A Matter of Trust: How an Israeli Start-Up is Making Blockchain Pay Off for Business

“Respect them but suspect them,” goes the old Hebrew expression, but it’s just as appropriate today. In the wake of endless scandals in government, financial and social institutions, schools, and everywhere else – not to mention the tidal wave of hacking, ransomware, Ponzi schemes, financial scams, and other increasingly creative ways to separate one from their money – the question has to be asked: Can you trust anyone these days?

You sure can, according to Jonathan S. Rouach, CEO of Israeli start-up QED-it – if you do it the right way. “Trust is the basis of doing business, but until now trust has been provided by institutions like banks and government, which have been the central sources of trust. If the bank or government vouches for you, then you are legit. But people have been seeking to transact without relying on outside help for trust. Our technology provides a foolproof method that enables people to do business directly, and trust each other, without requiring them to give up information they would rather keep to themselves.”

Bitcoin and the “Crisis of Trust”

A veteran of the Bitcoin business, Rouach is uniquely positioned to understand – and do something about – the Crisis of Trust that society faces. Trust in institutions fell precipitously over the past decade, according to Gallup – and trust in banks fell by more than double of any other institution, including Congress, the Church, the “mainstream” media, and even the presidency. With memories perhaps longer than politicians give them credit for, Americans clearly remember the financial crisis of 2008, and the banks’ contribution to it, particularly their role in the housing bubble.

Accompanying that lack of trust in the authority of banks and governments has been a fight of sorts from the top-down centralized financial systems these institutions represent, to the digital anonymity of Bitcoin and other digital currencies. Based on the concept of the blockchain – the digital ledger where all transactions have to be approved by all parties involved with them – the digital currencies provide their own innate “authority.” The ledger – the chain of transactions that show where a Bitcoin or other unit of currency came from, where it’s been and who is in possession of it – is available to all parties in the Bitcoin system.

How to make Blockchain work for the bank

That works out just fine for individuals who use Bitcoins to buy and sell; the pedigree of the Bitcoin is traceable, so there is no question of its validity – and if that pedigree is broken, the community would know about it immediately. But blockchain needs to graduate beyond full transparency of transactions, Rouach believes; if it succeeds, it has a great deal to contribute to the corporate world. “For banks, blockchain poses a dilemma. Their customers wish to perform direct transactions, transferring assets independently of centralized coordination, but banks need to ensure that these customers retain the confidentiality of their actions. That’s the dilemma QED-it resolves”, he said.

Over the years, Rouach has been involved in several blockchain-based ventures – for example, he established Bits of Gold, Israel’s largest Bitcoin exchange – and has developed a deep understanding of the system’s underlying philosophy. “Blockchain is about verifiable trust,” according to Rouach. “Parties to a blockchain-based transaction can access the digital asset’s history and verify its validity. QED-it supplies a method to prove to other parties the transaction validity, without granting access to the asset’s history – which remains confidential. It’s an adaptation of blockchain technology for enterprise use where confidentiality matters.”

Blockchain moves beyond Bitcoins

A good example of how this works is the sale of shares in a company by one entity to another. A seller offers stock for sale, and a buyer expresses interest. How does the buyer know that the seller has the rights to those stocks? Under the “traditional” system, it is the regulator – the SEC, or the bank itself – that guarantees that the parties to the transaction are legitimate players. “They do this using information about the identity of the parties, such as data about their assets, their credit rating, whether they have been involved in financial improprieties, etc.,” said Rouach.

In the example of the stock sale, the buyer would have access to information that proves that the seller has the rights to the stock – ensuring that the transaction is legitimate, blockchain-style, without the need for an “adult in the room” to regulate things – but also ensuring that identification and vetting is confined specifically to the transaction at hand, without revealing any extra information that both parties would prefer to keep to themselves.

QED-it uses cryptography to pull this off, with complicated mathematical formulas enabling parties to vet transactions, and each other. The system is based on a concept called Zero Knowledge Proofs, a method by which one can prove a fact based on confidential information, without revealing that information. “Israeli academics were among the first to develop the philosophy of ZKP,” said Rouach. “We’re using this advanced technology to bring blockchain into the enterprise world.”