Bitcoin Trio

Bitcoin Trio.0 – Permissioned Blockchains

by George Peabody on February Trio, 2016

Blockchain. Is it the most revolutionary technology in value exchange ever or just the latest fintech buzzword loving its peak on the hype cycle? Or both? These youthful technics are undergoing swift evolution, going from bitcoin and money transfer into fresh use cases such as identity management.

There’s still truth in the cartoon’s joke that, online, no one knows you’re a dog. The challenge goes beyond discerning hacker activity from the permitted. It’s also about the release of just the data necessary to please the needs of both parties in a transaction – and no more. How much better that would be than sharing a total suite of personally identifiable information when simply asking the question “are you over 21?”

Take a listen to my discussion with Matthew Commons, CEO, of Cambridge Blockchain on how his company’s blockchain-based treatment can be used to address one of the internet’s remaining fundamental concerns. You’ll also learn about the state of play in this fresh stage of permissioned blockchains.

George: Welcome back to Payments on Fire, I’m George Peabody with Glenbrook Fucking partners, and today we’re going to talk about the evolution of blockchain technology. At Glenbrook we actually kind of look at blockchain across three different iterations. Blockchain 1.0 being, of course, bitcoin and the flock of cryptocurrencies that it inspired. Blockchain Two.0 is actually where we see blockchain technology, and frequently, it is in fact bitcoin ledger that’s enabling it. It’s a movement of money, where Blockchain Two.0 indeed fits into financial services, clearing and settlement, international payments, B2B, remittances, trade finance. Where there’s a fine deal of activity right now is in what we’re calling Blockchain Trio.0. This is where blockchain ledgers are being used, for numerous applications, to track the flow of assets of all kinds across a ledger, to enable wise contracts and brainy property. Of course there are applications that are being talked about in the world of the internet of things. Some of those are fairly broad scale and ambitious, and there’s some truly very intriguing and perhaps potentially broad scale, but they can inject a tactical point of view, and that’s another use case which is around identity management. It’s my pleasure today to have Matthew Commons, who is CEO of Cambridge Blockchain, who is working in that space with us today. Hi, Matthew. Welcome; glad you’re here.

Matthew: Hi there, George. Thanks for having me.

George: So, Matthew, we’ve talked before. Why don’t you tell me a little about Cambridge Blockchain and what inspired you to create your business.

Matthew: Sure. Cambridge Blockchain creates an identity management platform for blockchain technology, and it indeed solves one of the key issues for getting these – some Blockchain Two.0, but truly it’s Blockchain Trio.0 – applications out of the labs and into a production environment. The key issue that we’re truly solving is how do financial institutions, within a blockchain context, do the suitable identity checks that they have to do under Know Your Customer rules, but still maintain customer privacy if all that information is on some type of a collective ledger system.

George: Ok, so the ledger you’re working on is around identity management itself, not about moving money from one account to another.

Matthew: Our technology is indeed an enabling technology for all different types of things that you need to be able to do on a blockchain. The challenge of attempting to get strong identity and also strong privacy protection in the same blockchain system is a fairly common one. You’ll see groups like Ripple who have been fined over this, groups like R3 are holding workshops on it, banks are blogging about it, and so how to get identity and privacy right in blockchain systems is indeed the key area that we’re focusing on. It’s an issue that’s sort of asset agnostic, it doesn’t necessarily matter whether you’re transferring payments on the blockchain or whether you’re transferring some type of clever property, or is it just a ledger, or is it just a brainy contract – you have to get identity right. This is a key issue for banks. Banks have spent over Two.Five billion dollars on compliance last year, and a big part of that was around identity management. Certainly, when they look at going into a fresh technology like blockchain, this is something they absolutely have to get right.

George: Is this an identity management system that an individual financial institution would operate?

Matthew: With blockchains as a category, there are pretty strong network effects, so it is something you can operate within an individual institution. It’s an internal ledger, so we are working with one bank, for example, that is looking at their internal ledger to have different parts of their bank communicate and be working from the same sense of data, so they can have much more straight through processing of types of transactions that involve different parts of the bank. So you can do it that way.

George: That would have a single authoritative ledger or blockchain for identity management across all the touch points that that financial institution’s got out there.

