If you want to grab the attention of the business press today, then blockchains are the thing. Almost every news story involving this nascent technology makes a splash but forget about bitcoin, there is far greater potential for companies in blockchain.
More often than not the sector involved is finance. Cryptocurrencies are the flavour of most months. Stories about bitcoin’s meteoric rise in value and more recent talk of a crash have vied for front-page space with news of what banks are doing to protect their market.
Blockchain is more than cryptocurrency
So it comes as no surprise that in many people’s minds blockchain is cryptocurrency. True, blockchain was created in 2009 to store bitcoin – the first cryptocurrency, itself developed as a way to store value following the 2008 global banking crisis.
However, there’s more to blockchain than cryptocurrency and there’s more to blockchain than hype. It has many applications relevant to small and medium-sized businesses – from lawyers to accountants, insurers to estate agents, farmers and manufacturers to musicians and publishing.
A blockchain is an encrypted database held on many computers worldwide all hooked up to the same network. For this reason it is sometimes called a “distributed ledger”. The computer owners offer the power of their machines (a node) to participate in the network in return for a reward.
The data is stored simultaneously on all nodes. The sheer number of nodes on each network means the data cannot be erased, copied or otherwise interfered with. It is a permanent record kept in chronological order that can only be added to by those on the network.
The data a blockchain holds cannot be faked nor does it need a central overseer. These two features make the technology versatile and useful. They make it a single source of truth. Dubbed the internet of trust, there’s an anarchic, revolutionary whiff to it – with many proponents predicting that peer-to-peer transfer of information will restore the power held by governments and large corporates to individuals and small business.
How blockchain can help your business
At its heart, blockchain provides certainty, fast. Seamus Cushley , blockchain director at consultants PwC, says: “During any transaction between two parties there’s a period of uncertainty that requires an independent third party to provide the trust.
“Traditionally this role has been held by the bank or a lawyer, for example. Blockchain is unique in that it allows trust to be established so that value can be exchanged without a third party providing the trust.”
Cushley is a blockchain professional and, while he doesn’t see anarchy, he envisages a blockchain revolution in the way we go about our lives – both business (big or small) and private. “Everything we do is some form of transaction,” he says. “And it won’t be long before everything is digitised. Blockchain will be a part of that.”
Practical uses include the instant transfer of funds and payments independently of banks, cutting down the time and cost of transactions such as payroll.
Smart contracts – automated by means of computer programs – are another. For example, if a down payment is due as part of a contract, the payment is automatically taken and held in escrow until completion. The process is secure, unbreakable and low-cost. Services such as this – one of many currently offered by lawyers – could use blockchain. Companies such as Uproov, which has a smartphone app, offer notary services, for example.
Another use case is gift cards and loyalty programmes. Again, blockchain can store the data securely and cut out the traditional provider, reducing costs.
And blockchain is perfect for Cloud storage. Fast, secure and affordable, distributed Cloud storage may cut data-storage costs for SMEs – and bigger corporates.
So blockchain is more than cryptocurrency – it is a secure data store that can be used to provide trust, knowledge and insight to help individuals, companies and other organisations make better, more efficient decisions.
Cushley says: “The sharing of a digital identity of an asset, corporation or individual is critical to unlocking the potential of digital transformation, but can currently be challenged. Blockchain solves all the challenges of sharing facts.”
Why business needs to think about blockchain now
As we start 2018, blockchain remains in its infancy. “We are in day one of its development – of what will probably be a 10-year cycle,” says Cushley, comparing the imminent shift to blockchain to that of companies switching from intranet to internet.
By the late 1990s, many organisations had become dependent on their intranet for internal communications. Almost overnight, it was replaced by the internet and email. “It’s a good comparison,” he says, adding that as blockchain applications develop and are implemented they will operate below the waterline. “That’s when we’ll know it’s successful,” he says. “We won’t be aware of it.”
We are still a long way from that day, but many companies are examining the technology and its potential for efficiency gains now.
Most businesses want to run faster and cheaper. Blockchain may allow them to do this because the duplication of data, data silos and fraudulent claims can be eliminated, says Cushley. The cost of capital may also be cut and businesses will need less infrastructure.
A recent study of mid-market and private companies by consultants Deloitte found many taking note of that potential, with 77 per cent having plans to tap the technology. These include storing and securing digital records, executing smart contracts and exchanging digital assets.
The report says: “Blockchain is making business more efficient and transparent for companies of all sizes. If credit scores have long determined the terms of certain financial transactions, blockchain-based solutions will raise the stakes even more for reputation and digital identities by adding a higher level of trustworthiness to digital interactions.”
