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Private blockchains – opportunity or threat for bitcoin?

Private blockchains – opportunity or threat for bitcoin? Image: Doppelganger4, Shutterstock.com
Written by Phil Siarri

Phil Siarri believes cooperation is the key to unlocking the potential for private blockchains and bitcoin to coexist.

Bitcoin arguably started the blockchain movement based on several key principles. Among these are accountability, decentralisation and transparency. This hasn’t stopped banks and other organisations involved in financial technologies to start developing private blockchains.

Private blockchains, sometimes referred to as ‘permissioned blockchains’, allow a specific network to appoint a group of participants in the network. These participants are given the authority to provide validation for blocks of transactions. Examples of private blockchains include Eris, Ethereum and Citicoin.

The concept of a private entity operating a blockchain is often seen as a stark contradiction to Satoshi’s ‘firmless‘ concept. This leads me to believe we are experiencing the development of a binary blockchain ecosystem divided into permissioned and permission-less camps. This shift could lead to both opportunities and threats for bitcoin.

Opportunities

To put it bluntly, bitcoin suffers from an image problem. The use of bitcoin by criminal organisations – including the infamous Silk Road – has been well documented. There is no doubt that this is hampering its development and acceptance as a legitimate form of payment. As major financial institutions such as Citibank and Bank of America have ambitious plans to launch their own blockchains sometime in the future, this could have a positive effect on bitcoin.

B2C and B2B stakeholders alike would feel reassured, and lead to individuals flocking to marketplaces where bitcoin is sold. One thing not to underestimate is that financial institutions have constantly ranked as some of the most trusted organisations by consumers.

This new wave of adoption and indirect association, combined with the brand awareness and first-mover advantage of bitcoin, would dramatically increase point of sale and number of merchants accepting the cryptocurrency (resulting in decreased volatility). Bitcoin could even use its “openness” as a marketing differentiator.

Threats

On the other side of the coin (no pun intended), perhaps mainstream consumers will continue to favour private environments to perform financial transactions. There is no doubt that the concept of open economy is understood and promoted by many. However, sometimes old habits die hard, and may relegate bitcoin to the background.

One can also expect interference from various levels of government. Earlier this month, a committee of the UK House of Lords, the upper chamber of parliament was critical of blockchain technologies, and more particularly bitcoin, asserting that private, permissioned models would be highly preferred by the Bank of England.

In my opinion, private and open blockchain environments such as bitcoin can coexist and cater to different sectors and demographics. Cooperation (or lack thereof) among governments, financial institutions and various intermediaries will dictate the adoption of such technologies. Stay tuned.

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Image: Doppelganger4, Shutterstock.com

About the author

Phil Siarri

Phil Siarri is an innovation management professional and fintech observer. He has been selected as one of Canada’s top 40 social influencers in finance, innovation and risk by Thomson Reuters, as well as top 50 fintech influencers in Montreal by FinFusion.

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