Ethereum startup EthSystems, which spun out of the Ethereum Foundation earlier this month, is making a bold bet: the key to bringing banks onto public blockchains is not scalability, but privacy. The company argues that financial institutions are ready to move beyond experimental pilots and into real-world production, provided they can transact on public networks without exposing sensitive financial data to the open web.
EthSystems founder Mo Jalil believes that the conversation around institutional blockchain adoption has long been dominated by a single metric: transactions per second. But after years of working with banks and financial firms, he says the real obstacle is far more fundamental. "The biggest barrier is not scalability, it's confidentiality," Jalil said in an interview. "Banks don't want their transactions publicly visible to competitors, regulators, or the world at large. If you solve that problem, everything else becomes easier."
The startup is building privacy infrastructure specifically designed for financial institutions that want to use public Ethereum. This includes layer 2 solutions, zero-knowledge proof systems, and confidential transaction mechanisms that allow banks to verify the integrity of transactions without revealing their contents. The goal is to give institutions the benefits of public blockchains — decentralization, transparency, auditability, and composability — while maintaining the privacy standards they are legally required to meet.
EthSystems' decision to spin out of the Ethereum Foundation is significant. The foundation has long been a hub for research and development in the Ethereum ecosystem, and its support lends credibility to the startup's technical approach. By operating independently, EthSystems can move faster and work directly with institutional clients without being constrained by the foundation's non-profit mandate.
The timing is also notable. The broader cryptocurrency market has experienced significant shifts in recent years, with institutional interest moving from speculative trading to practical applications. Banks that were once content to run internal proof-of-concept projects are now looking for ways to integrate blockchain technology into their core operations. This change has created a demand for tools that can bridge the gap between traditional finance and decentralized networks.
Privacy-preserving technologies have become one of the most active areas of blockchain research. Zero-knowledge proofs, in particular, have gained traction as a way to verify information without revealing the information itself. In a financial context, this could mean proving that a transaction has sufficient funds behind it without disclosing the exact amount, or confirming that a trade complies with regulatory rules without exposing the parties involved.
These technologies have matured significantly in recent years. What was once theoretical or limited to specialized cryptocurrency projects is now being adopted by mainstream financial institutions. EthSystems aims to package these complex cryptographic tools into easy-to-integrate infrastructure that banks can use without needing a team of cryptographers on staff.
"Institutional demand has shifted from experimental blockchain pilots to production deployments," Jalil explained. "Banks are increasingly looking for privacy-preserving tools that enable them to transact on public blockchains while meeting regulatory requirements. They want to be able to use the same financial logic they already have, but in a more efficient and transparent way."
The regulatory landscape is a major factor pushing banks toward privacy solutions. Many jurisdictions require financial institutions to keep customer information confidential. On a public blockchain, where every transaction is visible to anyone, this creates an obvious conflict. EthSystems is designing its infrastructure to help banks comply with regulations while still benefiting from public network effects.
The startup also sees an opportunity in the growing demand for tokenized real-world assets. Banks and asset managers have shown increasing interest in putting everything from Treasury bonds to private credit on blockchain rails. But tokenization alone does not solve the privacy problem. If a bank issues a tokenized bond on a public network, the ownership and transaction details are visible to all. Privacy infrastructure is needed to make these products viable for institutional clients.
Other projects in the Ethereum ecosystem have explored similar territory. Aztec, which focuses on privacy on Ethereum, has developed a framework for confidential smart contracts. Polygon has introduced zero-knowledge rollups that offer both scalability and privacy features. However, EthSystems is specifically targeting the banking sector, which has distinct needs in terms of compliance, custody, and connectivity.
The startup's approach involves working closely with financial institutions from the ground up. This means understanding their existing systems, their regulatory obligations, and the specific use cases they want to bring to blockchain. Rather than providing a one-size-fits-all solution, EthSystems aims to build customizable privacy layers that can be adapted to different types of financial activity.
