Blythe Masters Unveils Fix for Blockchain Privacy Concernsby
Firm details effort to keep trade data safe in white paper
Fingerprint data is only part of system shared among all users
Blockchain could finally drag Wall Street recordkeeping into the 21st century, but before they’ll use it financial firms want to know their data will be kept secret. The startup run by former JPMorgan Chase & Co. banker Blythe Masters says it’s found a solution.
The version of blockchain that powers the bitcoin currency is wildly transparent, recording each transfer of bitcoin from one person to another in a public database anyone can tap into. But such openness is anathema in finance, posing a conundrum for Wall Street firms otherwise drawn to digital ledgers because they could simplify and speed up recordkeeping.
Digital Asset Holdings, where Masters is chief executive officer, is deploying what it calls fingerprints to address that problem. Though these fingerprints get shared among all users of a given blockchain, only trusted parties can decipher them.
“Our view is that sensitive, contractual, market-moving, private data should be kept private,” Masters said at a recent client presentation. “Let’s think about what regulators and regulated financial institutions care about. First of all, it’s privacy.”
The approach is similar to what Digital Asset competitor R3 said it was developing earlier this year. Richard Gendal Brown, the former executive architect for industry innovation and business development at IBM, built a blockchain platform for the company called Corda that greatly restricts the information it shares among its users. Last week, R3 released Corda’s source code to the public.
Distributed-ledger technology has captivated Wall Street executives because it could process virtually any kind of trade or money transfer in minutes rather than days. That vastly reduces the amount of capital that must be set aside until transactions are settled. Industries such as health care, supply-chain management and mining are also experimenting with the software to improve efficiency or ensure the provenance of diamonds, for example.
The Digital Asset development -- like R3 and Chain releasing their code to the public, or world-renown cryptographers joining blockchain startups -- is another indication that the software is gaining traction.
“Distributed ledger technology is fashionable. In fact, if you could wear it, you’d put Ralph Lauren out of business, at least in my case,” Masters said at the customer event. “The reality of actually industrializing distributed ledger technology is quite another matter. It’s a real undertaking.” The opportunity for it in the financial world is great, she said.
Days to Minutes
Digital Asset clients include the owner of the Australian Stock Exchange and Depository Trust & Clearing Corp., the back-office entity that clears and settles all U.S. stock and bond trades. Both firms are testing if those systems can be switched to a blockchain to cut settlement and payment times from three days to minutes. Digital Asset hopes to have a version of its system ready for their use by the end of 2017, Masters said.
In the Digital Asset system described in a white paper released Wednesday, two parts of a transaction will be necessary for anyone to have a complete picture of what’s happening. The first is the transaction itself, with the price and counterparty and other details known only to the user. That part stays on a local server at a bank, for example, as it does today. The second part is the fingerprint, which everyone in the network can see but not everyone can interpret.
The fingerprints -- also known as a hash -- are important because they represent every transaction in a given market. For a user to trust the Digital Asset system as its ledger, it must be able to ensure only trades it authorized are attributed to it. That means if a user scans for all its trades and finds some that it didn’t initiate, it knows something fishy is going on. The veracity of the ledger can only be verified if every single trade that’s ever been executed within it can be referenced and double-checked.