Since the inception of the concept of a cryptographically linked chain of blocks, blockchain technology has undergone significant transformation. Its applications have expanded across various sectors, notably within financial services, where the technology is being embraced on a large scale, fulfilling many of its initial promises.
A recent example of blockchain’s practical application in finance is seen in a transaction involving BlackRock and JP Morgan Chase. The asset management giant utilized JP Morgan’s Tokenized Collateral Network (TCN) to tokenise shares in a money market fund. These tokenised shares were then employed as collateral in an over-the-counter (OTC) derivatives trade with Barclays. This operation, executed on a private blockchain platform known as Kinexys, illustrates the increased efficiency and stability that blockchain can provide in financial transactions.
However, despite its advantages in reducing friction and enhancing efficiency, blockchain’s adoption in banking and finance has been hampered by concerns regarding confidentiality. In stark contrast to traditional banking systems, public blockchains default to transparency, exposing critical information such as wallet balances and transaction histories. While this level of openness may appeal to retail crypto traders, it poses a significant risk for entities like private banks, hedge funds, and wealth managers that need to maintain client confidentiality. The visibility of every deposit, loan, and withdrawal not only jeopardizes client privacy but can also undermine competitive advantages in a highly regulated industry.
As the demand for privacy-preserving technologies grows, major tech companies like Apple and IBM, along with several privacy-focused blockchain initiatives, are stepping into the spotlight. There is a budding interest in technologies that can facilitate confidential, scalable, and compliant financial applications on-chain, without compromising performance or auditability. One promising area of development is Fully Homomorphic Encryption (FHE), a cutting-edge encryption technology that allows data to be processed in an encrypted state, maintaining confidentiality even in public blockchain environments.
FHE presents a range of potential applications, including:
– Secure transaction processing that ensures sensitive financial data remains undisclosed to competitors.
– Risk modeling and confidential on-chain payments, making blockchain viable for financial institutions.
– Continuous updates to smart contract states while preserving encryption, allowing for innovative wealth products and structured investments.
Despite its clear advantages, FHE has not yet seen widespread use in blockchain due to historical barriers regarding performance and accessibility. However, there is a growing momentum towards addressing these challenges. Recent advancements have significantly improved the speed of FHE technology, making it suitable for a variety of on-chain payment scenarios. Projections indicate that FHE could become 100 times more scalable in the coming years, capable of catering to even the most demanding applications.
Additionally, advancements in hardware integration, particularly the utilization of Graphics Processing Units (GPUs), are paving the way for processing hundreds of transactions per second. Efforts are also underway to develop dedicated chips that could further accelerate FHE, potentially enabling tens of thousands of transactions per second.
On the developer front, the integration of FHE has become more user-friendly, as current coding languages like Solidity are now compatible, allowing developers to deploy their projects on chosen blockchain networks without having to learn new languages.
The past has dictated that using blockchain necessitates transparency. Yet, with the accelerating evolution of technology and an increasing shift towards on-chain finance, the realization of executing complex transactions with full confidentiality, compliance with regulations, and institutional-grade performance may soon become a reality for the financial sector.
