Public Blockchains Are the Future for Regulated Industries

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.

Regulated industries, such as finance and healthcare, face unique challenges that blockchain technology is well-suited to address. These industries typically have stringent requirements, such as know your customer (KYC), anti-money laundering (AML) and data privacy regulations, which blockchain can help to meet.

For instance, 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. Past opinion has favored private, permissioned blockchain for such use cases to ensure maximum data privacy and protection. However, 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 Present Special Challenges That Blockchain Is Well-Suited 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.

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.

Blockchain Use Cases for Regulated Industries

* Healthcare data protection: Blockchain can facilitate the secure sharing of healthcare data among patients and providers, while also maintaining privacy and data integrity.

* Identity verification: Blockchain can offer decentralized identity verification, enabling individuals to safely share their personal information without the need for identity providers.

* Smart contracts: Self-executing contracts, or smart contracts, can enforce contract terms automatically, avoiding the need for a central authority and resulting in reduced costs and improved efficiency.

* Supply chain management: Blockchain can be used to track and verify goods as they move through different phases of a supply chain. This leads to enhanced transparency, lower incidence of fraud and more ethical sourcing.

Public vs. Private Blockchain for Regulated IndustriesPast 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.

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.

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