Moody's Research alerts on risks of Private Blockchain

One of the major players of the so-called Big Three Credit Rating Agencies – Moody’s Investor Services has warned the corporate industry of risks involved in private or centralized Blockchain.

Amidst the rapid adoption of blockchain , the rating company highlights on the potential impact of this technology on structured finance in a report titled with – “Blockchain Improves Operational Efficiency for Securitisations, Amid New Risks“.

Essentially, the document stresses on the difference in security between private and public blockchains, saying that consensus mechanisms in private chains may not be as strong as those seen in public chains, or may be absent altogether.

The report further states that,

Private/centralised blockchains are more exposed to fraud risk because system design and administration remains concentrated with one or few parties

Talking on the risks, reports quotes that, “Sound blockchain governance is key for risk management” especially where roles and structural responsibilities are clearly defined. However “the number of gateways for attacks” increases along with benefits of easy auditing and data recovery.

Perhaps it’s known fact in the finance industry that major global entities have already invested in blockchain in one way or the other. But resultant of which doesn’t appear to be the same as that of a public blockchain like Bitcoin. Examples like Accenture’s editable blockchain technology indicates that users have the privilege to alter the flow of information and in turn implies of differences in security between private and public blockchain systems.

Are Smart Contracts completely trustworthy?

The report also questions on the trustworthiness of code, entities, and dynamics that are hard to see and understand from the outside which might pose a potential risk to the system.

Well said that Moody’s report also discusses blockchain’s potential to bring benefits to a number of industries. For example, the use of smart contracts could streamline the creation and management of securities. Although, as the technology hasn’t reached maturity yet, “applications, in the near-term, will remain experimental, limited to pilot phases with a small number of participants and/or parallel processing with conventional technologies”.

Quoting various instances where blockchain based land registry has turned out to be pivotal in EU nations, the author concludes that,

Without blockchain based land registers, efficiency gains on the asset side of a mortgage backed securitization transaction will remain limited.

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