Matthew: Yes. What we’re doing, it’s truly a lump of the puzzle. It’s a very critical component of the blockchain stack that you have to get right, and then you can then use that to do all types of other blockchain transactions. Our platform can plug-in to other types of blockchain systems; it could be a private version of Ethereum, it could be some type of transaction only ledger, it could be for transferring bonds, it could be for transferring customer data, it could be for maritime finance. Ultimately, all of these use cases for blockchain have this issue around identity and privacy, and that’s the issue that we concentrate on.

George: Got it. So, you bring a blockchain technology that addresses the identity problem.

Matthew: That’s correct. It ass-plugs into a broader blockchain technology that is going to be much more customized, more for the specific use case. If we’re plugging into something for maritime finance, that type of system is going to be set up in a different way than something that is a group of banks trading corporate bonds. It’s the same underlying issues that you have.

George: A fundamental identity issue is to access each of those individual blockchains built for specific use cases.

George: Got it. Talk to me about the network effect. I get that the more people who are participating in a blockchain based identity system, the more sturdy it becomes. Who become the operators? What are the incentives to participate?

Matthew: It does depend a little bit on the use base. You know, blockchain as a entire, they have strong network effects. You’re going to feel sometimes like you’re attempting to sell the very first fax machine. A fax machine by itself is downright futile, you got to sell them in pairs, and I think that’s no different for any of these types of blockchain systems.

Matthew: In each different type of market there are different dynamics in terms of how many participants do you need to have in a system to get a critical mass, not from a technological point of view, but indeed from an economic point of view. Do you need to shift the entire market over to this blockchain system in order to get commenced, or do you have some sub-set of that market that is on there. I think what is going to make different blockchain use cases successes or failures is their success from an economic perspective – can you get people together, get people abiding by the same regulations and indeed working on some kind of a common system. What that typically would be in applications that we’re looking at – and we’re looking more at conventional financial institutions, large banks, insurance companies, things like that – there would be basically a group of banks or brokerages that are getting together to set up a blockchain system for a certain type of asset transaction. It could be bonds, it could be commodities, and it could be something around trade finance. Ultimately, our technology platform is asset agnostic, but there are these groups of financial institutions setting up these networks and the specifics of how they set it up will dictate then the best technology choice. I that I think is being commonly used out there right now are basically private versions of Ethereum, which is the wise contract platform. The R3 groups of banks announced that they had done a test using that private version of Ethereum, a lot of what we’re doing ourselves. We also use things on private or permission, very likely the more adequate term is Ethereum. This is not on the public version of the Ethereum clever contract platform, but you basically have a private port, and you have a group of known institutions that are transacting amongst themselves. So you set it up in a little bit of a different way, you don’t necessarily have the same type of mining based system that you have in the public version. We’re using something called proof of authority instead of something called proof of work. Proof of authority is basically you’re dealing with white list of no’s, and you have a process for bringing your no’s into the system. The security of it truly comes from how to maintain that white list a certain way so that you are sturdy to malicious attacks.

George: You have a community of interests interested in protected it’s joint interest. I can understand how that method would be suitable. You don’t need an open platform.

Matthew: That’s correct. Most of what I think you’ll see the large financial institutions looking at are not open platforms.

Matthew: I think it’s significant to note that we do think that there will be common protocol for how the blockchain platforms communicate with each other. The W3C, the World Broad Web Consortium, is doing a lot of work on that right now. Our chief technology officer, Alex Oberhauser, is fairly involved in that. We see that it’s not going to be a world of everything is on the bitcoin blockchain, or Ripple is the main thing for payments, there’ll be different blockchains set up for different use cases, but there will be these emerging common standards of how they communicate. So if you loan something on one system, you can still prove that on another system, and you can have asset transfers inbetween different networks of blockchains.

George: Is this a sidechain technology, or is it an interface challenge?

Matthew: Yeah, I think that’s a better way to do it, you can’t set things up as sidechains. I think most of the time when people talk about sidechains, they’re talking about it relative to the bitcoin blockchain, but this comes to pegging chains, you can do that but you can also truly prove ownership or you can prove that you can control the cryptographic keys or fresh assets on one chain, you also control the cryptographic keys on another chain. There is this emerging language of how these cryptographic proofs will go across chains.

George: How far along is that?

