We see a growing number of blockchain projects being started, but it adds a considerable amount of risk if you are just getting on the buzzword bandwagon. These projects are simply technology buzzwords trying to find a problem to solve, a dangerous approach which works in the wrong order. We need to start with problems that are the best fit for blockchain to solve, not the other way around.
As technology around us advances into the future, we find ourselves addressing and evaluating new technologies every day. Blockchain burst onto the radar as the latest buzzword and the technology has now entered boardroom discussions in financial services and trade systems, where they use authorities to verify transactions within that network.
Several industries are heavily dependent on a single institution to govern and control the record keeping. Banking or trade finance systems and medical records are all based on varying forms of ledgers. Could this groundbreaking technology fuel and sustain the transformation of industries?
Most parties in the financial sector already have a grasp of concepts such as bitcoin and other cryptocurrencies. These concepts work on the blockchain technology, which is essentially a digital, distributed transaction ledger with identical copies maintained on each of the network’s members’ computers. Transactions are grouped in blocks, recorded one after the other in a chain of blocks (the 'blockchain'). The links between blocks and their content are protected by cryptography, so previous transactions cannot be destroyed or forged. All parties can review previous entries and record new ones. This means that the ledger and the transaction network are trusted without a central authority – a ‘middleman’.
A desire for transparent work practices coupled with multiple parties seeking assurance across various jurisdictions can hamper authorities and players from interacting in a high trust relationship. This is where blockchain technology comes in. It has the potential to eliminate systemic vulnerabilities with transparent, trusted transactions.
In the financial industry, there are a number of complex intermediate functions that blockchain could upend: from identity and reputation to payments and remittances, trading value, insurance & risk management, and audit & tax functions. It could speed up and simplify cross-border payments, allowing for greater trade accuracy, and a shorter settlement process where future trading is concerned.
For me, what I feel is one of the most promising applications of blockchain technology is the smart contract. It can execute commercial transactions and agreements automatically. It also enforces the obligations of all parties in a contract – without the added expense of a middleman.
Most firms cite opportunities to reduce friction and costs. Most financial intermediaries themselves rely on a costly array of intermediaries to run their own operations. Santander, a European bank, put the potential savings at $20 billion a year. Capgemini, a consultancy, estimates that consumers could save up to $16 billion in banking and insurance fees each year through blockchain-based applications.
Take for example SWIFT, the global banking messaging giant. Real-time blockchain settlements across borders, can directly challenge SWIFT which has set the international standard for cross-border payments for over four decades. Despite SWIFT utilising Global Payments Initiative (GPI) which doesn’t use blockchain technology, this service allows clients to receive payments within minutes, and even seconds.
Some banks like Morgan Stanley and BNY Mellon, are co-opting the technology through the development of blockchain systems to maintain secure backup records and to more efficiently process transactions.
Logistics/ Supply Chain
Since the early days of trade, entire empires were built on the exchange of goods and services. The modern world has literally evolved into a global digital economy, the systems of record that manage these transactions are increasingly more complex. Whether it's for the exchange of money between two companies or tracking goods through a supply chain; the extension of globalisation and global trade has created a spaghetti mess of disparate ledger systems vulnerable to errors, fraud and misinterpretation.
Blockchain probably has the answer to the problems that have been plaguing the logistics industry for decades - from dispute resolution to administrative efficiency and order tracking, the technology holds an incredible amount of promise (and peril). A good illustration is the Blockchain in Transport Alliance (BiTA), a forum for the development and application of blockchain technology standards and education for the trucking, transportation, and logistics sectors, continues to see an increase in interest from the logistics community.
CASE STUDY - THE JOURNEY OF A SMARTPHONE
For example, consider the journey of a smartphone from raw materials to the consumer's hands – that covers a complex landscape of legal, regulatory, financial, manufacturing and commercial interactions that all have to align. The supply chain is reliant on intermediaries at every step, adding time and cost.
Blockchain empowers all parties involved in a network of secure and synchronised records of transactions, recording every sequence of transactions from beginning to end. Whether it's hundreds of steps in a supply chain or a single online payment, it's placed into a 'block'. Each block is connected to the one before, and after it, groups of transactions are blocked together, and a fingerprint of each block is added to the next, thus creating an irreversible chain. That's why blockchain is ideal for recording the manufacturing and distribution of one of the most valuable goods in the world, our smartphones.
It can trace a device from the raw materials to the hands of the consumer with exceptional security and transparency. Key features make blockchain uniquely capable of handling the requirements of a regulated industry like smartphones, it's distributed, its permission driven, and it's secure because the ledger is distributed. It works as a shared form of record keeping, ensuring no one person organisation holds ownership of the system as the materials pass through the supply chain.
On the flipside, we see a growing number of blockchain projects, purely for the sake of blockchain as a buzzword, adding a considerable element of risk. These projects are technology buzzwords trying to find a problem to solve, a dangerous approach which works in the wrong order. We need to start with problems that are the best fit for blockchain to solve, not the other way around.
In the case of smartphones, a blockchain ledger keeps a record of high-resolution photos of each component at every touch point along its journey. It holds certificates of authenticity and real-time records of every transaction throughout the supply chain. There is a complete auditable an indisputable record of information blockchain technology gives us the ability to travel form industries of all sorts from smartphones to flowers, monetary transactions or even things like contracts deeds records and other public and private agreements.
It frees up capital flows, speeds processes, lowers transaction costs and most importantly provides security and trust. Blockchain will do for business what the internet did for communication - create new ways of working, resulting in improved efficiencies while leaving more time for creativity and innovation.
But the enormous opportunity for blockchain is in government as it's applied to entity and record management where we have yet to see full on adoption.
Overall, we are bullish on Blockchain, but the devil lies in the details of execution. A new technology is panacea only if it offers speed, transparency, industry-wide connectivity AND regulatory oversight. Are we doing it for the right reasons? And do we acknowledge the challenges?