As a seasoned crypto investor with over a decade of experience navigating the ever-evolving digital asset landscape, I can confidently say that the tides are shifting towards open, public blockchains. My personal journey has been marked by numerous encounters with financial institutions favoring closed, private networks, but their efforts have consistently fallen short in capturing the interest and trust of customers, businesses, and investors alike.
As an analyst over the past decade, I’ve observed a consistent trend among financial institutions: they have predominantly gravitated towards the use of closed, private blockchains for digital assets, rather than open, permissionless systems. Notably, many large banks and financial institutions worldwide have invested in and experimented with digital assets on exclusive, permissioned blockchain networks. Regrettably, none of these efforts have garnered significant engagement from customers, businesses, or institutional investors.
One common point raised by financial institutions regarding the focus on private over public blockchain use is that regulatory bodies often favor and sometimes mandate permissioned blockchains due to their controlled nature. However, I’m of the opinion that this trend may be nearing its conclusion.
Over the next few years, the traditional regulatory stance is expected to undergo significant changes. While it may seem challenging to imagine now, I strongly believe that regulators will soon view the storage of assets on private networks as something to be scrutinized, rather than public chains.
Three factors will drive this change.
Liquidity matters
To start with, liquidity is crucial. Networks such as Ethereum, which boast millions (eventually billions) of users, will house hundreds of billions (on the verge of trillions) in capital. Assets traded on Ethereum gain access to this vast pool of investors seeking opportunities. In essence, a larger number of buyers and sellers within a market increases the likelihood that products are priced fairly and can attract buyers prepared to pay a reasonable price, much like well-established stock markets.
Assets traded exclusively on private networks might not receive equal fair market valuations due to limited buying opportunities. It’s worth noting that there is at least one instance where a real-world asset, tokenized and launched on a private network, has dropped below its net asset value in price. While this could signal a possible further devaluation of the asset, it might also suggest that the private network lacks a substantial buying community accustomed to capitalizing on such deals.
It’s likely that within a short time, a dissatisfied customer who owns an underperforming token and can’t find buyers might lodge a complaint with a regulatory body against the financial institution. They may argue that by marketing these tokens as assets confined to a private network, they were not given fair treatment.
Evolving technological maturity and resilience
“The growing technological sophistication and robustness of public networks will significantly change how regulators perceive them. Permissioned systems, despite initial hype, have yet to gain significant traction, with their development progressing slowly and yielding limited offerings. The most advanced permissioned systems today boast barely a dozen products, while many in production serve only a handful of users. Moreover, the lack of privacy in blockchains means that there’s usually just one entity with direct access to the chain, with all others having to interact through restricted APIs.
Compare this to public blockchains. Ethereum alone has several hundred thousand smart contracts, nearly 3,000 operational protocols, and is processing several trillion dollars a year in payments and asset transfers. The Ethereum ecosystem is going through a substantial hard fork every 3-6 months and its overall capacity has risen from about a million transactions a day by itself, to hundreds of millions a day through more than 50 layer 2 networks and dozens of independent analytics vendors, compliance providers, and auditors. This is more than an order of magnitude bigger than any permissioned blockchain.
Regulatory acceptance of public blockchain ecosystem
In conclusion, with regulators increasingly accommodating frameworks and infrastructure for cryptocurrencies, it becomes inevitable that they recognize the applicability of Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) regulations not only to the trading and transfer of cryptocurrencies but also to stablecoins and other digital assets. Given that cryptocurrency operates solely on public networks, its global acceptance has paved the way for various types of digital assets.
Examples like the EU’s Markets in Crypto Assets (MiCA) demonstrate where things are going. MiCA was designed considering public networks, although it doesn’t mandate them, it has triggered a surge of investment and innovation among European banks in the field of public blockchain technology.
Essentially, the benefits that private digital networks have enjoyed in terms of regulatory ease and compliance are becoming less substantial, or may already have vanished completely.
In numerous regions globally, regulators no longer automatically reject offerings solely due to their presence on public networks. It’s only a matter of time before they delve deeper and inquire about any attempts to list assets on private networks, questioning the intentions behind these actions. Be advised.
The opinions presented in this article belong solely to the writer, and they don’t automatically represent the beliefs of CoinDesk, Inc., its proprietors, or associated entities.
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2024-12-04 23:50