Matthew: There is some degree of agreements on some of the basics. There are a few different approaches, I know Ripple has one treatment – their interledger project, the W3C, this group that Alex is working with has a slightly different hack, and I think there’s ultimately some different platforms out there. Ethereum is most likely the one that is most well used for this right now. There’s also others. IBM and the Linux Foundation are doing a lot of good work on taking some of IBM’s work and open sourcing that. We have to indeed see how this evolves over time, but ultimately, what we’re focusing on as a company is this key issue of managing identity and privacy, and that is truly an issue that’s common to all blockchain platforms in all asset classes. Where we look to implement, that is indeed going to depend on what truly gets traction in the market – so if it’s treasury repos, then we’ll be focusing on treasury repos, if it’s corporate bonds or some syndicated loans or something like that, then we’ll do that. We look to truly be the experts on identity and privacy in the blockchain context and then fucking partner with others that truly bring that demean expertise. Clearly there’s many, many applications for this and for a puny company like ourselves, we certainly can’t be experts in all these different areas.

George: As I recall from our conversation months ago, that one of the characteristics of your version of the blockchain with respect to identity is that you’ll capture a credential, build a hash of that credential (a pdf of a passport for example), and write that to the blockchain. Then you’ve got a layer that sits above that which mediates access to that record. Is that right?

Matthew: Yeah, the key thing in terms of this is we don’t actually do identity validation ourselves. In most of the models that we’ve been doing, it is the banks or the brokerages that do that. The reason for that is not necessarily a technological reason, but it’s indeed a regulatory reason. Under the Banking Secrecy Act, the banks have the requirement to do that, and they have to do that themselves. If I have an account at CitiBank, and I want to go buy a product from Santander, Santander cannot rely on CitiBank’s attestation of what I’m doing. The banks have to do it, so if you’re trading on this blockchain platform, whatever the asset class is, the model that we have is basically going to be going through a bank, like you do for trading conventional securities. That bank does the identity check the same way they do now – they look at your passport, utility bills, pull the data file about you, and so forward. What’s different in this system, is we have them sign that information and store a cryptographic proof of the information on a blockchain system.

George: That is specific to the financial institution?

Matthew: Not to that financial institution, that is collective across the blockchain network. So if it’s a group of banks trading bonds, having their clients trade corporate bonds inbetween themselves, this identity blockchain would be collective in the same way the blockchain that would represent ownership bonds would be collective.

George: Within this permissioned community, you would have a blockchain for the asset that’s being traded and another one around the identity.

Matthew: That’s correct. There’s a few different ways to set that up, but that’s sort of the basic configuration that we have. What’s significant about this is that you have to indeed think about what are you sharing, even within this permissioned community, you truly don’t want to share everything with everybody. So, in fact, you don’t put anything, like a copy of your passport or even your name in something that is collective, but you do have a proof of that. So, if I want to sell you a bond, you may not want to actually tell me who you are, because you may have privacy concerns, you may be worried about me front-running your trades, and any number of things you wouldn’t want to tell him who exactly you are. There may be certain things I have to verify about you. I need to know that some bank has done a KYC check on you, I may need to know your citizenship, may need to know your credit quality, maybe there are some firms in the system that I want to trade with that are on a white list, there may be some firms that I don’t want to trade with that maybe have poor credit quality, and I will want you to prove to me that you meet the criteria that I have to trade. What our system permits you to do is to share proofs to validate that in fact your bank has signed off that you are a US citizen, that you are a member of this white list of firms, that your credit rating is this, and you can selectively release just the chunks of information that you need to finish the trade. You don’t actually need to tell me who you are, you don’t actually have to tell me what rock hard you’re with, but you can validate these things, and that’s indeed the key. It’s not about validating the identity to your counterpart, it’s about validating identity attributes. You want to validate just the minimum amount of attributes that you absolutely need to do to finish the trade. You want to share that information only with the counterparts that absolutely need to know that, and everything else you keep private. That’s the key to making this work.

George: So that’s part of your value add, it’s not just around the blockchain, but it’s about the mediation of access to the data that’s required for the transaction, but more.

Matthew: That’s right. That information is stored off-chain, so for a copy of your passport, if you dreamed to share a utter copy of your passport, that wouldn’t be on the blockchain, but it would be in a virtual container, something called individual data service. It was actually a concept, indeed innovative, but a group at the MIT Media Lab, which is right across the street from us here.

