The first bank blockchain may come from this company. The former Morgan Stanley CEO revealed that he has solved the blockchain privacy problem.

Blockchain may finally force Wall Street's last century record-keeping system into the 21st century, but before using the technology, financial firms want to be sure their data will be kept private. A startup run by Blythe Masters, the former head of JPMorgan Chase and the mother of credit default swaps, has found a solution (download white paper).

The blockchain that underpins bitcoin is designed to be highly transparent, recording every bitcoin transfer in a public database that everyone can view. But for the financial industry, such publicity is anathema, creating problems for Wall Street firms that could otherwise use digital ledgers to simplify and speed up record-keeping.

Digital Asset Holdings (DA), of which Masters is CEO, is deploying a solution called "fingerprints" to address this problem. While these fingerprints are shared by users of a given blockchain, only trusted parties can decipher them.

Masters recently said in a client presentation:

“Our view is that data that is sensitive, contractual, market-oriented and personal should be kept private. Let’s think about what regulators and regulated financial institutions care about. First and foremost is privacy.”

Digital Asset’s approach is similar to the kind of solution that rival R3 said it was developing earlier this year. Richard Gendal Brown, a former architect at IBM’s industry innovation and business development division, created a blockchain platform for R3 called Corda that significantly limits the amount of data that can be shared between users. Last week, R3 announced that it was officially open sourcing Corda.

Distributed ledger technology has attracted Wall Street executives because it can process almost any type of trade or money transfer in minutes rather than days. This greatly reduces the amount of capital that is held up waiting for trades to be settled. For example, industries such as healthcare, supply chain management and mining are also experimenting with the software to improve efficiency or ensure the provenance of diamonds.

Developments at digital asset companies — like R3 and Chain making their code public or world-renowned cryptographers joining blockchain startups — are another sign that blockchain software is gaining traction.

She said:

“Distributed ledger technology is very trendy. In fact, if you wore it, you could put Ralph Lauren out of business, at least for me. But industrializing distributed ledger technology is something else entirely. There is real promise. There are huge opportunities for this technology in the financial industry.”

From days to minutes

DA’s clients include the Australian Stock Exchange and the Depository Trust & Clearing Corporation (DTCC), both of which are testing whether their systems can be moved to a blockchain to reduce settlement and payment times from three days to minutes. Masters said DA plans to have a version of the blockchain system that they can use by the end of 2017.

On Wednesday, Digital Asset released a white paper on the system (full text download). According to the white paper, anyone who wants to see the complete transaction history needs to get two parts of the transaction. The first part is the transaction itself, and only the user knows the price, counterparty and other details of the transaction. For example, this part stays on the bank's local server, which is the same as the current system. The second part is the 'fingerprint', which everyone can see, but not everyone can unlock.

These fingerprints - also known as hashes - are very important because they represent every transaction on a market. In order for users to trust the DA system as their ledger, it must be ensured that the ledger only contains transactions that they have authorized. This means that if a user scans all of his transactions and finds some that he has not executed, the user will know that something is fishy. If every transaction in the ledger can be referenced and reviewed, the authenticity of the ledger can be verified.