GREENLIGHT

The consulting firm was able to identify between $80-110 billion of impact in financial services alone. They and other observers estimate that commercialization is not far away (3-5 years).

In a number of areas, implementation is already underway. For example, ID 2020, founded in 2017, is an alliance of Microsoft, Accenture and others, ‘committed to improving lives through digital identity.’ The alliance aims to provide legal identity to the estimated one billion or more who lack it and are thus ‘invisible to society, which makes them most vulnerable to trafficking, prostitution and child abuse’, says Yorke Rhodes, who manages Microsoft’s Azure Blockchain Engineering. Again, the Kimberly Process, an international organization representing 81 countries, is examining blockchain solutions to help trace the provenance of diamonds, in part to eliminate “blood diamonds” from the market.

However, most executives have a low level of familiarity with the technology or its applicability to their business. Top execs of middle market businesses are generally strapped for time and resources, and are unsure whether they should pay attention to this technology, or allocate resources to investigating or pursuing it.

Should business owners pay attention to blockchain technology?

The answer is an unequivocal yes, in our opinion, for the following reasons:

• Blockchain is likely to be transformative and disruptive in many key industries and markets;
• The financial industry, particularly accounting, auditing and payment services, is likely to be substantially affected by blockchain implementation;
• Real applications are already being built;
• Key technology and financial companies, as well as venture capital firms, are deploying a great deal of resources to blockchain; and
• Blockchain could radically impact the business model and cost structure of many enterprises in the future.

Blockchain Basics

A blockchain is a shared, distributed, cryptographically secure, immutable ledger designed to record transactions or track assets, with the following attributes:

Distributed: a blockchain runs on a peer-to-peer network made up of members’ computers;

Shared: every participant is notified of entries to the blockchain, since the copy residing on their computer is automatically updated as changes are made;

Consensus: a block of transactions only becomes authentic and gets added to the chain after all participants agree on its validity; validity is determined by a “consensus mechanism”;

Provenance: the blockchain contains a record of all assets dating from their origin to present time, including ownership changes;

Immutability: an entry in the blockchain cannot be erased once it is recorded; an incorrect entry must be reversed by another entry and then both transactions, the error and its reversal, are visible;

Secure: each new block on the blockchain is encrypted using a “hash” function. Hash functions are encryption mechanisms that are asymmetrically difficult;

Authority: the blockchain is the sole record of transactions.

For more on how blockchain works we suggest going here.

Business Benefits

Since the blockchain operates on a peer-to-peer basis, it eliminates the need for an intermediary, some central authority that controls or coordinates. This creates efficiency and reduces costs. Traditional methods of recording transactions and tracking assets involve either of two configurations: (i) parties keep separate records or (ii) rely on a third party to keep a record. Where separate records are kept, the issue of third-party auditing and reconciliation with its attendant delays arise; where an intermediary is involved, he must be paid for his services; and the entire system, since it is centralized, is susceptible to mistake, fraud and cyber assault; in both configurations, costs increase.

A blockchain system can save time because transactions do not have to be approved by an intermediary. In instances that involve interactions between many parties, such time savings can be substantial. A blockchain system also saves costs. Implementing a blockchain will reduce regulatory expenses, since the system is policed by participants. And since transactions take place directly between peers, there is no need to pay an intermediary to facilitate exchange. Costs are also reduced since duplication of effort is avoided. A participant will not need to expend resources on starting and maintaining his own record, when he can simply access the blockchain.

A promising application area is that of Smart Contracts which “can help small businesses inexpensively streamline the flows that keep them in business. They use blockchain to create, check and enforce contracts between users, who would be a young firm’s merchants, clients and customers. Whether it be invoicing, paying employees or bills, settling interest fees, creating insurance policies, handling fulfillment of inventory, closing new deals or any other transactional activity, smart contracts can have a positive financial impact on small business.” (Entrepreneur, ‘Why Blockchain Matters to Small Businesses’, January 9, 2018)

Contracts are at the heart of any business and making them smarter and automating them would have numerous benefits.

In Blockchain We Trust

Since a blockchain system dispenses with an intermediary, participants transact directly with each other, which may lead to problems if one of them has perverse objectives. Traditionally, the role of an intermediary has been to mitigate the risk involved in direct dealing. Two strangers may be unable to trust each other, but they can still enter into a transaction if it is executed through a third party, whom they both trust. However, in a blockchain, there is no trusted intermediary; that role is performed by a variety of consensus mechanisms. These can take many forms, the two most common being “proof of work” and “proof of stake”. For example, the cryptocurrency Bitcoin employs a “proof of work” consensus mechanism.

A number of well-known companies are investing in trust, according to a report in the Wall Street Journal. Ten food industry giants, including Walmart Inc. and Nestlé SA, are building a blockchain to track food throughout their global supply chains. Named the Food Trust, the blockchain aims to identify quickly bad food and its sources, hopefully, reducing the time that customers are at risk.

To be sure, some risks remain with blockchain and the technology itself is still evolving. Even more reason to stay in the know.

To Blockchain or Not to Blockchain, that is the Question

A blockchain can be useful if (i) your business needs to keep a ledger (record of transactions); (ii) that ledger provides access to many parties; and (iii) there is uncertainty about the trustworthiness of those parties.

Paul Brody, who oversees Ernst and Young’s (EY’s) initiatives and investments in blockchain technology across consulting, audit, and tax business lines, has devised a 5-point test:

• Are there multiple parties in this ecosystem?
• Is it establishing trust between all the parties and issue?
• Are we securing the ownership or management of a finite resource?
• Do all the parties need to work with shared, complex business logic?
• Does the process depend on an extended business network?

Answering at least three of those questions in the affirmative means a blockchain solution could be relevant or even transformational to your business. Helica can help you think through the strategic business issues related to blockchain and how to engage with it for your business.