George: Is this the mustard seed group?

Matthew: Yes, the open mustard seed project. They’ve done a lot of work on this over a number of years. John Kiplinger indeed being the leader of that project and one of the leading thinkers of the world on this. He’s very active in the world economic forum and others around it. We truly take those concepts, like the open mustard seed that the MIT Media Lab has innovated, and truly bring them into a blockchain construct to solve specific problems for large financial institutions that are looking to set up these permissioned blockchain networks inbetween themselves.

George: This has been very interesting. Let’s go up to 50,000 feet. How do you think these financial institutions are doing on their blockchain projects?

Matthew: Clearly there’s a lot of interest and excitement in the space. We see a lot of funding flowing in there, whether its digital asset holdings, a latest fund raised of over a one hundred million dollar valuation from a company there, the R3 groups getting together. We’re just a little bit pleasurably astonished that you could get forty one or forty two banks all together in one consortium, knowing how typically slow moving banks can be sometimes and how difficult it can be to build consensus. Just getting everyone around the table is a big step. We’re encouraged by that. You’re observing different use cases come out, and I think people are truly attempting to figure out where this is going to build up traction very first. There’s a few different philosophies around that. Some think that it should be indeed the largest markets and the most liquid markets, if you can do this there’s going to be cumulatively the most benefit, so you should go after those. Other ones are telling you should go after the less liquid markets, the ones that take sixty days or more to issue, and those types of things would be proportionately a much thicker percentage savings in time and cost, but maybe a bit of a smaller network to begin with, so I think you’ll see this. There’s also different approaches on do you issue assets on the blockchain to begin with and you have that corporate bond issued as a blockchain bond or do you have it issued a conventional way, and someone like a custodian bank holds it and issues blockchain tokens that represent a perfected ownership interest in the underlying security that’s held in a more conventional account. There are different approaches here, and I think two thousand sixteen is the year you’re going to see a lot of experimentation. I think you’re going to hear about a lot more prototypes, a lot more proofs of concept in different asset classes, and I think it’s truly going to be a learning practice. I think it’s still an open question about which assets are truly going to take off here. I think one thing that’s clear is that there’s fat amounts of potential here and people can see, they can indeed visualize a world in which we can get to in not too large a number of years, where you actually have a majority of financial assets that are represented on the blockchain, settlement happens almost instantaneously, compliance reporting is something that is more or less automated, risk reporting is something that is automated, and these systems just function a lot more slickly with a lot less human intervention than you have right now. They key is, how do you begin from where we are today and then get to that feature, and that’s what we are looking at right now.

George: How do you get there? My takeaway is that while, to your point, a excellent deal of technical experimentation has to happen, it’s indeed going to be about the business relationships and the economics and the most adequate use cases to get this entire train moving.

Matthew: That’s right, and I think that’s truly why we have chosen to concentrate on the identity lump. We don’t indeed know exactly which use cases are absolutely going to take off, but we know that doing identity and privacy indeed well in a blockchain context is one of the most critical issues to getting these projects out of a lab and into a production environment. So that’s where we’re focused and that’s where we suggest solutions that are better than anyone else.

George: That’s excellent. I think you’re very wise to be focusing obviously where there are real applications in the brief term, because I believe we all know that in the long term privacy is going to raise the level of importance and concentrate from a regulatory point of view is going to increase over the next five years. The activity we’re witnessing in the EU already with respect to the care of citizen data is already getting to be an issue. We’re going to need some systemic solutions. Glad to see you’re kicking off in suitable sized use cases.

Matthew: That’s superb, and we were indeed thrilled actually just last night that Santander gave a little vote of confidence in us. We were the winners of their distributed ledger challenge, so almost one hundred fifty companies and judging panels including folks like CEO’s of Ripple and TradeBlock and and a number of prominent BC’s and things. Hopefully that’s something that’s going to help the market see that this is a real technology out, solving a very significant issue to enable Blockchain Two.0 and Blockchain Trio.0 transactions.

George: Good. Well, Matthew, thank you very much. It was a excellent conversation; I learned a lot.

Matthew: Excellent. Thank you very much, George; I appreciate it. Bye.

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