Moody’s Warns of Private Blockchain Risks


Some of the newest reporting on how regulators and other parties are assessing blockchain comes from Moody’s Investors Service, a research wing of the renowned credit rating agency that has such a large effect in the bond market.

William Suberg at Cointelegraph is reporting this morning on a new broadside from Moody’s about private blockchain technologies.

“Part of an investigation into the potential impact of blockchain technology on structured finance, the report highlights key differences between current market trends,” Suberg writes. “Specifically, corporations should be aware of the pluses and minuses involved in using private blockchains, which can run without a decentralized consensus or governance mechanism and thus become open to manipulation.”

Suberg cites a specific line in the research report showing what may happen when blockchain technologies are not based on the public consensus model that is so central to cryptocurrencies like Bitcoin and the work of its founder, Satoshi Nakamoto:

Risks include counterparty concentration, IT and operational risks, inappropriate blockchain governance and legal and regulatory issues.”

Essentially, as this report shows, companies that are trying to create private blockchains are really setting out in a brand-new direction with regard to how blockchain has been traditionally used to create decentralized payment systems.

The bulk of cryptocurrencies or crypto “coins” are tied to decentralized, consensus-based systems – think of a deal being done in a room full of hundreds of people as witnesses. When you make a blockchain private, all of that goes away. To any true blockchain purist, private blockchains are not really the same technology at all.

Suberg’s report shows how central banks are looking to create central-bank digital currencies that may be centralized. However, it’s one thing for a central bank to set up a national system – it’s another thing entirely for private companies or parties to create private coins that may not be accountable to a very large group of people.

Counterparty risk is among the chief concerns because a few powerful interests could effectively ‘own’ private blockchain networks. The whole transparency and integrity mechanism for blockchain is the decentralized, consensus-based platform.

That’s one reason why Moody’s, such a major name in financial observation and oversight, has put out this kind of report warning that private blockchain may be a very tricky area of tomorrow’s finance world.