After becoming the first financial institution to combine public and private blockchains in a live transaction, Spanish multinational bank BBVA has hit something of a quandary.
Specifically, it's unsure how to take its forward-thinking work … forward.
In the process of executing what was expected to be the third in a series of blockchain-based corporate loans, the bank had to work around a lack of legal and regulatory clarity over whether it could (or should) hold the cryptocurrency needed to power a transaction on ethereum.
In short, BBVA's innovation is meant to act like a public notary service, combining private Hyperledger technology (used to negotiate the loan) with a public blockchain (in this case ethereum) in an effort to identify and store each loan agreement with auditability.
However, erring on the side of caution, BBVA chose to abide by European Banking Authority (EBA) recommendations and not use the native token of ethereum, ether, which also serves as a kind of fuel to update the ledger. Instead, the bank anchored the loans to an ethereum testnet, a blockchain which simulates the live version, but that doesn't move real value.
No big deal, you might think, but this uncertainty is hindering the hard-won innovation work.
Alicia Pertusa, managing director of corporate and investment banking at BBVA, said that according to the EBA recommendations of 2014, European banks are discouraged from owning, buying or selling cryptocurrencies. She pointed out that the process BBVA used for the loans was exactly the same as it would have been on the live ethereum, the only difference is it would need the regulator's approval before using the real ether.
While the Bank of Spain, the regulator in this case, would not go on the record, it's clear regulators understand banks may need or want to have small amounts of crypto, not as an asset or an investment, but to validate transactions.
Regulators tend to point out that the EBA 2014 recommendation is not legally binding and thus is not a formal ban. Still, the compliance department of a given bank would have to judge whether this particular use of cryptocurrencies is advisable.
Pertusa told CoinDesk:
"We do think that regulators are evolving in the way they look at cryptocurrencies and in this case in particular we have talked with our regulators. They understand very well that the use of gas and ether in this kind of network is very different from the speculation of cryptocurrencies."
Still, the results are a rare, tangible example of how inconclusive guidance, combined with big-bank jitters about the possibility of plans going wrong, are having an impact on innovation.
Only in March of this year, EBA chief Andrea Enria said it would be more effective to prevent banks and other regulated financial institutions from holding cryptocurrencies, rather than regulating the tokens themselves.
In a statement to CoinDesk, the EBA said: "The EBA has issued several warnings to consumers regarding virtual assets and has discouraged financial institutions from gaining exposures to such assets in view of their high-risk nature. However, as a matter of EU banking law, there is no prohibition on financial institutions gaining direct or indirect exposures to such assets."
None of this lessens the irony that BBVA is doing real corporate loans – €75 million to technology company Indra in April; followed by last month's €325 million to oil and gas company Repsol; and last week €100 million to construction firm ACS – but is uncomfortable holding a few dollars worth of ether because of mixed signals from regulators.
In fact, BBVA's corporate loans platform achieves a number of regulatory goals, such as making the pre-trade negotiation of the loan – which is normally done with a mix of phone calls and messages – a single, transparent and easily audited process. And the lessons learned from the tethered loans will be taken on into BBVA's blockchain syndicated loans project, which will launch in the coming weeks.
As far as the public part is concerned, Pertusa acknowledged that while public blockchain notarization is a powerful tool for those who know how to use it (there is lots of appetite among the bank's clients for this tech, she said) there still needs to be plenty of education elsewhere.
She told CoinDesk:
"We see this as the future of public notaries because at the end of the day it's a public record of an agreement that's been reached privately. But a lot still needs to happen in that direction in terms of regulation, admitting that this public blockchain has the same value as a public notary."
A popular use case
Turns out public blockchains are a popular tool for anchoring data – that is, creating a timestamped proof that the data existed at a certain time – in the world of enterprise ethereum.
Kaleido, the partnership between ethereum development studio Consensys and Amazon Web Services, found that enterprises wanted to anchor private blockchain applications on the public chain more than just about any other blockchain-as-a-service feature.
Indeed, a poll of Kaleido blockchain cloud users saw this use case come out on top with some 37 percent of votes.
"The results mirror what we are hearing in our client and partner discussions around the world," said Kaleido founder Sophia Lopez.
Asked what he thought of the uncertainty facing banks looking at public blockchains for this purpose, Steve Cerveny, CEO of Kaleido, said he was aware of the issue and is in discussion with customers about it, adding that a workaround is in the offing.
"We are currently exploring how Kaleido's pinning/tether feature as-a-service could alleviate this concern," said Cerveny. "For example, they pay Kaleido in fiat for this optional feature and Kaleido handles all of the technical details including ether/gas."
Speaking on behalf of the Enterprise Ethereum Alliance, Conor Svensson, blk.io founder and EEA standards chair, said the conundrum demonstrates why financial organizations are far more comfortable working with private blockchain deployments.
"It's where they can exert a much higher degree of control over the network and are not bound by the same regulatory concerns that apply whilst working with the public blockchains."
BBVA image via Shutterstock