Feeling exposed? The challenge of embracing public blockchains for financial transactions
In our work we meet many customers, established companies with multitudes of users, who are interested in creating new, blockchain-based offerings. We help these companies not just create a technological solution, but design and implement innovative, fair and stable decentralised economies.
Every project is a journey, as we jointly analyse the markets, brainstorm ideas, devise solution architectures and identify the unique requirements of each ecosystem.
Among the many challenges of such projects is the real concern of exposing the financial transactions of a private enterprise to the public. Financial transactions can enable others to deduce sensitive financial information, such as revenue streams, transaction volumes, customer segmentation, dependence on specific customers, price discrimination practices and much more.
Would a company like its main customer to know what percent of total revenue they provide? Or a competitor to know what customer segments are being underserved? This risk of such exposure constitutes a significant concern that should be addressed when designing a new economy and novel means of business interaction.
It should be noted that businesses do, in some cases, expose their financial information to other parties and even to the public. They do that mainly due to legal requirements, either in reporting to tax, or other financial, authorities, or when they are interested in raising funds from the public, such as in the course of an IPO.
Disclosing financial information to tax authorities does not automatically expose it to the public. Interestingly, in some locales these records are publicly available, such as in the Nordic countries, and once upon a time even in the United States. However, even tax filings do not comprise such detailed information as exact transaction volumes, dependence upon specific customers, revenue correlation with specific events etc.
The IPO-related financial statements requirements are much more detailed, including income statements, cash flows, various selected financial information and more. The main purpose is to enable the public to properly understand the business, evaluate the investment opportunity and the associated risks. The exposure associated with disclosing the financial statements can serve as a deterrent for a private company from going public.
However, even without the cooperation or the will of a company, a lot of information regarding its financial transactions can be garnered through multiple sources. For example, consider credit card data — modern customer-serving businesses depend on credit card payments, making the credit card transactions sensitive financial information, as their exposure would make it possible to analyse a significant part of the whole business operation.
But this same data is accessible (though usually in some aggregate or anonymised form) for various interested parties. Check out this list of alternative data providers, and notice the significant number of companies dealing with credit/debit card data.
So how can a company approach the challenge of exposing its financial transactions on a public blockchain?
One possible (and, perhaps, even trivial) solution is to avoid using public blockchains and go for private ones.
By employing a private blockchain a company remains in control of who has access to the transactions, whether it’s just the company’s own business units or select business partners. But this approach prevents 3rd parties from connecting to the blockchain (unless proprietary “connection points” are provided by the company) and significantly hinders the growth of the economy and its ecosystem. And in designing new operations critically dependent on network effects, such a hindrance can be devastating to the project’s success.
In a future post, we will explore some potential ways to address this concern, such as the use of multiple addresses, designing interaction patterns, employing technical means (such as mixers) and others.
Feel free to add your comments and suggestions below - do you think this concern is real? Are there easy or overlooked ways to address it? Or, perhaps, we are on our way to a totally open, public and transparent society, where there are simply no more secrets?
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