Such transparency is invaluable when it comes to raising finance, building a brand and extracting value. But it goes beyond that. High transparency within an organisation can cut waste.
Cushley suggests blockchain could eliminate much of the huge duplication around data storage and processing, for example.
“Companies today have to have primary and backup data-storage solutions; sometimes even a third to keep data safe. All have to be updated regularly, taking resources. Blockchain means they only need one – that’s one-third of their infrastructure costs,” he explains.
And there are more savings. With data stored on a blockchain, compliance becomes easier and faster; fraud is reduced; and banks will be able to calculate more accurate credit scores, allowing them to realistically assess and charge for risk.
There are also time benefits because companies will have to do less checking to verify information and the need to pay third parties to validate transactions disappears.
Furthermore, companies trading on a premium product or service will be able to prove their claims, building trust, burnishing the brand and enabling them to charge more. Marketing spend will no longer dominate the conversation with the consumer; facts will. A boon to smaller players.
A blockchain primer for business: what to consider now
Before any company adopts blockchain it needs to do research. It should examine its core systems and system requirements in terms of the benefits blockchain can bring, check out the return on investment and examine tactical uses. If it decides to go ahead, it must also have the right kind of data.
Records need to be digital – everything relating to its customers, finance department, legal, logistics, supply chain, shareholders, partners, distributors, inventory etc. This data should be in a blockchain-friendly format – chronological order rather than double entry as is usual in bookkeeping.
The firm then needs to consider how to implement blockchain. Will it be part of its core systems or consumed as a service provided by a third party specialist, whereby the blockchain technology/software is rented rather than bought as a package? There is no standard version of the technology, with at least 200 small vendors, who sell blockchain software rather than rent it, working on their own versions, adding risk. This makes it harder to pick the right vendor, and one with longevity. And it is essential to ensure candidates fit any existing Cloud strategy.
Working with a big vendor such as Microsoft and IBM may reduce risk, but it can also reduce flexibility and push up internal costs because their solutions are proprietary.
Another route would be to work with a blockchain service provider that itself uses blockchain – for example, a company specialising in supply-chain verification such as Provenance . Set up by Jessi Baker in 2013, Provenance uses blockchain to make supply chains more transparent.
She says: “Provenance cuts risks and helps people and organisations know what they are buying. It cuts fraud and double spend. With a fully transparent supply chain you know there will be no fraud, that the quality and quantity you have agreed is delivered.”
There is often a price premium associated with quality. “Proof justifies the premium. It enhances a business’s reputation and it can sell more,” she says.
In the past, supply chains relied on third-party certification to validate quality and authenticity. But even though these third parties are independent, fraud, double counting and variable standards are common. High-profile scandals of fraudulent supply-chain claims have included olive oil, horse meat sold as beef, fake medicines and steel.
Provenance’s business model is software as a service. This means it doesn’t sell the software but rents it as a service, with clients paying a monthly fee based on the complexity of their supply chains, the number of verified claims and volume. Individual projects are charged on top. This type of business model is ideal for SMEs thinking of adopting blockchain technology.
Cutting the cost of finance
Demand for Provenance’s services isn’t limited to the need to justify a price premium. It is part of a new year-long project announced at the end of 2017 at the One Planet Summit in Paris looking at whether supply-chain data could cut the cost of finance.
Working with multi-national consumer-products giant Unilever and Sainsbury’s, the UK’s second-largest supermarket group, the project will examine how blockchain can help verify sustainability claims in supply chains. It has wide ramifications for SMEs.Focusing on as many as 10,000 farmers in Malawi who supply Unilever and Sainsbury’s with tea, the project will track materials used for the product’s packaging. The idea is to see whether making the data available to banks and other companies affects risk assessments and therefore the cost of finance.
According to Marguerite Burghardt, head of the trade finance competence centre at BNP Paribas, one of three banks involved, access to such data will enable “financial institutions to broaden the scope of their financing offers and to propose financial incentives to their clients based on their environmental and social standards”. This could have a huge impact on business models and growth. Harking back to Adam Smith, an efficient economy is all about allocating resources to deliver optimum utility.
Not every gain will be rapid. Some of the return on blockchain will be delayed and will flow from the fact that behaviour will be easier to audit. This will make regulation easier to enforce, helping to make business fairer, cleaner and less susceptible to risk. It will be harder for companies to get away with flouting environmental laws, for example, and allow consumers to vote with their wallets. In this way, blockchain could level the playing field for SMEs competing with multi-national conglomerates. Some even believe fake news could be more easily identified.
