Regulated industries such as healthcare and financial services must comply with numerous requirements, including know-your-customer (KYC), anti-money laundering (AML), and data privacy regulations. In many ways, blockchain answers the call for these industries. Blockchain enables robust KYC and AML by verifying identity in real time and providing an immutable record of data and transactions for financial crime detection. It also facilitates secure data sharing between authorized parties using encryption and access controls. Finally, smart contracts on blockchain can automatically enforce rules, facilitating compliance and reducing human error.
However, for regulated businesses, the question arises as to whether a public or private blockchain is preferable for these institutions. Indeed, past opinion has sometimes recommended a private, permissioned blockchain for such use cases to ensure maximum data privacy and protection, but private chains come with their own challenges that negate their advantages. While there are proponents on both sides, recent innovations in public blockchains (which offer all the security features of private chains and many of the benefits of public chains) may quickly make this question obsolete.
Regulated Industries Provide Fertile Ground for Blockchain
Blockchain offers many potential benefits in serving the unique needs of regulated industries, including finance, healthcare, identity verification and supply chain management.
The estimated value of the blockchain technology market in 2024 is $19.7 billion The estimated value of the blockchain technology market in 2032 is $943 billion 30%
Blockchain offers a great solution to the challenges faced by regulated industries.
Regulated industries present special challenges that blockchain is perfectly suited to manage. Regulation generally exists to protect industry participants, especially around the movement of data and funds. Blockchain’s transparency and traceability have the ability to increase trust and security, while also improving the speed and efficiency of operations.
For example, in the healthcare sector, blockchain’s distributed ledger technology can be leveraged to streamline centralized management of patient records while ensuring only authorized parties have access to sensitive data. Blockchain also offers financial services faster, more secure transactions and the elimination of costly intermediaries, as in the case of cross-border payments. The technology facilitates faster and more efficient transactions compared to traditional banking methods, and programmability through smart contracts enables automated transactions and regulatory compliance.
Blockchain is playing an important role in the financial sector.
As the digital economy expands, the need for stable, efficient, and secure digital money is becoming increasingly apparent. Stablecoins and deposit tokens, which are digital representations of traditional bank deposits issued by regulated financial institutions, are gaining popularity for this purpose. While cryptocurrencies such as Bitcoin and Ethereum are often volatile, stablecoins and deposit tokens are both backed by fiat currency, making them just as stable as traditional money and bank deposits. Some of the world’s largest banks believe that tokenized assets will be crucial to the future of the global digital money environment.
Blockchain Use Cases in Regulated Industries
Healthcare Data Protection:
Blockchain facilitates the secure sharing of medical data between patients and healthcare providers while maintaining privacy and data integrity.
Identification:
Blockchain can provide decentralized identity verification, allowing individuals to securely share personal information without the need for an identity provider.
Smart Contract:
Self-executing contracts, or smart contracts, can automatically enforce contract terms, eliminating the need for a central authority, reducing costs and increasing efficiency.
supply chain management:
Blockchain can be used to track and verify goods as they pass through various stages in the supply chain, which will increase transparency, reduce the incidence of fraud, and enable more ethical sourcing.
Public and Private Blockchains for Regulated Industries
Previous preconceptions have been that private blockchains have been preferred over public blockchains in regulated industries due to strict data privacy requirements, but private blockchains have drawbacks that may make them difficult to maintain and less secure than public chains.
Source: The Value Exchange. DLT in the Real World Survey Key Findings. 2024. https://www.broadridge.com/article/capital-markets/dlt-in-the-real-world-2024. Accessed July 2024.
The benefits of private blockchains for regulated industries are debatable.
The inevitable question that arises most frequently for regulated companies considering entering the blockchain space is whether a public or private chain is better suited for their purposes.
A private blockchain is a permissioned network with access restricted to only those participants authorized to participate, and the consensus process is typically controlled by a single organization or consortium. Because the public does not have access to the code that powers the network, proponents argue that private blockchains are better suited to facilitating regulated corporate transactions. In fact, due to regulatory pressures, nearly two-thirds of the enterprise blockchain ecosystem consists of private blockchains. However, these arguments overlook the point that public blockchains are actually very secure, and that using private chains has drawbacks that could make them unsustainable or impossible to use at all.
Private blockchains have fundamental disadvantages compared to public blockchains.
