By: David Vandervort
In October, 2016, JP Morgan Chase unveiled Quorum, an effort to extend blockchain technology with “A permissioned implementation of Ethereum supporting data privacy.” The point of the “permissioned” aspect was that it could allow interaction between public and private (permissioned) blockchains. Whether it worked or not (I have only glanced at the code, not tried to run it) this shows something significant about how financial companies think about blockchain technology.
Private blockchains, run by single companies like JP Morgan Chase, give those companies control over their own and their customers’ transaction data. Among other things, that control makes it possible for them to protect client’s privacy. Registering transactions on a public blockchain, which will have many more nodes attached, gives them more security. Building this on top of Ethereum, a smart contract platform, shows that they have more in mind than simply sending money from account A to account B. Good to know.
On February 28, 2017, the announcement of the formation of the Enterprise Ethereum Alliance (EEA) showed the next step. EEA is a consortium of established companies, startups and even non-profits, that intend to work together to enhance Ethereum and the systems that surround it so that they are suitable for “enterprise-grade” applications. More or less by definition enterprise-grade applications must be able to smoothly handle high transaction volumes, while conforming to known standards of behavior. Standards are important for interoperability and auditability. We’ll come back to this point in a bit.
Quorum is one of the things the folks at the EEA point to as an example of the technology they are building. JP Morgan is one of the founding members of this alliance. Notably, it’s not all just big banks or fintech startups. Non-banking members include Microsoft, Thomson Reuters, Intel and British Petroleum. There has been plenty of fine reporting on the EEA announcement. See https://drive.google.com/file/d/0B42vMkapQi1MSEVaa2tuVEtXZXM/view,https://www.ethnews.com/enterprise-ethereum-alliance-officially-launches and especially https://www.reddit.com/r/ethereum/comments/5wo6hy/ethereum_enterprise_alliance_live_updates/ for some examples. What I want to do here is discuss what it means.
To begin with, the Age of the Blockchain is in full swing. The struggle that Bitcoin and its innovative blockchain have gone through to be accepted as legitimate and important is all but over. Likewise, smart contracts in general and Ethereum in particular are here to stay. For a technology that is still in its infancy, this is remarkable. It is also a tremendous responsibility. The hacking of the DAO (Distributed Autonomous Organization) last summer was catastrophic, at least until the Ethereum hard fork got people their money back. Something similar involving a few mega-banks like JP Morgan, Credit Suisse and Mellon Bank could take down a big chunk of the world economy. The pressure on them to have a rock-solid, safe and secure implementation is immense.
In many countries (including the U.S.) finance is a highly regulated industry. Know Your Customer and Anti-Money Laundering laws have spread almost worldwide since 9/11. They require banks and similar institutions to gather information on who their customers are, verify their identities and often report transactions over a certain limit (In the U.S. I think that limit is $10k). This is where Quorum or something like it comes in. It seems to allow institutions to run an instance of a blockchain, which may contain proprietary data and PII (Personally Identifiable Information) internally, where it can be protected. In addition, they can interact in a more protected way with a public blockchain. Authorities can audit the internal blockchain for compliance while companies can do business on the public one. This may only be a start but it shows that someone is thinking hard about the risks and looking for real solutions. So far, so good.
One of the more interesting goals claimed by the EEA, is the development of standards and governance for the interoperable blockchains they envision. Think about it. Two banks, each with an internal blockchain, want to do business. Maybe they have large corporate customers — or even countries — that want to send large amounts of money back and forth on a regular basis. They need to protect data about who the clients are behind the money but they also need to reveal the amount and type of currency, the rate of exchange, the institution initiating the transfer and who knows what else?
A standard transaction format seems essential not just for interactions with the public blockchain but for transparency, so everyone can read the blockchain and know its state. So it can be audited. Blockchains optimize data storage. They measure them in bits, meaning that some format like JSON, lightweight for transferring data between a web browser and an API, is much too verbose for a blockchain. Millions of transactions take up too much room to be saved as ordinary text. There is much to consider when developing data formats.
Governance is another aspect of standards and of the work of developing blockchains. The hard fork of Ethereum referred to earlier repaired the damage done by the hack and returned money (Ether) to DAO investor’s. Some people thought this action was unethical and kept working the old way, with what is now called Ethereum Classic. In essence, the users of Ethereum Classic rejected the legitimacy of the governance then in place. Banks and other companies that may come to depend on Ethereum for day to day operations are unlikely to have a similar option. It would upset shareholders, regulators and clients, too much. Nor do they want far-reaching decisions about the protocol being made by a bunch of developers who they do not know and have no control over. They will want (need) to have a say in what happens.
Smart contracts add another layer of complexity to the standards issue. What terms or operational data should smart contracts always have so that all the entities involved can understand and verify them? What terms should they never have? How can terms be modified, or terminated? These questions can be answered by technology in multiple ways. Answering them in a way that also satisfies regulators and customers is another question. Development of standards that allow people to have confidence in the state of any given smart contract seems incredibly important.
Interestingly, a project out of Australia is considering some of the same issues of standards, legality and governance, in an international context. Meanwhile, last summer, the EU’s International Securities Association for Institutional Trade Communication (ISITC) published a set of benchmarks for blockchain standards. In other words, this is the frontier. Efforts are arising around the world to set up the legal and logistical infrastructure that will allow blockchain tech and smart contracts to be integrated into the world economy.
With the amount of information currently available, it’s hard to tell how far along the EEA is in developing its own standards and in interacting with these others around the world. However, we should note that the current membership of the EEA includes heavy hitters such as JP Morgan and Microsoft, companies that are veterans in dealing with legal, regulatory and standards issues. If their expertise is brought to bear, we can expect to see interesting and well-thought-out results.
So we’ve seen that, on the technology front, the EEA is off to a good start. There is more to do, especially in scaling up to “enterprise-grade” transaction volumes and speeds and the interoperability of multiple blockchains and blockchain-based currencies. For businesses like banks and investment companies, having not only the tech but some predictability in its behavior are crucial. The Enterprise Ethereum Alliance seems to be well positioned to push this frontier forward. It will be interesting to see what comes next.