For Cushley it’s quite simple. He believes blockchain will become the technology of distributed and decentralised data storage. It seems governments agree with him. Already, the United Arab Emirates has declared its intention to go fully blockchain by 2020 and other governments are looking at applications including healthcare, voting, identity, land registration, corporate registration, tax and benefits management to name but a few.
Good news for the Internet of Things
Separately, blockchain could be the catalyst for the Internet of Things, because it will faithfully record billions of small transactions. Ettienne Reinecke, chief technology officer at Dimension Data, says: “In the Internet of Things you’re generating millions of small transactions that are being collected from a distributed set of sensors. It’s not feasible to operate these systems using a centralised transaction model; it’s too slow, expensive and exclusive.” Blockchain is the perfect solution.
Word of caution
That said, blockchain is not the answer to every data problem. Instead, it is a different rather than better way to address data or transaction management. Advocates believe it could be transformative, but without planning it could be a costly misadventure with training and energy budgets burnt up. While it is generally thought to be tamper-proof, thanks to its distributed nature, even Satoshi Nakamoto, the founder of bitcoin, warned of the 51 per cent rule. This supposes a scenario in which 51 per cent of the nodes or computers on a blockchain network are controlled by hackers, who can then change the data. Equally, the database is only as good as the data that is inputted. The adage “garbage in means garbage out” still holds true.
Simple transactions may not be faster – although complex, multi-stakeholder transactions probably will be. Finally, because the same data is stored simultaneously on many computers on the blockchain network, energy costs will be high and some warn of the cost of scalability.
Data is seen as one of the most valuable assets for any company and the ways we can exploit it are growing daily. It makes sense that this asset is kept safe and in a place where its value can be extracted. For many SMEs, blockchain will eventually be part of that solution.
3 actions your business should take now
According to a Deloitte study, 77 per cent of SMEs plan to use blockchain, with uses ranging from securing digital records and executing smart contracts to exchanging digital assets. Before they make what could be an expensive and risky investment, consideration must be given to the pros and cons of a still nascent technology and how to go about implementing it.
1. Decide whether blockchain will benefit your company
Any company thinking about blockchain should look at its existing core systems and system requirements, the potential return on investment over the short, medium and long term, all the risks, and examine the tactical use cases.
PwC lists six circumstances in which a company may benefit from blockchain. These are where:
- multiple parties share data
- multiple parties update data
- there’s a requirement for verification
- intermediaries add complexity
- interactions are time-sensitive● transactions interact
It recommends that firms only proceed when at least four of the six circumstances apply. The next step is to ensure the relevant data held is accurate and in blockchain-friendly format. Everything relating to customers, the finance department, legal, logistics, supply chain, shareholders, partners, distributors and inventory must be digital and in chronological order. At the same time, the company needs to decide how it wants to use blockchain. Will it be part of its core systems or consumed as a service provided by a third party? Adopting the right strategy is important because it will affect costs, flexibility and risk.
2. Think about how your firm would buy blockchain services
Using a blockchain service from a specialist third-party supplier, whereby a company pays a monthly fee and is billed according to use might limit scope and flexibility, but can help keep costs within budget. Charges are usually linked to volume of data. Going to a vendor, which develops and sells its own software solutions, may increase flexibility but as yet there is no standard version of the technology, meaning you may back the wrong horse. Implementation costs are also harder to control.
If using a third-party service provider, it’s important to make sure that it can deliver the kind of services you really want and that the culture fit is good. For example, a small law firm specialising in conveyancing may want to buy in a smart contracts service. In this case it should check to see that the scope of the offer covers property and land to the detail required.
Similarly, a food manufacturer may want to authenticate the quality and origin of ingredients to allow it to claim organic or Fair Trade status. If using a third party offering this service it is vital to make sure it is collecting the right kind of data and that the data is verifiable.
3. Determine when blockchain is right for your business
Finally, think about whether now truly is the right time to adopt blockchain. Will it really give you a competitive advantage that is worth the risks of early adoption? Energy costs and scalability have both been flagged as potential problems, and in many cases traditional databases are cheaper. Blockchain is a significant technology development that will undoubtedly have a big impact on business. It’s worth keeping an eye on even if you don’t want to take the plunge now.
Whilst care has been taken in the production of this article and the information contained within it has been obtained from sources that Aon UK Limited believes to be reliable, Aon UK Limited does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the article or any part of it and can accept no liability for any loss incurred in any way whatsoever by any person who may rely on it. In any case any recipient shall be entirely responsible for the use to which it puts this article.
This article has been compiled using information available to us up to 16/06/22.