JP Morgan and MIT on public blockchains and regulated institutions‍

A new paper from Kinexys by JP Morgan and the MIT Digital Currency Initiative sets out, in unusually concrete terms, why public blockchains remain hard for regulated financial institutions to use at scale, and where the fixes actually sit. It is a rare case of a major bank and a serious research lab agreeing on the specifics, and it is worth reading in full via MIT DCI.

The paper is candid about something the industry often skates over. A public blockchain is designed so that no single participant has control, and that property is precisely what makes it difficult for a regulated institution, which is accountable for everything it touches, to rely on such a network without a set of workarounds.

Key takeaways

The authors focus on four problems that look small but remain unresolved, and then map where each one can genuinely be addressed.

• Front-running and Maximal Extractable Value (MEV). Because transactions are visible before they are confirmed and can be reordered for profit, an institution's activity, including administrative actions such as freezing or reclaiming an asset, can be observed and exploited.
• Transaction censorship. Block producers are under no obligation to include or prioritise a given transaction, so an urgent administrative action can be crowded out by fee competition at exactly the wrong moment.
• Unsolicited tokens. Anyone can send anything to any address, which means institutions face a steady stream of unwanted and sometimes sanctioned-origin tokens that they must monitor, assess, and often return, at real cost.
• Gas fees paid to sanctioned entities. On a permissionless network, there is usually no onboarding or identity check for the participants who produce blocks and receive fees, which creates a strict-liability sanctions risk that no amount of care fully removes.

The most useful contribution is the layered framework the authors use to locate solutions, running from the application and smart contract layers, through token standards, the blockchain network, and network governance, up to regulation. Their central finding is that the fixes most easily reached by institutions, at the application and contract layers, mostly treat symptoms, while the durable solutions sit at the network and governance layers, where institutions have the least direct control. Among those network-governance solutions, the paper names enforcing rules on who can be a validator, and observes that a known, onboarded validator set removes several of these problems at the root.

Two points deserve a careful reading. The authors judge that permissioning validators would be an unacceptable trade-off for a general-purpose chain such as Ethereum, because it would centralise the network, and they suggest instead that networks built specifically for financial institutions may adopt this approach. They also note that Layer 2 networks, which many treat as the institutional on-ramp, still settle on a permissionless Layer 1, so the underlying problems return at the settlement layer even when they are abstracted away higher up.

What this means for the industry, and for Rayls

The paper reframes a debate that is usually conducted in slogans. The real question is not decentralisation against control in the abstract, but where in the stack a regulated institution can get the accountability it needs without waiting for an entire public network to change its rules. The authors' answer, that the durable solutions sit at the network and governance layers, is the same conclusion we reached when we chose the Rayls architecture.

Here is how our design maps to the paper's analysis.

• A network built for financial institutions. Rayls is the kind of purpose-built network the authors describe when they say that institution-focused chains may adopt a known validator set. We run the Rayls Public Chain with a permissioned, identifiable validator set, which addresses the sanctioned-gas-fee and censorship problems by construction rather than by workaround.
• Solving the four problems at the right layer. Because we govern our own network and reduce the adversarial visibility that makes front-running possible, and because we embed compliance at the token level through identity-aware and permissioned token standards, the front-running, unsolicited-token, and sanctions problems are handled where the paper says they should be, at the network, governance, and token-standard layers.
• Privacy with auditability. Rayls Enygma gives institutions the confidentiality they need for commercially sensitive flows while preserving auditability, which is the balance the paper identifies as necessary and which pseudonymity on a public chain does not provide.
• The Layer 1 advantage. This is where we diverge most clearly from the common institutional playbook. The paper's warning that Layer 2 networks still inherit the risks of a permissionless Layer 1 at settlement is a warning we do not need to heed, because Rayls is itself a Layer 1 with an identifiable validator set. It settles on infrastructure we control, so it does not reintroduce the very problems it set out to solve.

It is worth being accurate about what the paper does and does not say. It does not endorse any particular network, and it does not claim that regulated finance requires permissioned validators everywhere. What it does is identify, from the vantage point of a major bank and a leading research lab, that the durable answer for institutions lies in known, accountable validation at the network layer, and that purpose-built networks are the natural place for it. We made those choices before the paper was written, which is the most useful kind of validation a strategy can get.

The gap between public blockchains and regulated finance is real, and this paper describes it more honestly than most. The more interesting question is who has already built for the other side of it.