Institutions delay Web3 adoption due to lack of privacy options

The highly transparent nature of public blockchains is deterring institutions from embracing Web3 and distributed ledger technologies, according to Avidan Abitbol, project director for the Data Ownership Protocol (DOP).

Abitbol highlighted that transparency on permissionless blockchains creates risks for institutions, including theft, scams, and competitive disadvantages.

“Institutions want to hide payments, workflow, daily work, who they pay, and when. If you have Bitcoin (CRYPTO:BTC) or Ethereum (CRYPTO:ETH) balances, those things are very relevant to other people,” he said.

Market risks also arise as traders use institutional holdings or transactions as signals to manipulate asset prices, Abitbol explained.

These concerns have slowed institutional adoption, despite the potential benefits of Web3 technologies.

The issue of privacy has been widely acknowledged in the industry.

In September 2024, Paul Brody, global blockchain leader at EY, emphasised the importance of privacy for safeguarding institutional operations.

He noted that this need extends beyond corporate finance to sectors like healthcare, where patient confidentiality is critical.

Efforts to address this challenge are underway.

In October 2024, Chainlink (CRYPTO:LINK) introduced privacy-focused tools for institutions, including the Blockchain Privacy Manager and CCIP Private Transactions encryption suite.

The Australia and New Zealand Banking Group (ANZ Bank) was among the first to use these tools for real-world tokenised asset transactions.

Blockchain transparency also exacerbates problems like maximal extractable value (MEV), where block producers reorganise transactions to maximise fees and gain economic advantages.

Privacy-enhancing solutions, such as data obfuscation and zero-knowledge technology, could mitigate these issues and make blockchain networks more appealing to institutions.