By Alaa Al-Shuwaikh
Chief Risk Officer, ATME
Blockchain has emerged as an impactful innovation rethinking how assets are owned and traded. By enabling real-world asset (RWA) tokenization, the technology has brought a new level of accessibility and liquidity to capital markets.
For those unfamiliar with the concept, tokenization of RWAs involves representing them as digitally tradable tokens on a blockchain. This approach decreases the check size of assets like private equity and commodities, making them more accessible to investors and allowing the issuers to gain more liquidity. Blockchain also makes the processes of exchange faster, delivering better transparency and reducing operational costs.
For organizations, choosing between public and private blockchain-based platforms is not just a technical decision, but a strategic one that is underpinned by their long-term security and compliance considerations.
In this write-up, I will provide strategic risk insights to help decision-makers like business leaders and investors understand the key differences and make informed choices between public and private blockchains. Let’s begin by first understanding how these two systems differ.
Public vs Private Blockchains: What’s the Difference?
Public Blockchains
Think of public blockchains as vast oceans: open, expansive, teeming with activity, and full of uncharted depths. Like oceans, they are globally interconnected systems that run on decentralized networks like Ethereum where everyone can observe the flow of transactions. They offer transparency but require careful navigation due to their unpredictable nature. This transparency builds trust, but the openness comes with challenges: scalability and privacy can be complex to manage, especially for institutions handling sensitive data.
Despite these hurdles, public blockchains continue to evolve with innovations aimed at improving performance, security, and energy efficiency.
Private Blockchains
Private blockchains, by contrast, are more like ponds: contained ecosystems designed for specific inhabitants. They are controlled, tailored environments that limit access to only authorized participants, making them perfect for use cases needing strict governance and confidentiality. Such systems are ideal for entities with stringent regulatory and data protection requirements, often integrating rigorous KYC/AML protocols to meet these demands efficiently and securely.
Breaking Down the Risks
Both public and private blockchains present distinct opportunities. By diving deeper into these aspects, we can see how they align with specific security and compliance needs. Let’s take a closer look at the key considerations.
Security
- Public Blockchains: Leading platforms like Ethereum are robustly secure because they rely on decentralized validator pools. This isn’t the case with smaller networks as they are vulnerable to 51% attacks. Still, innovations like zk-SNARKs and off-chain computations are enhancing confidentiality and reducing risks.
- Private Blockchains: These systems bring enhanced security through permissioned access and centralized oversight. However, this level of control requires careful management, as centralized governance can introduce risks of misuse if not driven by clear policies and robust oversight.
Regulatory Compliance
- Public Blockchains: Compliance can get tricky on public networks due to their pseudonymous nature. But tools like Chainalysis (a blockchain-based data platform that helps government and private sectors detect and prevent illicit use of cryptocurrency) and permissioned layers are improving transaction traceability and accountability – with full regulatory alignment still a work in progress.
- Private Blockchains: Here, compliance is built into the system. KYC/AML protocols make it easier to comply with regulations, which is a win for a lot of market players. ATME platform, for instance, adheres to the Central Bank of Bahrain’s (CBB) regulations to ensure that businesses and investors interact within a safe and compliant environment.
Data Privacy
- Public Blockchains: Transparency can act like an open window. It allows everyone to observe and verify, which builds trust but also exposes sensitive details that require careful handling. Solutions like zero-knowledge proofs address these privacy concerns, but they have yet to achieve widespread implementation.
- Private Blockchains: Privacy is a top priority for these systems, making them perfect for use cases that demand secure information handling.
Scalability and Performance
- Public Blockchains: While improving, they still face slowdowns during peak demand. Ethereum’s Proof of Stake and Layer 2 solutions are improving scalability, but they are not a silver bullet.
- Private Blockchains: Private systems tend to offer consistently high performance by enabling faster transactions and scalability for large-scale projects. Their downside, however, is that they may lack the global reach of public networks.
Governance and Resilience
- Public Blockchains: Typically use decentralized governance, which fosters resilience and long-term stability but can be slow to adapt to changing needs.
- Private Blockchains: Predominantly use centralized governance that enables swift decision-making and robust resilience through advanced failover mechanisms, which is great for ensuring operational continuity and staying ahead of market demands. Though there are centrally distributed private blockchain platforms like ATME that blend the concepts of centralization and distribution.
In our case, we may have our blockchain nodes hosted for example at Bahrain Clear, which is licensed by the CBB as a Clearing House and Central Depository. This approach decentralizes transaction validation across trusted entities, thereby enhancing transparency and security while maintaining centralized oversight to ensure regulatory compliance and streamlined operational management.
Choosing the Right Platform
The future, I believe, lies where both systems will stand with their unique value propositions. The key is to understand the risks, weigh the benefits, and choose the right tool for the job.
Choosing the right platform, hence, would really depend on what helps you achieve your long-term objectives, regulatory obligations, your internal code of conduct, and many more requirements. Public blockchains shine in transparency while their private counterparts enable innovation by offering tailored solutions that excel in compliance, confidentiality, and control.
With regards to the ATME platform, we have opted to develop it on a private blockchain based on the enterprise-grade Hyperledger Fabric (HLF) framework. While Ethereum excels in open networks and public use cases, HLF is ideal for sectors (e.g. finance, healthcare and supply chain) that require privacy, performance, scalability, and regulatory compliance. Users of HLF-based platforms gain greater control, security, cost efficiency, and alignment with enterprise needs, making it, in my opinion, the superior choice for business-focused blockchain applications.