Moody’s warns of risks posed by private blockchains

Bond credit rating firm Moody’s has released a comprehensive blockchain report in which it warns of the risks associated with private blockchains. The New York-based firm also hailed the many benefits that accrue from blockchain implementation, especially for financial firms.

The report, titled ‘Blockchain Improves Operational Efficiency for Securitizations, Amid New Risks,’ examined the differences between private and public blockchains, with each having its own set of benefits and risks.

Public blockchains are easier to audit as well as collect and recover data. However, their decentralized nature makes them more susceptible to attacks. The firm thus advised firms that are exploring blockchain technology to consider private blockchains. However, they must be aware of the risks that come with it. These include a weaker consensus mechanism compared to public blockchains. The report added:

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

Despite the risks posed by blockchain technology, its benefits are immense. The report looked at a number of industries which would benefit greatly by integrating blockchain technology, including the securities industry. The use of smart contracts could greatly streamline the creation and management of securities, the report deduced.

We are still a long way from full-on blockchain integration, however. Currently, “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,” the report concluded.

In the future, smart contracts could revolutionize the legal industry, being applied in the development of legally binding agreements. In effect, this could replace law with code, at least partly. However, scripting language used to develop smart contracts means that they are less flexible than the current systems, the report explained:

“A full replacement of natural language contracts by computer code is unlikely, because of a lack of flexibility with regards to the scripting language. Furthermore, parties to a smart contract should consider governance and control mechanisms to ensure that modifications to the original contract can be made at a later stage without greater difficulties.”

Despite the hurdles that come with the new technology, institutions have greatly invested in its research and development. In the past week alone, Lenovo, Philip Morris and Volkswagen have all announced blockchain initiatives.

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