Moody’s Report Criticizes Private Blockchains

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Moody’s, the renowned ratings agency, has released a report warning about the risks of centralized, private blockchains. The report, entitled ‘Structured Finance — Global: Blockchain Improves Operational Efficiency For Securitisations, Amid New Risks’ looks at how banks can benefit from blockchain technology but also warns about certain aspects of particular chains. The report discusses issues such as trust, governance and the risk of fraud/attacks within blockchains, offering a balanced perspective on the emerging technology while raising important issues on the technology that has already been adopted by the likes of JPMorgan and Santander.

Private Blockchains “Exposed to Fraud Risk”

Moody’s report touches on a number of areas, with the discussion of private vs public blockchains particularly telling. Moody’s states that the consensus mechanisms used by public blockchains are stronger than those used within private blockchains, which may have little or no mechanisms in place at all. The report comes at a time when private blockchains like Ripple and Stellar are trying to make further inroads into the banking sector, and will presumably have something to say about Moody’s assertion. The report elaborates on this aspect by stating that “Private/centralised blockchains are more exposed to fraud risk because system design and administration remains concentrated with one or few parties.” This is an accusation that has already been levelled at the likes of EOS. It isn’t exactly glowing about public blockchains however, stating that despite increased auditing and data recovery capabilities over private blockchains, decentralized systems are more open to being compromised, such as through 51% attacks. Moody’s conclude that private blockchains with a clear governance and responsibility structure offer the best balance for institutional use.

Blockchain Benefits

On the positive side, Moody’s state that blockchain technology, when properly managed, does have huge benefits. They state that blockchains and smart contracts could be used to streamline a number of areas, from loan issuance to land ownership, noting however that existing projects are “limited to pilot phases” or have been embedded within conventional technologies. The report, snippets of which have been leaked to the public, talks a lot of sense and offers a well-balanced view on the current and future state of blockchain offerings. Whether certain private blockchains will have the same opinions however is doubtful.