One of the challenges is that public blockchains are inherently transparent by design. The entire value proposition of a decentralized ledger is that many parties can see and verify the same data. Introducing privacy can be seen as a step away from that ideal. But proponents argue that privacy and transparency are not mutually exclusive. A bank can have confidential transactions while still allowing regulators to access audit trails through controlled mechanisms.
This is where cryptographic techniques like selective disclosure come into play. A financial institution could prove to a regulator that it followed anti-money laundering rules without revealing the full details of a transaction. Or it could allow an auditor to verify the correctness of a balance without exposing the balance to the public. These capabilities are essential for mainstream adoption.
EthSystems' founding comes at a time when the Ethereum ecosystem is also dealing with questions about its future direction. The network's transition to proof of stake has reduced its energy consumption dramatically, but scalability remains an ongoing challenge. Layer 2 networks have emerged as a partial solution, but they also introduce their own complexities, including fragmented liquidity and reduced composability.
Privacy could be the next major feature that sets the Ethereum ecosystem apart from more traditional financial systems. While banks are accustomed to closed networks like SWIFT or private permissioned blockchains, these systems lack the openness and interoperability of public networks. By adding privacy to the public chain, EthSystems hopes to give banks the best of both worlds.
Jalil's background includes extensive experience in both traditional finance and blockchain technology. He has worked on projects involving digital asset custody, tokenization, and institutional trading infrastructure. This combination of skills is essential for building a product that can bridge the divide between Wall Street and decentralized finance.
The startup is already in talks with several financial institutions, though Jalil declined to name specific partners. He said the interest is strongest in regions with clear regulatory frameworks, such as Europe, Singapore, and parts of the United States. These jurisdictions have been more active in providing guidance on how banks can use public blockchains, making it easier for institutions to explore the technology.
EthSystems also plans to contribute to the Ethereum open-source ecosystem. By publishing research and making parts of its infrastructure available to developers, the startup hopes to encourage innovation and build trust with the developer community. This open approach is common among Ethereum Foundation spinouts, which often retain close ties to the broader Ethereum ecosystem.
The broader market for blockchain-based financial services is expected to grow substantially over the next few years. According to several industry reports, banks are increasing their spending on blockchain technology, with a particular focus on tokenization, cross-border payments, and trade finance. Privacy infrastructure is seen as a critical enabler for many of these use cases.
Some analysts caution that privacy on public blockchains could also raise concerns for governments that are used to monitoring financial transactions. Anti-money laundering regulations require banks to identify their customers and report suspicious activity. If transactions are fully private, it could create challenges for law enforcement. However, the technology can be designed with built-in compliance features, such as the ability to provide audit access to authorized parties.
EthSystems is positioning itself as a partner to both banks and regulators. The company argues that privacy infrastructure should not be seen as a way to hide financial activity, but rather as a way to protect legitimate business confidentiality while still enabling oversight where required. This balanced approach is likely to be essential if public blockchains are to play a significant role in the future of finance.
The startup's ambition extends beyond Ethereum. While its initial work is centered on the Ethereum blockchain, the underlying technologies could be applied to other networks and protocols. The team is building modular infrastructure that can potentially support multiple blockchains, giving banks flexibility in how they deploy the technology.
In the coming months, EthSystems plans to release technical documentation, a testnet version of its system, and a roadmap for its mainnet launch. The startup is also actively hiring engineers with expertise in zero-knowledge cryptography, Rust programming, and Ethereum protocol development. These are among the most sought-after skills in the blockchain industry, and competition for talent is intense.
The stakes are high. If EthSystems succeeds, it could unlock a new wave of institutional participation in public blockchains. Banks have long been cautious about using networks where transaction details are visible to anyone. By providing a layer of confidentiality, EthSystems is addressing one of the deepest concerns that has held back adoption. The company's success will depend not only on its technical abilities but also on its capacity to build trust with both financial institutions and the decentralized community.
Source:Coindesk News