Blockchain for Business: Hope and Hype

This is the second post in a series about cryptocurrency and blockchain. The first post covered “Basics of Bitcoin and Other Cryptocurrencies.” Stay tuned as we share insights on how these new technologies and trends may relate to you and your business.

In May 2018 approximately 8,500 people attended Consensus 2018, the fourth annual conference by CoinDesk that offered presentations and panels on blockchain and cryptocurrency topics. High attendance to such events and frequent headlines in the news are indicators of blockchain’s perceived disruptive potential, but the average small-to-mid-sized business presently appears unaffected. If blockchain has so much potential and promise, why hasn’t it impacted more businesses yet?

One reason may be that although large companies, such as financial services organizations, are currently developing blockchain solutions, most impactful use cases are still conceptual or in their development phase.  In other words, we’re not there yet.

Here’s a look at some of the possible applications and obstacles for blockchain.

Conceptual solution models using blockchain

Blockchain, the distributed database model that includes features designed to offer security and privacy, is the technology that made Bitcoin possible. However, the potential uses for the technology go far beyond cryptocurrencies.

Other uses typically involve applying the technology in situations where people or organizations need to trust that records are accurate. The accuracy is supported by blockchain’s design for making records immutable (unchangeable). Use cases often propose to take advantage of three conceptual solution models of blockchain technology: tokenization, disintermediation, and automated reconciliation.

1. Tokenization

A blockchain architecture may be used to create tokens, unique digital representation of assets.  The token may include provenance information, such as who owns the assets, where they come from, and where they have been. That information can be appended, allowing the token to be bought and sold much in the way a bill of lading can be bought and sold. The advantage proposed by blockchain in this scenario would be the richness of information and immutability—the inability to alter the records without authorization.

2. Disintermediation

Disintermediation means removing an agent or broker from a transaction. For example, when a person wants to give funds to another person or business, cash can be handed over or banks can be used as intermediaries. In such a case, the payer instructs their bank to send the funds to the receiver’s bank, using a payment card, a check, or wire transfer. Customarily, banks charge fees for their services as intermediaries. If the bank is removed from the process, then the payer could send electronic payment to the receiver with no intermediary, possibly with reduced fees and time. Other examples not involving banks may instead involve an existing or proposed data custodian when records need to be transferred from one party to another. Like banks, companies such as PayPal and eBay are also intermediaries that could be affected in an environment where blockchain is prevalent.

3. Automated reconciliation

Blockchain solutions can be configured to execute predetermined arrangements when conditions are met. A blockchain application might continuously check records for satisfaction of predetermined conditions, such as receipt of payment, passage of time, or receipt of a token. Because the software automatically checks for conditions and executes agreed-upon changes, these arrangements are typically referred to as “smart contracts.” An example may be the transfer of a digital key in the form of a token to a renter from a landlord upon receipt of the rental payment.

Use case examples for blockchain

Bitcoin and Ethereum are examples of use of a public blockchain that have attracted attention, but small and mid-sized businesses are mostly unaffected by those public use cases. By contrast, enterprise use cases of blockchain technologies may involve combining the technology’s conceptual benefits for the business use of a single organization (private blockchain) or for multiple organizations (consortium). Currently there are organizations looking to take advantage of those benefits in areas like trade financing, vehicle record maintenance, and Know Your Customer (KYC) compliance.

For example, Bank of America Merrill Lynch is working with Microsoft on a solution that aims to streamline the trade finance process. Frequently when an organization is making large purchases of goods or materials, the buyer obtains a standby letter of credit from a bank to give to the seller, indicating that the payment will be accurate and timely. The solution proposes to reduce the process from weeks to days by creating letters of credit as smart contracts on a blockchain application, a process designed to reduce errors and inaccuracies currently experienced.

Groupe Renault is working with VISEO and Microsoft to create a digital record of vehicle maintenance.  By putting vehicle maintenance records on a blockchain, the organizations hope to create a streamlined, tamper-proof record for each vehicle in a central location. Currently vehicle maintenance records are distributed over many sources, such as owner’s personal records, manufacturers, dealers, repair shops, and insurance companies. Those records can be aggregated by a data-providing company that searches records, such as CARFAX, but the solution Renault proposes would allow authorized owners and buyers to access those records directly, removing the intermediary organization.

Maersk has teamed up with IBM to develop a blockchain solution to streamline shipping.  Currently container shipping involves the burdensome use of many paper records that document a variety of transactions, from the renting of container space to passage through ports, to duties and fees. The blockchain solution proposed would involve digitizing those transactions and using the automated reconciliation of a blockchain application to reduce significant human labor costs.

Deutsche Bank partnered with IBM and other organizations to create a proof of concept of a blockchain-based consortium solution for satisfying Know Your Customer (KYC) regulatory requirements. Currently, each time someone wants to open an account or take a loan at a financial institution, the financial institution is required to verify the customer’s identity through documents. The proposed solution would establish a platform accessible by multiple financial institutions that would allow authorized participants to collect and share that information in a secure manner directly.

Timelines and potential obstacles

These prospective use cases appear promising. The projects are in different stages of the systems development lifecycle, and estimates for the impact of these and other use cases range from one to ten years. Even as organizations begin rolling out blockchain solutions, years may pass before large sections of the respective markets reach a tipping point. At that time, as with other disruptive technologies, the market may appear to change overnight.

Cloud technology took a while to impact many small and mid-sized businesses. Entrepreneurs may note that Amazon originally launched cloud web tools in 2002 but didn’t begin offering its popular S3 and EC2 cloud computing services until 2006. Amazon Web Services didn’t become profitable until April 2015, and more than fifteen years after its original launch market adoption is prevalent but by no means universal.

Furthermore, blockchain projects face risks and regulatory issues. Anytime organizations—even large, established ones—adopt emerging technologies, there is a risk that the projects will encounter delays in development and unexpected setbacks. Additionally, there are regulatory risks with such new technologies. For instance, currently there may be questions regarding the tax implications of transacting in cryptocurrencies, the most adopted use case of blockchain technologies today. The SEC has provided resources that include warnings, bulletins, and advisories regarding cyptocurrency coin offerings and digital assets. Certainly, there is ground to cover.

In the fast-paced landscape of technological evolution, blockchain itself is also susceptible to disruption.  The benefits of blockchain rely heavily on cryptography, which relies on somewhat predictable trajectories in computational processing power. If cryptography quickly becomes disrupted by revolutions in processing power—such as the potential offered by quantum computing—then the benefits of blockchain may be critically limited.

Preparing for the future of blockchain

In conclusion, organizations are investing in developing blockchain solutions.  As with other emerging and disruptive technologies, such as artificial intelligence and the Internet of Things, small and mid-sized businesses may be served best by maintaining a general understanding of developments in the space so that they are prepared to explore the risks and opportunities as they present themselves. As Bill Gates said in his 1996 book, The Road Ahead, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”