Coin Center, a non-profit research and advocacy center focused on the public policy issues facing open and decentralized blockchain technologies, has urged European Securities and Markets Authority (ESMA) to avoid writing-off open technologies.

The comment comes as a response to the ESMA’s discussion paper entitled, “The Distributed Ledger Technology Applied to Securities Markets”. The paper highlighted the potential benefits and risks of blockchain and distributed ledger technologies (DLT). ESMA invited comments from market participants and said that the feedback will be used to develop a position on the use of the DLT in securities markets and in particular to assess whether a regulatory response may be needed.

In a letter to the ESMA, Coin Center particularly focused on the agency’s conclusion in the discussion paper that “open” or “permissionless” blockchains may be inappropriate for financial services.

“The presumption that only permissioned-based systems are “likely” to be used in financial markets is premature. As of yet, all permissioned-based systems remain in the proof-of concept (“POC”) stage of development, and none are, as-of-yet, securing high-value information. Permissionless systems have been running in public for almost ten years, and they are battle-tested”, Coin Center said, adding that Bitcoin secures a ledger that describes roughly $10 Billion worth of valuable assets.

Although Coin Center admitted that ESMA has rightly articulated some of the risks with permissionless systems, it emphasized that until permissioned POCs begin to face similar scrutiny from security researchers and hackers, it is difficult to conclude that these systems better address risks or can be as robustly secured as bitcoin has thus far proven to be. To that end, the letter addresses the efficiency, security, and privacy of permissioned systems:

Efficiency: Coin Center says that although permissionless blockchains generally have a slow settlement speed at present, these limitations are not fundamental to the technology. It highlights the ongoing research to improve the both Bitcoin and Ethereum – Lightning Network, proof-of-stake, and consensus sharding – and says that such technologies could potentially deliver settlement times and throughput that surpasses even highly sophisticated centralized payment or clearing intermediaries today.

Security: Coin Center says that permissioned systems exhibit two fundamental weaknesses in security as compared to open systems – first, if the integrity of an entity is corrupted, it could potentially shift the balance of power on the permissioned network; and second, the nature of an identified consortium may make it easier for some subset of the consensus members to find each other and collude to defraud the rest of the network.

“The sanctity of the consensus mechanism, and thus the immutability of a ledger, is only upheld by trust in an identifying agent and the safekeeping of identity credentials by participants”, it said. “This is in contrast to permissionless networks where the consensus mechanism relies on a provable sacrifice of resources by participants—thus reducing the viability of an attack by adding true economic costs to the efforts of a hacker.”

Privacy: The letter pointed out that the information upon which a network reaches consensus cannot be truly private, adding that some information about participant transactions must be public to the group of validators. It cites the example of R3’s Corda in which privacy is ensured by only sharing the “state object” with one’s trusted counterparties, and with those “who have a legitimate reason to see it.” It further noted that R3 is investigating various other approaches to better enhance privacy, and said that these approaches (address randomization, zero-knowledge proofs) apply equally well to open consensus driven systems, and have been primarily pioneered in the Bitcoin and related cryptocurrency communities.

Coin Center concluded saying:

“Great work is being done to develop secure, private, and efficient distributed consensus systems, both from those working on open as well as closed blockchain technologies. We urge ESMA to avoid writing-off open technologies.”