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Public or private blockchain? A beginner's guide – part 3

What characterizes the different variations of the technology that can revolutionize the world of finance and online payments?

This next part of Cashless's guide to blockchain technology explores the subject of using it in banking and payments. Despite the fact that blockchain in this context is still associated with cryptocurrencies, the financial sector can see beyond the most common example of bitcoin. A number of market regulators, banks and fintech companies have been devoting more and more resources in order to use blockchain solutions to increase the safety level of financial systems, perform payments or even issue bonds.

Examples can be found all around the world. JPMorgan Chase wants to patent a system that uses distributed accounting ledgers as a way to execute financial transactions more easily. Great Britain's central bank is already working on using the technology to improve the efficiency of the money transfer system. When it comes to Poland, the Credit Information Bureau in cooperation with tech company Billon are introducing a blockchain solution for storing and sending documents on a durable medium.

In other words, blockchain is an innovative data encryption method that provides the highest level of security: once encrypted, an entry will be stored in a registry forever and cannot be deleted or falsified. The registry is often public and can be accessed by anyone.

How can it be used in banking and finance then? To understand that, we need to understand the differences between private and public blockchain. That's why we talked to Billon's expert, Jeff Deneau.

Let's start by saying that a public network can be joined by anyone. However, the verification mechanism for the operations being performed there requires a great deal of processing power, which consumes an enormous amount of energy. The cost of that is discouraging. That is why in the case of cryptocurrency transactions - for instance with bitcoin - participants of the computing process are given new assets, which means new bitcoin. Those people are called miners because thanks to their computers’ processing power, new coins are created.

Moving away from the subject of cryptocurrency, a private blockchain is not used to mine coins, which means it doesn't generate the associated costs. What are some other differences between private and public blockchains?

Trust is the most fundamental difference. Public blockchain made it possible to transfer money and information in an environment that lacks the certainty as to whether the parties have honest intentions, are who they claim to be or whether their identity can be confirmed. Despite that a system was created in which those transactions take place, which is a significant achievement. Private blockchain includes a kind of security guarantee. We have basic information about the transaction participant. It's not a full “know your customer” procedure that is required in banks, but the information makes it possible to identify the person “on the other side”.

Isn't knowing the identity of the person performing the transaction a contradiction of the idea of blockchain? What about anonymity?

Anonymity is not a core value when we're talking about transferring money. We do want to know who we're sending it to or who is sending it to us. That's also required by banking law. A private blockchain offers a whole spectrum of means to verify someone's credentials without the energy and resources required for the verification mechanism in a public blockchain. A private blockchain is more like a business, where a minimum level of verification of the participants of a transaction is necessary. Private blockchain uses all of the advantages of blockchain in general - transparency and auditability - but we don't need cryptocurrencies in this system.

Who is in charge of verifying the participants in a private blockchain? How does it work? How does it work in the case of so-called electronic money?

We should distinguish between the first blockchain transaction, that is creating an asset in a blockchain as a so called genesis block, and further verifications of the transaction. For instance, the first block in a blockchain used for encoding digital cash is only generated by an institution authorized to issue electronic money. This institution is usually a bank that has the appropriate license. The first block in a blockchain used for saving documents, which Billon is developing together with the Credit Information Bureau, is created by banks, insurance companies or lenders.

Subsequent blockchain transactions are verified by the users of particular blockchain solutions. In some private solutions that's going to be privileged users, meaning institutions, and in others it's going to involve all users as long as they have network access.

If we want to find out more about a certain blockchain solution, we should ask several basic questions: does it contain a cryptocurrency, can developers have open access to the software, what types of nodes or network participants there are and who has the right to join it.

In the next part of our guide we will find out why banks should use private blockchains for such purposes and why it's better than the currently used solutions.


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