Blockchain: The next big thing
There is an increasing expectation that blockchain will play a major role as a future economic driver.
Proponents believe blockchain may well be one of the key technologies (along with the internet, automation, AI and robotics) that propels us into the next industrial revolution, with new paradigms for doing business in finance, commodities trading, and many other industries.
What is Blockchain?
In the same way there are there are many ways to describe the internet, there are many ways to characterise blockchain. In simple terms blockchain is a distributed (or decentralised) digital ledger which records digital data or events in a series of blocks, which are tamper-resistant. While the data may be accessed, inspected or added to, it cannot be changed or deleted, leaving a permanent and public chain of transactions.
In reality, blockchain incorporates a range of other characteristics including acting as a marketplace for financial and other services, including cryptocurrencies (like bitcoin) and as an open source platform for software development. Importantly, it unbundles trust so that anyone performing a trust function will be challenged and can be verified by the blockchain which means that there is no longer a need for a middleman of any kind. This means that the transfer of ownership of anything of value — whether it is money, a bond or stock or a digital asset with a right attached to it — can happen instantaneously.
Blockchain and banking
To date the financial services sector has been most active in using blockchain. The main areas in which banks and other financial institutions will be able to implement blockchain technology are reducing costs and making bank-to-bank and international transfers faster. Research by Accenture found that the global banking sector will save up to $20 billion by 2022 through the adoption of blockchain.¹
Another field of blockchain application in the banking industry is for the creation of a client identification system based on the distributed ledger technology. This is highly relevant because all credit organizations have to perform Know Your Customer (KYC) when processing applications. Blockchain enables users to be identified on a single occasion and this information is stored with access granted to other banks in the system.
Heavyweights ramping up blockchain
Beyond financial services, we are also seeing other sectors increasingly considering the merits of blockchain technology. Commodity traders and trade finance banks are embracing blockchain as a way to reduce costs and administrative tasks, while improving record keeping and tracking for trades. The biggest traders conduct thousands of transactions per year valued in the billions of dollars, but those deals typically have low profit margins. For blockchain to succeed, however, industrywide adoption of standardised platforms and systems will be needed. For this reason banks are teaming with the biggest trading houses, such as Louis Dreyfus, on early blockchain tests.
Oil traders and commodity trade finance banks have already used blockchain to conduct energy trades. Some of the world’s biggest oil producers, trading houses and trade finance banks have formed a consortium develop a blockchain-based digital platform to manage physical commodity transactions. The venture is expected to be fully operational by the end of 2018.
Blockchain is also being used for improved ethical supply chains. Diamond industry giant De Beers recently commenced a pilot scheme to train and equip artisanal diamond miners in Sierra Leone before authenticating and buying their production. The company plans to make the technology available to the entire diamond industry. Should the scheme prove successful, it could solve multiple problems. Artisanal miners will have a route to market that will offer them better prices, while De Beers gains additional supply and consumers can have the confidence that the product they are buying is free from many of the negative connotations of small-scale mining.
There are already moves afoot to replicate the De Beers’ scheme in cobalt mining. Cobalt is a key ingredient in lithium-ion batteries used in electric vehicles and the scarcest of battery raw materials. It is also the most geographically challenged in terms of economically viable deposits: More than 50 per cent of global reserves are found in the Democratic Republic of Congo, a country plagued by political instability.
Securing supply and ensuring it meets the sustainability demands of customers, who want to know that extraction has met environmental and social standards, are at the heart of the difficulties of building a sustainable and ethical supply chain. The proposed cobalt pilot will monitor artisanal mines against OECD sourcing standards by using blockchain technology to trace those supplies and ensure against supply chain contamination.
The use of blockchain technology may also become the norm through regulation. So far, most proposed or piloted blockchain schemes are being driven by companies or industry groups. Yet, as the technology advances and regulators tighten rules, there’s an increasing likelihood that such monitoring technologies will become compulsory in the future.
Given its vast implications, organisations will clearly benefit from a considered, methodical and sustained approach to implementing blockchain.
The key question is how to go about this and whether it is led by technology or business. A sensible option could be a hybrid approach with a blockchain champion to articulate a strategy and move projects forward which focus not just on cost savings but also innovation. In large organisations there will need to be many champions. In the same way that the internet has become omnipresent, their ultimate goal will be to ingrain blockchain as part of the organisation’s operating DNA.
This article was first published in 2019 Outlook Creating Opportunities. Read more articles from the magazine.Speak to a specialist