Private Blockchains: Opportunity or Threat for Bitcoin?

Private Blockchains: Opportunity or Threat for Bitcoin?

Phil Siarri

Principal Advisor at psiarri.xyz

Views 556

Private Blockchains: Opportunity or Threat for Bitcoin?

25.07.2016 09:00 am

Bitcoin arguably started the blockchain movement based on several key principles; among these: accountability, decentralization, and transparency. That hasn’t stopped banks and other organizations involved in financial technologies to start developing private blockchains. Private blockchains, sometimes referred as “permissioned blockchains”, allow a specific network to appoint a group of participants in the network who are given the authority to provide the validation of 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 with Satoshi’s “firmless” concept. This leads me to believe we are experiencing the development of a binary blockchain ecosystem divided into permission 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 organizations including the infamous Silk Road has been well documented; there is no doubt such 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 organizations 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 sales 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 the concept of open economy is understood and promoted by many however sometimes old habits die hard and such may relegate Bitcoin to the background.

Once 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; definitely asserting that private, permissioned models would be highly preferred by the Bank of England.

In my opinion, both private and open blockchain environments such as Bitcoin can co-exist 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. 

Research, thoughts and opinions are my own.

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