Blockchain’s Benefits for Regulated Industries

Regulated industries, including healthcare and financial services, must adhere to numerous requirements, such as know your customer (KYC), anti-money laundering (AML) and data privacy regulations. In many ways, blockchain is the answer to these industries’ wish lists. Blockchain enables robust KYC and AML by verifying identities in real time and providing an immutable record of data and transactions for the detection of financial crime. It also facilitates secure data sharing between authorized parties by using cryptography and access controls. Finally, smart contracts on blockchain can enforce rules automatically, aiding compliance and reducing human error.

One question that arises for regulated enterprises, however, is whether public or private blockchain is preferable for these institutions. Indeed, past opinion has sometimes advised private, permissioned blockchain for such use cases to ensure maximum data privacy and protection, yet private chains come with their own set of challenges that can defeat their benefits. There are advocates on both sides, but recent innovations on public blockchain — offering all the security features of private chains plus the many benefits of public chains — may soon render this question obsolete.

• Regulated Industries Offer Fertile Ground for Blockchain
• Public vs. Private Blockchain for Regulated Industries
• Public Blockchain: New Functionalities for Regulated Industries
• Secure and Stable Public Blockchain Solutions for Enterprises

Regulated Industries Offer Fertile Ground for Blockchain

Blockchain has numerous potential benefits to serve the unique needs of regulated industries, including finance, healthcare, identity verification and supply chain management, to name a few.

Blockchain offers elegant solutions to the challenges faced by regulated industries.

Regulated industries present special challenges that blockchain is ideally equipped to manage. In general, regulations exist to offer protection to industry participants, typically around data or money movement. Blockchain’s transparency and traceability have the capacity to boost trust and security while also increasing the speed and efficiency of operations.

For example, in healthcare, blockchain’s distributed ledger technology can be leveraged to streamline centralization of patient records while ensuring that only authorized parties have access to their confidential data. Blockchain also offers financial services greater transactional speed and security, as well as the elimination of costly intermediaries, as in the case of cross-border payments. The technology facilitates faster and more efficient transactions compared to traditional banking methods, and its programmability through smart contracts allows for automated transactions and regulatory compliance.

Blockchain is becoming a regular player in finance.

As the digital economy expands, the need for a stable, efficient and secure form of digital money is becoming increasingly evident. Both stablecoins and deposit tokens — digital representations of traditional bank deposits issued by regulated financial institutions — are gaining favor for this purpose. Unlike cryptocurrencies such as Bitcoin or Ethereum, which are often subject to volatility, both stablecoins and deposit tokens are backed by fiat currency, making them as stable as traditional money or bank deposits. Some of the world’s largest banks are envisioning tokenized assets as crucial to the future of the global digital money landscape.

Public vs. Private Blockchain for Regulated Industries

Past preconceptions have favored private over public blockchain for regulated industries due to strict data privacy requirements, but private blockchain has drawbacks that can make it untenable — as well as less secure than public chains.

Source: The Value Exchange. DLT in the Real World Survey Key Findings. 2024. https://www.broadridge.com/article/capital-markets/dlt-in-the-real-world-2024. Accessed July 2024.

The benefits of private blockchain for regulatory industries are subject to debate.

The inevitable question that arises most frequently for regulated enterprises considering entry into blockchain is whether public or private chains are better suited for their purposes.

Private blockchains are permissioned networks where access is restricted to participants who have been granted permission to join, with the consensus process generally controlled by a single organization or consortium. Because the public at large does not have access to the code empowering the network, proponents argue that private blockchain is the better candidate for facilitating regulated enterprise transactions. Indeed, regulatory pressure has resulted in nearly two-thirds of the enterprise blockchain ecosystem consisting of private blockchains. However, what these arguments miss is that public blockchain is actually very secure, and there are downsides to using private chains that can make them unsustainable — or unusable altogether.

Private blockchain has fundamental disadvantages compared to public blockchain.

