The blockchain industry has spent years debating which infrastructure problems matter most. For many developers, the focus is on scalability, throughput, and cost. For banks and financial institutions, however, EthSystems argues that the real barrier is privacy. Without the ability to keep transactions confidential, institutions cannot meet legal obligations to protect client information, prevent market abuse, or maintain competitive advantages.
EthSystems, which came out of the Ethereum Foundation this month, is built on that view. The startup is designing privacy infrastructure for banks and other financial entities that want to use public Ethereum rather than closed, permissioned networks. Its thesis is that public blockchains can offer banks the benefits of transparency, settlement assurance, and accessibility, but only if the privacy layer is robust enough to satisfy regulators.
Founder Mo Jalil said institutions have shifted from proof-of-concept projects to practical deployment. The early days of enterprise blockchain were marked by consortium experiments and isolated pilots. Many of those projects demonstrated technical feasibility but never reached production. The reasons varied, but privacy and governance were recurring obstacles. In a public ledger where every transaction is visible, a bank's trading strategy, client relationships, and treasury positions could be exposed to competitors.
The challenge is not simply hiding data. It is revealing exactly what is necessary and nothing more. Banks need to prove that a transaction happened, that it was authorized, and that it complies with rules, without making the details public. This is where modern cryptography comes in. Zero-knowledge proofs allow a party to demonstrate knowledge of information without revealing the information itself. Homomorphic encryption allows computation on encrypted data. State channels and other layer-2 techniques can keep certain interactions off the main chain while still maintaining a settlement anchor.
A changing institutional mindset
EthSystems is not the first to approach this problem. The Ethereum Foundation has supported research on privacy for years. Previous projects such as Baseline Protocol aimed to bring private, business-focused data coordination to Ethereum. But EthSystems appears to be narrowing the focus specifically to banking and regulated finance. The spinout structure gives it more flexibility to move quickly and build products directly with financial institutions.
Banks have reason to pay attention. Public Ethereum offers liquidity, global accessibility, and a neutral settlement layer that permissioned systems often lack. Consortium chains require coordinated governance, trust in the operator, and maintenance of separate infrastructure. Public blockchains, in contrast, are already running and widely secured. The asset base is large, and stablecoins have made Ethereum a hub for digital-dollar movement. But the public nature of the chain has been a blocker for many institutions.
Why privacy matters more than throughput
Regulators have their own considerations. In many jurisdictions, banks are required to safeguard customer information. Confidentiality is not optional. At the same time, anti-money laundering and sanctions compliance require visibility into certain aspects of transactions. A privacy infrastructure must therefore be selective: it should obscure information from unauthorized parties while remaining transparent to regulators and auditors. This is a delicate balance, and the technical choices are as much about policy as cryptography.
EthSystems' approach reportedly involves creating a privacy layer that can be integrated with institutional workflows. The goal is to let banks transact with each other on Ethereum in a way that feels like existing financial messaging and clearing systems, but with the advantages of blockchain settlement. If successful, that could open the door to tokenized deposits, digital securities, cross-border payments, and other use cases that have remained largely experimental.
The technology behind confidential public blockchains
The institutional shift is visible in the broader market. Banks have spent the past several years exploring tokenization and digital assets. A growing number of financial firms are issuing bonds, funds, and credit instruments on public blockchains. Asset managers are experimenting with tokenized money-market funds. Central banks are studying wholesale central bank digital currencies that could settle interbank transfers on distributed ledgers. These initiatives share a common need: private, permissioned interactions on infrastructure that is often public.
Mo Jalil said the demand from banks is now more concrete. Instead of asking whether blockchain works, institutions are asking how to deploy it in a way that satisfies legal, risk, and compliance teams. That shift has led EthSystems to focus less on general-purpose privacy tools and more on integration with banking standards, identity frameworks, and regulatory reporting processes.
There are several technical paths for confidential transactions on Ethereum. The most widely discussed is the zero-knowledge proof. ZK-rollups, for example, bundle many transactions into a single proof that is posted to the base chain. The individual transactions remain private to the parties, while the proof demonstrates their validity. This is already used in consumer-facing applications, but institutional use may require changes in how identity is handled.
Another path is based on encrypted storage and authorized decryption. In this model, transaction data is encrypted on-chain, and private keys determine who can read it. Regulators could be granted restricted access under certain conditions. This approach has a tradeoff: it relies on key management and access control procedures that need to be robust.
There is also the possibility of using a public blockchain as a settlement layer while keeping sensitive data off-chain. In that design, banks would exchange encrypted messages and settlement instructions through private channels, then submit a commitment to the public chain. The commitment proves that the transaction occurred without revealing the details. This resembles the way existing settlement systems work, with the blockchain providing finality rather than serving as a database of record for all details.
Each technical path involves tradeoffs between privacy, transparency, latency, and regulatory verifiability. EthSystems is not publicly describing every detail of its architecture, but its stated mission is to make confidentiality a first-class feature for financial institutions on Ethereum.
From Foundation research to commercial application
The startup's emergence from the Ethereum Foundation is notable. Foundation spinouts are not common, but they signal that research has reached a stage where it can be applied. The Foundation has backed numerous efforts over the years, from core protocol development to applied cryptography. EthSystems is intended to commercialize the privacy work and bring it to a market that has been waiting for a viable solution.
The team's background may also matter. Mo Jalil's experience in the Ethereum ecosystem and with enterprise technology gives the project credibility among both developers and banking partners. In the early days of enterprise blockchain, the conversation centered on permissioned ledgers. Hyperledger Fabric, Corda, and Quorum were often the default choices for banks because they allowed fine-grained privacy and known validators. Ethereum, a public network, was generally viewed as unsuitable for confidential transactions.
That perception has begun to change. Advances in cryptography and layer-2 technologies have made it possible to reconcile public settlement with private data. Several projects have demonstrated that a public blockchain can support confidential payments, private digital identities, and auditable regulatory reporting. The challenge is making these tools easy enough for banks to adopt, with the right governance and legal frameworks.
Banks moving toward production
EthSystems' focus on banks also reflects a broader trend in the crypto industry. Companies are moving away from serving only retail users and toward building infrastructure for institutions. The market for tokenized treasury products, private credit, and digital bonds is growing. Banks are hiring digital-asset specialists and launching innovation labs. But production deployments have been limited because of the privacy gap.
The word production has become a key measure of progress. A pilot may show that a blockchain can process a bond issuance or a cross-border payment, but a production system must operate continuously, under regulatory oversight, with clear accountability. Privacy infrastructure is a prerequisite for that kind of operation. EthSystems believes it can provide that layer.
The next few months will likely reveal how the startup plans to deliver its technology. Partnerships with banks, pilot deployments, and technical documentation will be important signals. For now, the company's central claim is clear: the future of banking on public blockchains depends on solving privacy first.
Source: Coindesk News