Blockchain: The Good, The Bad, and The Business Case
For a relatively nascent technology, blockchain – the shared ledger or shared database technology allowing any participant in a business network to see the system of record – seems to be everywhere. Well, verbally everywhere. Earlier this month, I participated in a Digital Leaders TV discussion on this very topic. It’s also something I’m frequently asked about so I thought I’d use this blog to give a high level perspective.
Most people want to know if the prize worth it? Or has blockchain just been hyped-up by the slew of start-ups and their private equity firms that have so far provided more than $1 billion in capital? It depends what you’re trying to achieve. There are certainly significant operational and capital efficiency gains to be had. Not so for the older – well older relative to the blockchain technical evolution – Bitcoin blockchain which cost $6 a bitcoin to mine and takes one hour to confirm. It is the ease of auditability, lack of a third party administrator in the process, automatic reconciliation and transparency and security that are attractive selling points for the new blockchains.
Is a distributed ledger always the best approach? Well it depends on the business situation. Providence is a perfect example. Blockchain can help with traceability in say, the diamond industry ensuring there are no blood diamonds, it can help with retail fraud, and safeguarding the supply chain against counterfeit goods. Buying a house or a car, where verifiability is important, are another logical fit. Compelling business cases can be made for all these examples. Another is international payments where banks often take at least four per cent of the amount. Like a magician, currencies go from one to another without any firm recourse to the midpoint of the currencies at the point of exchange.
International payments could benefit in terms of cost, service, transparency and speed but the status quo for banks remains highly lucrative for them. For banks, blockchain technology could work well in managing asset risk, post trade activities, such as removing costs, automating the supply change, and increasing revenues. International payments need disruption, while banks, where it’s to their advantage in staying compliant, reducing costs and/or growing revenues need a complementary action. Based on any particular banking stream, Fintech have to decide between disruption or collaboration.
As blockchain automatically reconciles itself this may prove safer and more accurate than the general ledgers. With the majority of banks running multiple ledgers and often making thousands of quarterly manual adjustments, blockchain could prove very valuable to the regulators!
For distributed ledgers to enter a company’s General Book, two new data elements are needed – the chain number and the number of the block in that chain. The existing database needs to be changed, but given the age of banking systems that is not easy. The information in the blockchain needs to be captured and monitored, especially around the market prices of similar assets. The latter is needed to support the new regulations around asset pricing becoming law in 2018.
Banks are cautious by nature. Nobody wants to be last, but not many want to be first. The reality is you may not need to be either. Given the trajectory of big data, it may well be the case that blockchain follows a similar adoption path. Some of the biggest and early users could be businesses with large distributed networks, such as Amazon, Facebook or Netflix.
Regardless of market sector, rather than thinking of blockchain as a replacement, consider the context within the current environment. It can be absorbed and sit alongside general ledgers, without distorting the books or giving away private information. Banks can simultaneously run their own ledgers, and balance the distributed ledger. So when that blockchain changes, the ledger picks it up.
With support for the R3 initiative from most of the major banks, standards and interoperability will emerge, and blockchain could become an underlying protocol sitting on top of the internet. It will take time for standards to emerge, the technology to mature, and business models to adapt. But technological evolution has speeded up as has the adaption by us all.
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