By Tim Laehy
(Second in a Series of 3 articles on Blockchain)
The promise of blockchain should not be undervalued. This new technology has the potential to forever change the way we conduct business today including the speed and cost of it.
There are many benefits to blockchain including:
- Broad application across sectors and transactions
- Lower transaction costs
- Faster transaction processing (“real-time”)
- Improved, more secure record keeping
- Reduced risk of fraud and errors
Broad Application Across Sectors and Transactions
Perhaps blockchain’s strongest benefit is its wide applicability to so many different types of transactions across industry sectors and players. Blockchain can have many unique and varied applications. While one of the first uses of blockchain technology involved trading and managing cryptocurrencies like bitcoin, there are many other applications even today including managing transactions related to trade and commerce, including finance processes like payables, receivables, and regulatory compliance.
Currently, there are three types of blockchain networks – public blockchains, private blockchains and consortium blockchains. Public blockchains (such as Bitcoin and Ethereum) are fully decentralized, require very low levels of trust, are fully transparent where anyone may view public transaction records, require a consensus process for transaction validation, have limited privacy protections and are associated with very low transaction costs.
Private blockchains differ significantly from this public blockchain model. Private blockchains are highly centralized and require a ‘high trust’ entity (e.g. an enterprise or a consortium of companies). They restrict participants with ledger “read-only” permissions while the centralized authority rules on all allowable changes, transaction reversals and modifications. They also have greater privacy protections with the centralized entity controlling who has access to various parts of the blockchain and the amounts are charged for blockchain transactions. Currently, common finance applications of private blockchains in use by enterprises include order-to-cash, trade finance, intercompany transactions, and account reconciliation.
But the promise of blockchain beyond these limited applications is significant. Other processes that extend well beyond finance, such as for supply chain management, asset tracking, warranty service, and regulatory compliance have the potential to also be streamlined using blockchain technology.
Lower Transaction Costs and Faster Transaction Processing
Blockchains perform transactions and facilitate recordkeeping using automated, low-cost mechanisms. They enable rapid asset transfer through secure, real-time protocols. Eliminating the slower “stage-by-stage” middlemen required by more traditional nonautomated transaction processing squeezes cost out of the supply chain processing and eliminates the concomitant costs of record keeping and data reconciliation all along the way. Huge cost savings. Faster transactions. Global reach.
Improved and Secure Record Keeping
The permanent (immutable) record created through blockchain transactions also provides excellent governance in the form of smart contracts. A smart contract makes sure each part of a transaction is validated the instant it happens, triggering the next required action, exactly when it is supposed to occur, until the process is complete. And another benefit of blockchain is that the permanent and irreversible nature of blockchains greatly reduce the possibility of fraud and errors.
Specific examples of blockchain and their benefits include:
- Smart Loans: “Smart loans” hold digitized information like loan clauses integrated with automated business logic to reduce settlement times. BENEFITS: Reduced need for intermediaries.
- Digital Identities: Digital identities cryptographically bound to details (e.g. creditworthiness) of all stakeholders for accelerated onboarding and predefined roles. BENEFITS: Faster transactions, shared data.
- Document Digitization: Loan agreements, term sheets and contracts are converted into “smart” digital documents enabling proof of existence and eliminating inefficiencies from paper documents. BENEFITS: Increased efficiencies, less paperwork.
- Verification & Authentication: Real time confirmation of associated digital documents (commitment / authorization / collaterals) across multiple stakeholders. BENEFITS: Faster time to market, real time results.
- Asset Transfers: Dynamic transfer of ownership of loans, securities, collateral, and physical assets (fiat currency) to reduce cycle time and facilitate reconciliation. BENEFITS: Reduced time and headcount required to monitor transfer of assets.
- Encryption: Encryption technologies enable anonymity of sensitive data in shared environments for transfer of assets and currency. BENEFITS: Secure data, more privacy.
Future Opportunities Using Blockchain
The business benefits of blockchain are truly in their nascence. The technology is so new and with only one “killer app” (Bitcoin cryptocurrency) currently available in-market, we see only the tip of this iceberg at present. But change is coming and when it comes, it will be massive. Here are the business conditions and situational factors which will foster more rapid adoption of this technology:
Transactions involving multiple participants
When multiple separate companies need to write or add to a ledger, blockchain can be an effective way to streamline transaction processing and create one source (record) of the truth. Blockchain is an excellent solution when participants include multiple manufacturers, suppliers, customers, service providers, transportation providers, regulators, and even, possibly, tax authorities.
Complex business transactions
When a group of companies share a targeted purpose within a sector (e.g., food safety, health care claims adjudication, or mortgage underwriting compliance), blockchain has strong potential. Groups of companies facing a broad set of complex transactions can benefit greatly from setting up blockchains across their trading ecosystems. Blockchains enable the management of things like asset purchases, financing, warranties, insurance, regulatory compliance, and public safety – in an integrated manner and all at the same time, faster, at lower cost and more reliably.
Mandated, quality record keeping
In some transactions, high-quality records add value at the time of the transaction, and for a limited time after. Blockchain delivers immediate benefit for real-time recordkeeping. Blockchain is an excellent solution when many parties need to access, create, and maintain records over an extended timeframe (e.g., such as occurs with decades-long asset lifecycles, or over the entire lifetime of a patient). Also, for many regulatory bodies, blockchain is a reliable way to document and manage compliance.
Real-time transfer of assets
For companies that want to improve their working capital or liquidity, the lower friction of blockchain enables near real-time transfer of assets. Blockchain can eliminate the lag in payment cycles and asset transfer, which can help reduce costs, improve accuracy, and provide compliance efficiency. Additionally, the transparency of blockchain can help streamline trade finance and/or supply chain financing across multi-party networks.
The most likely scenario here is that technology leaders within companies will discover new blockchain-enabled solutions and will become the early adopters of this evolving suite of applications. Company leadership teams will then be charged with strategic decision making about when and how much to invest in this new path.
Our final article in this series on blockchain examines the CFO’s role in strategically evaluating blockchain’s potential and partnering with the management team and board of directors to unlock the promise of blockchain across an enterprise.