For the last decade, financial institutions have defaulted to closed, private blockchains for digital assets over open, permissionless systems. Many, if not most of the world’s biggest banks and financial institutions have invested in, and tested out digital assets on private, permissioned blockchain networks. None of them have achieved traction with customers, businesses or institutional investors. A key argument that financial institutions have made for prioritizing these efforts over putting assets on public blockchains is that regulators and regulations strongly prefer, and in some cases, specifically require permissioned blockchains. I believe that time is coming to an end. The “default” regulatory perspective is going to evolve much more over the coming years. Though it might be hard to see now, I believe we’re not far from a time when regulators will look on with suspicion not at putting assets on a public chain, but keeping them on private networks. Three factors will drive this change. Liquidity matters First and most importantly, liquidity matters. Public networks like Ethereum have millions (soon billions) of users and will hold hundreds of billions (soon to be trillions) in capital. Digital assets trading on Ethereum get the benefit of all those customers with capital to invest. Like big, public stock markets, the more buyers and sellers there are in a market, the more likely it is that your product will be priced fairly and find buyers willing to pay a fair price. Digital assets that are only bought and sold on private networks may not get the same fair pricing opportunities. Indeed, I am already aware of at least one case where a real-world asset, tokenized and launched on a private network, has fallen below its net asset value in price. This could, of course, represent a reasonable expectation that the asset’s underlying value is set to further decline, but it could also be an indicator that the private network doesn’t have a robust group of buyers who would normally snap-up such deals. I don’t think it will be long before the first angry customer with an underperforming token and no buyers complains to a regulator about that financial entity. They will claim that in selling them as an asset only tradeable on a private network, they were not treated fairly. Evolving technological maturity and resilience The second big driver that will transform how regulators look at public networks is their evolving technological maturity and resilience. Not only have permissioned systems not really achieved take off, but their evolution has also been relatively slow, and the offerings developed relatively few. The most ambitious permissioned systems today have less than a dozen products and many that are in production have only a few users. The lack of privacy in blockchains means that many permissioned systems have only one entity that can directly access the chain and all the others must access the network 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 Lastly, as regulators accept more and more frameworks and infrastructure for cryptocurrency, they will be forced to accept that the same Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) rules that work for selling and transferring cryptocurrencies can work for stablecoins and other digital assets. Crypto exists only on public networks and its widespread acceptance around the world has blazed a trail for digital assets of all kinds. Regulations like the EU’s Markets in Crypto Assets ( MiCA ) is a good example of where things are headed. MiCA was developed with knowledge of public networks in mind and while it does not require them, it has unlocked a wave of investment and innovation among Europe’s banks in public blockchain systems. Bottom line: the advantages that digital assets on private networks have had with regard to regulator comfort and compliance are eroding, if they have not eroded entirely yet. We have already reached the point in many parts of the world that regulators are not systematically blocking offerings simply because they will be on public networks. Sooner or later, they will take one step further and start asking anyone trying to offer assets on a private network just what it is they think they are doing. Don’t say I didn’t warn you. Disclaimer: These are the personal views of the author and do not represent the views of EY.