Some of the drawbacks of private blockchain for enterprises include the following:

High cost: Establishing and maintaining a private blockchain network can be extremely expensive, requiring a high number of resources related to infrastructure, development and continuous operational costs. Indeed, some sources argue that private blockchains are, in essence, “cumbersome databases,” with the costs of servers, staffing and network infrastructure all falling to the controlling entity’s responsibility. These costs often make private blockchain networks impractical or untenable over time, not just for mid-sized and smaller companies but even for top global businesses such as IBM.

Difficulty with scalability and interoperability: Private blockchains may encounter scalability issues as they increase in size and complexity, especially if the underlying technology cannot adequately handle a large volume of information. One source notes that private blockchain is substantially slower and less scalable than public blockchain. Moreover, because private chains are generally built on proprietary technologies, interoperability among many institutions is often impossible to achieve, with costs making it infeasible for most private owners.

Security issues: The security of a private blockchain largely depends on the chosen consensus mechanism and the trustworthiness of participants. A malicious or compromised participant could corrupt the entire network. Ironically, some even argue that private blockchains’ exclusive nature can make them more vulnerable to bad actors than public networks. Relatedly, private blockchains’ lack of transparency through restriction to authorized participants can, in a worst-case scenario, raise the potential for data manipulation.

Public Blockchain: New Functionalities for Regulated Industries

Public blockchain is fast, inexpensive and, ultimately, very secure. Moreover, innovative token extensions are bringing all the benefits of private, permissioned networks to public blockchain.

Public blockchain’s benefits include those of private blockchain — and more.

Public blockchains consist of decentralized networks that permit anyone to join, view transaction history and verify data integrity through a consensus mechanism, such as “proof of work” on Bitcoin or “proof of stake” on networks like Ethereum or Solana. Proponents of public blockchain also add that, contrary to its name, it is very private. Indeed, in its original conception and design, blockchain’s intrinsic security arises from the anonymity of the parties engaged in any given transaction. Blockchain’s immutable and permanent record of transactions ensures this security, and because this record is swiftly validated by multiple independent data centers around the world, consensus is quick, nearly ruling out data tampering. In addition, integrated encryption and other forms of obfuscation further enhance public blockchain’s innate security principle.

On Solana, token extensions are opening up new use cases on public blockchain.

Moreover, innovations on public blockchain are rendering the public-versus-private debate itself moot. Token extensions, a new token issuance program, for example, are a turnkey innovation on the Solana public blockchain that can apply security controls to the network akin to those of permissioned, private blockchains. Some of the features enabled by these “extensions” include confidential transfers, reversibility and the ability to white- or blacklist accounts globally. Because these features are embedded into the token itself, there is no need for third-party smart contracts to enable this type of functionality. This innovation is currently making new use cases possible on public blockchain for regulated enterprises, such as the issuance of stablecoins for payments and the tokenization of real-world assets, including stocks, bonds, real estate, commodities and even artwork. Tokenization of these assets allows for higher liquidity and fractional ownership, making these investments more accessible to those who might not otherwise be able to partake of these opportunities.

There is a ‘momentum shift’ occurring among enterprises toward public blockchain adoption.

An HFS Horizons report noted a recent “momentum shift as enterprise focus pivoted toward public blockchains,” with ongoing innovation driving further growth in their adoption by regulated enterprises. Researchers noted that while highly regulated enterprises frequently reported choosing private blockchains due to regulatory pressure, firms are becoming increasingly comfortable with public blockchain as innovation unlocks new levels of privacy. The report concludes that enterprises will turn more and more to public blockchains to achieve scalability in years to come.

Secure and Stable Public Blockchain Solutions for Regulated Industries

Innovations such as the Solana network’s token extensions are indicative of a paradigm shift in how assets are being developed, managed and traded. By boosting security measures, ensuring regulatory compliance and encouraging the tokenization of real-world assets, this innovation could allow blockchain to revolutionize a number of regulated industries.

As the integration of blockchain continues to bridge the gap between traditional financial and decentralized ecosystems, this technology can help pave the way to a more efficient global economy — one that’s based on transparency, security and financial inclusion.

Source: PayPal USD. PYUSD Launches on Solana: The Next Phase of Adoption. May 29, 2024. https://pyusd.mirror.xyz/TpEwPNybrwzPSSQenLtO4kggy98KH4oQRc06ggVnA0k. Accessed July 2024.