All disruptive technology has a “tipping point” – the exact moment when it moves from early adopters to widespread acceptance. Just as it was for Google in the late 1990s and smartphones in the 2000s, could we be approaching the tipping point for the next big disruptive technology – blockchain?
Essentially, blockchain is a shared digital ledger technology that allows a continuously growing number of transactions to be recorded and verified electronically over a network of computers. It made its debut in 2009 as the system used to track dealing in the first cryptocurrency, Bitcoin, and, since then, organizations around the world have spotted blockchain’s potential to transform operations. And investors are flocking to get in on the action: according to Pitchbook, private investments in blockchain companies topped $4.5 billion for the first nine months of 2017.
Even though the development of blockchain for business is still in its early stages, business leaders have swiftly moved from general awareness to action. Jacqueline Quintal, financial institutions practice leader, Aon Risk Solutions, observed, “Nine months ago, business leaders simply wanted to understand blockchain and its potential uses. Now, seemingly, not a week goes by without a major company making an announcement about its blockchain pilots.”
Many questions remain: Which industries stand to benefit most from blockchain? What use cases are being developed? And what new risks will blockchain create? Getting initial answers can help business leaders develop strategies to pursue new opportunities related to the technology.
Blockchain functions as a decentralized ledger of all transactions across a network: When a transaction occurs, everyone on the network knows about it. Blockchain is tamper-proof and virtually instantaneous, registering a transaction the moment each party verifies it. The chain consists of the history of transactions, and, once data is saved, it cannot be changed or deleted. These attributes make blockchain both secure and transparent – and a tool with almost limitless potential.
With these attributes, blockchain has attracted attention across industries. Here are just some of the most exciting blockchain applications currently being explored:
Financial services. Functions that still rely on a paper trail are prime candidates for blockchain, which could streamline asset management settlements, insurance claims processing, Know Your Customer (KYC) efforts and international payments, among other efforts.
Transportation and shipping. In the marine industry, many of the processes involve dozens of stakeholders, are paper-based and, in some cases, still use fax machines for transmitting documents. Blockchain has the potential to speed up trade finance dramatically – however it would require all stakeholders to use the system.
Health care. In the U.K., the National Health System is exploring the use of blockchain as a way to aggregate information. The technology could be used to give health care providers and other stakeholders real-time access to error-free medical records.
Energy and utilities. Blockchain has the potential to serve as an inexpensive, transparent platform to record and validate financial or operational transactions across a distributed network of utilities and customers. Utilities from Austria to Brooklyn are experimenting with energy exchanges supported by blockchain.
Supply chain management. In sprawling global supply chains comprising hundreds of vendors and touch points, blockchain could track the journey of every component or order. Such applications could revolutionize the food supply chain, for example, especially in the event of a recall.
These applications share some common themes. Quintal notes, “Blockchain is a natural fit for use cases that are transactional but with a high degree of process complexity or volume.”
Technology: Collaboration and Development in Financial Services
So far, financial services has been one of the leaders in finding use for blockchain. According to Quintal, “In many financial services use cases, blockchain is being pursued to replace existing technology, not necessarily reimagine manual processes, while in others blockchain could be a replacement for paper-based transaction processing.”
Since the more expansive the network, the larger the potential benefits, the financial services industry has several notable collaborations under way:
B3i. Fifteen companies, including Allianz, Munich Re and Zurich Insurance Group, have banded together to explore the ability of blockchain technologies to increase efficiencies in the exchange of data between reinsurance and insurance companies.
Linux Foundation Hyperledger project. IBM is leading an effort to build a blockchain on the open-source Hyperledger Fabric. The initiative has 122 members, including American Express, the Bank of England, JPMorgan Chase and Wells Fargo.
The Enterprise Ethereum Alliance. Ethereum is a blockchain-based protocol that enables smart contracts. The alliance consists of Fortune 500 enterprises, startups, academics and technology vendors.
R3. This consortium of more than 80 members (among them Barclays, BBVA, Credit Suisse and UBS) is seeking to create a distributed ledger called Corda based on blockchain. It was specifically designed to meet the banking industry standards.
Such efforts represent a shift among executives in their engagement with blockchain. According to Quintal, “Business leaders are increasingly willing to talk about what their firms are doing, which has raised awareness about different applications. Even exploratory, small-scale use cases to assess the benefits of blockchain have become much more public.”
Barriers to Adoption
Despite the flurry of activity and promising initial developments, blockchain faces a number of obstacles that will need to be overcome before companies choose to adopt it on a broader scale. Its decentralized network runs counter to the current business emphasis on centralizing data or functions to support security efforts. Users and operators alike must shift their mind-set to embrace and trust the system.
Among blockchain’s selling points is its security: high encryption and protocols. Since the general public largely doesn’t understand how the technology works, many still have concerns with data privacy and cyber security.
As with many technologies, blockchain’s recent emergence has outstripped the ability of government regulatory agencies to issue clear guidance on its use. And while many companies are considering blockchain uses, they aren’t in a rush to alter or jettison existing systems.
Quintal explains, “So far, the growing interest in blockchain has not translated to a sense of urgency to fully replace systems. Blockchain could offer tremendous savings in transaction costs and time, but the transition’s high initial capital costs could be a deterrent.” Various functions, not just IT, are in the process of building the business case for enterprise-wide implementation of blockchain.
Enterprise Risk Management: Preparing for Blockchain
As companies begin to identify small-scale, easy-to-implement use cases in discrete parts of the business, identifying and mitigating any resulting risks should be part of the conversation. Quintal says, “Organizations are starting to have strategic conversations about how their existing risk-transfer programs would address blockchain exposures.”
As with all new technology, when it comes to blockchain, business leaders should view any initial use cases as part of their enterprise risk management. In Quintal’s experience, executives “are attuned to the business and risk implications of blockchain. And in many cases, blockchain, like other technology platforms and systems, can be covered under existing insurance programs.”
The next several years could see blockchain move from test bed to becoming an essential business tool, so staying abreast of the latest developments and how it is being used will be critical.
“Blockchain will become the default technology wherever there is a need to ensure the integrity of data.” – John Zanni, President, Acronis
“This is not like another technology, like AI [artificial intelligence], the cloud, robots, drones, the Internet of Things, and all of the rest of the stuff that are part of this fourth industrial revolution. This is the transactional platform that will enable all of those things to be part of the economy.” – Don Tapsworth, Coauthor, Blockchain Revolution
“Blockchain is poised to disrupt trade finance” – PricewaterhouseCoopers, August 3, 2017
“Five ways banks are using blockchain” – Financial Times, October 16, 2017
“The growing list of applications and use cases of blockchain technology in business & life” – Business Insider, September 28, 2017
“This is why blockchains will transform healthcare” – Forbes, November 29, 2017