Free Enterprise Staff  | October 21, 2016

Who Are You? Ask the Blockchain

One Cambridge technology startup believes it can use the same core technology behind digital currencies like Bitcoin to save financial institutions a ton of time and money – and it says it has the app to prove it.

“We’re in the business of streamlining digital identity for banks,” explains Matthew Commons, CEO of Cambridge Blockchain.

Commons’ company is one of many so-called fintech (financial technology) startups storming onto the scene in recent years, bringing Silicon Valley style software and technology platforms to the world of banking and finance. While some fintech firms focus on consumer applications—Venmo or Betterment, to name a couple—Cambridge and others are building tools to help banks streamline their own operations.

In the most basic terms, Cambridge Blockchain’s software verifies the digital proof of a customer’s identity while preserving his or her privacy. However, what happens under the hood is much more complex. A blockchain is a distributed database that is designed to be a tamper-proof historical record of ownership, transactions, or anything else. What is a distributed database? Essentially, while most bank databases are centralized, meaning that only one person (or in this case, one division of the bank) has access to the database and permission to update it, multiple people (or divisions) have access to distributed databases.

Blockchain technology was initially created to serve as a ledger for Bitcoin transactions, but Cambridge uses blockchain as a shared repository of identity attestations. It’s important to note that these attestations are not identity data in and of themselves—your Social Security number won’t appear there, for example—but rather a series of identity verifications. The blockchain stores what are called one-way cryptographic proofs. These show that the information a customer shares about himself or herself is correct and matches information that has been verified by another trusted institution. There is no way to reverse-engineer a customer’s personal information based on what is stored in the blockchain, Commons says.

The company’s technology appeals to banks for several reasons. First, it meets their stringent data privacy needs. Second, it eliminates duplication of efforts during the onerous identity verification process. In other words, when different parts of the same bank need to confirm who a customer is, they can rely on the same ledger. “Data privacy rules around the world make it difficult for one bank division to share identity information with another,” Commons says.

The so-called Know Your Customer regulation is intended to prevent identity theft, money laundering, fraud, and other criminal activity. In performing the identity verifications the regulations require, Commons says, separate divisions of a bank often check the same data again and again. That costs time and money for the bank and may be a hassle for customers.

“It can be really expensive,” he says. “A bank could spend up to $50,000 to do a fully detailed Know Your Customer check on an institutional client. We’ve had a lot of traction with institutional Know Your Customer for hedge funds, investment funds and others.”

Finally, Cambridge abides by the numerous and increasingly complicated rules to which financial institutions are subject. Commons says his company has sought guidance from entities such as the United States Treasury, the Federal Reserve, and the European Commission in order to comply with national and international regulations.

“If you’re doing something in the digital identity space for financial services, you’re going to need to have regulators on board,” he says.

Founded in April 2015, Cambridge Blockchain got its start after Commons met Alex Oberhauser, who was running the blockchain engineering program at the University of Amsterdam. The duo discussed potential business applications for blockchain technology and settled on digital identity as the most promising opportunity. Commons says the firm has participated in a number of programs such as Valley Venture Mentors, a mentorship and accelerator program in Springfield, Mass., to help the company evolve and develop connections with potential backers and future clients.

In February, Cambridge Blockchain won the Santander InnoVentures Distributed Ledger Challenge, a pitch competition in New York for fintech startups that use distributed ledger technologies in financial services. After that, the team joined the New York FinTech Innovation Lab, a program sponsored by Accenture and the Partnership Fund for New York City. Commons says participating in that program led to pilot projects with several financial institutions and some commercial opportunities with other customers.

Looking ahead, Commons says his company might not be a fit within one bank, but rather as an interbank service to which multiple institutions subscribe. For now, though, he is busy working on growing sales and raising money. The company has raised more than $1 million to date and is eyeing a possible Series A funding round in early 2017.

“We’re hoping to get through these pilot projects, demonstrate them, secure commitments to the next phase, and give a much more tangible roadmap for our company as we look to raise additional capital next year,” Commons says.