Rating agencies: There are risks in the private chain, and blockchain technology will be promising

According to Coindesk's April 30 report, rating agency Moody warned of several risks about centralized private chains in a report sent to customers, as well as the pros and cons of blockchain technology.

The report, “How to Improve the Efficiency of Securitization Operation While Bringing New Risks,” describes the basic characteristics and vision of blockchain technology, and explains how banks and other companies should make good use of them. This emerging technology is creating value for it.

Moodys-860x430 (Source: Coindesk )

In the report, Moody's highlighted the differences in security between the private and public chains, and said that the consensus mechanism in the private chain may not be as powerful as the consensus mechanism in the public chain, or it may be completely missing:

Private centralized blockchains are more susceptible to risks such as fraud, as the design and management of such systems is still concentrated in one or several aspects.

The report also stated:

Perfect blockchain governance is the key to risk management.

Moody's believes that in risk management, the private chain with clearer governance and accountability structure will win. In addition, although the decentralized system makes data recovery and auditing easier, it greatly increases the number of times the gateway is attacked.

Advantages and Disadvantages of Blockchain Technology

Moody's believes that there are some new risks in the blockchain. Because this technology "replaces the trust of 'known parties' (others, institutions, and intermediaries), it turns to trusting 'unknown parties' (codes, entities, and dynamics that are difficult to see or understand from the outside)."

While pointing out the risks of blockchain technology, Moody's report discusses the value that blockchain technology brings to multiple industries. For example, the use of smart contracts can simplify the process of creating and managing securities. Of course, the technology is still not mature, the report writes:

In the short term, the application of blockchain technology will remain in the experimental phase and will be limited to a small number of participants and pilot phases that are processed in parallel with traditional technologies.

Another promising use case for blockchain technology will be loan issuance. By placing loan information along with loan-backed securities data on the blockchain, banks will be faster and more intuitive in handling communications between such businesses, and information will be automatically updated and changed.

The report reads:

The securitization blockchain can be automatically checked and controlled depending on the data provided by the loan blockchain.

In addition, Moody's report also outlines some of the fruitful work that has been done in the blockchain field. For example, some EU countries have begun to register land by using blockchains:

Without a blockchain-based land register, from an asset perspective, mortgage-backed securitization transactions will still be very limited in terms of efficiency gains.

The code is the law?

Moody's report also mentions the possibility of using smart contracts as a legally binding agreement in the future.

The author believes that there is still a long way to go before this vision is realized:

It is impossible to completely replace the natural language contract with computer code because the scripting language lacks flexibility. In addition, parties to smart contracts should consider relevant governance and control mechanisms to ensure that they do not encounter greater difficulties in modifying the original contract later.

Moody has been monitoring the development of blockchain technology for many years. As early as 2016, the company revealed that its ratings of multiple governments and companies are working on as many as 120 different blockchain related projects. In April last year, the company also released a report saying that blockchain technology could help the US mortgage industry cut spending by as much as $1 billion.