The disadvantages of private blockchains for businesses include:
High Cost: Building and maintaining a private blockchain network is very costly, requiring numerous resources related to infrastructure, development, and ongoing operational costs. In fact, some sources claim that private blockchains are essentially “unwieldy databases,” with all server, personnel, and network infrastructure costs being the responsibility of the governing entity. These costs often make private blockchain networks impractical or unsustainable over time, not just for mid-sized businesses, but also for world-class enterprises such as IBM.
Difficulty in Scalability and Interoperability: Private blockchains can face scalability issues as they grow in size and complexity, especially if the underlying technology cannot adequately handle large amounts of information. Sources say that private blockchains are significantly slower and less scalable than public blockchains. Furthermore, because private chains are generally built on proprietary technology, interoperability across many institutions is often impossible and cost prohibitive for most private owners.
Security issues: The security of a private blockchain depends heavily on the chosen consensus mechanism and the trustworthiness of the participants. A malicious or compromised participant could potentially take down the entire network. Ironically, some argue that the exclusivity of private blockchains may make them more vulnerable to malicious actors than public networks. Relatedly, the lack of transparency of private blockchains by restricting them to authorized participants at worst increases the potential for data manipulation.
Public Blockchain: New Features for Regulated Industries
Public blockchains are fast, cheap, and ultimately extremely secure, plus innovative token extensions bring all the benefits of a private, permissioned network to a public blockchain.
The benefits of public blockchains are in addition to those of private blockchains, and many more.
Public blockchains consist of decentralized networks where anyone can join, view transaction history, and verify data integrity through consensus mechanisms such as Bitcoin’s “proof of work” and networks such as Ethereum and Solana’s “proof of stake.” Proponents of public blockchains add that, contrary to their name, they are also highly private. Indeed, in their original conception and design, the inherent security of blockchains stems from the anonymity of the parties involved in a given transaction. The blockchain’s immutable and permanent transaction record ensures this security. And because this record is rapidly verified by multiple independent data centers around the world, consensus is fast and data tampering is nearly eliminated. Moreover, integrated encryption and other forms of obfuscation further strengthen the inherent security principles of public blockchains.
At Solana, token expansion capabilities are enabling new use cases on the public blockchain.
Additionally, innovations in public blockchains are making the public vs. private debate moot. For example, our new token issuance program, Token Extensions, is a turnkey innovation for the Solana public blockchain that allows the network to apply similar security controls to permissioned private blockchains. Some of the features enabled by these “extensions” are confidential transfers, reversibility, and the ability to globally whitelist or blacklist accounts. These features are embedded in the token itself, so no third-party smart contracts are needed to enable this type of functionality. This innovation is now enabling new use cases on public blockchains for regulated companies, such as the issuance of stablecoins for payments and the tokenization of real-world assets like stocks, bonds, real estate, commodities, and even artworks. Tokenization of these assets increases liquidity, enables fractional ownership, and makes these investments more accessible to people who might not otherwise be able to participate in these opportunities.
There is a “momentum shift” happening among businesses towards public blockchain adoption.
The HFS Horizons report noted a recent “shift in momentum towards enterprise focus on public blockchains,” with continued innovation driving greater adoption of public blockchains by regulated companies. While researchers report that highly regulated companies often choose private blockchains due to regulatory pressures, they note that companies are becoming increasingly comfortable with public blockchains as innovation takes privacy to new levels. The report concludes that companies will increasingly turn to public blockchains to achieve scalability in the coming years.
A secure and stable public blockchain solution for regulated industries
Innovations such as the Solana network’s token expansion represent a paradigm shift in how assets are developed, managed, and traded. By strengthening security measures, ensuring regulatory compliance, and facilitating the tokenization of real-world assets, this innovation has the potential to make blockchain a revolutionary force in many regulated industries.
As blockchain integration continues to bridge the gap between traditional and decentralized financial ecosystems, the technology will help pave the way for a more efficient global economy based on transparency, security, and financial inclusion.
Solana was selected for several reasons. [PayPal USD (PYUSD)] Solana has significant strengths in scalability, including proven cost-effectiveness and high throughput. But the more nuanced reasons for choosing Solana relate to the unique capabilities it enables with PYUSD. PYUSD is enabled by Solana token expansion, and brings familiar FinTech capabilities to stablecoin payments. These features are not just nice-to-haves; we believe they are critical capabilities to offer merchants if PYUSD is to expand its utility across a broader segment of commerce.”
Source: PayPal USD. PYUSD Launches on Solana: The Next Stage of Adoption. May 29, 2024. https://pyusd.mirror.xyz/TpEwPNybrwzPSSQenLtO4kggy98KH4oQRc06ggVnA0k. Accessed July 2024.
