key cryptography to provide row-level permissions without requiring a central validator. Every transaction includes a proof that it was approved by the owners of the rows which it modifies, and this proof can be verified by every participant in the blockchain network.

“Some people have inflated expectations of private blockchains. They’re not going to transform the legal aspects of the assets being transacted, at least for the foreseeable future.”

PwC: So if your business process doesn’t need a cryptocurrency, maybe it’ll use features that might just end up as part of a more advanced database?

GG: Yes, I think it is possible that blockchains will ultimately be integrated into existing database platforms as a new way to manage security and synchronization in a peer-to-peer replication scenario. But I expect there will be plenty of room for new products as well, which tailor the technology for particular use cases.



Chris Curran

Principal and Chief Technologist, PwC US Tel: +1 (214) 754 5055 Email

Vicki Huff Eckert

Global New Business & Innovation Leader Tel: +1 (650) 387 4956 Email

Mark McCaffery

US Technology, Media and Telecommunications (TMT) Leader Tel: +1 (408) 817 4199 Email