The press surrounding the wild ride of Bitcoin’s valuation mostly misses the larger story of blockchain, the transformational technology that underpins Bitcoin. Companies that work to stay ahead of consumer and client expectations appreciate the power of blockchain to alter business paradigms. According to a Deloitte study, analysts project that blockchain can save $15–20 billion annually by 2022 in the financial services industry . There are similar projections for insurance, real estate, and health care.
Some analysts envision the security, efficiency, and speed of blockchain as transformative as the internet, with the power to reorder businesses and transform everyday individual transactions. Blockchain frees transactional records from the historical constraint of isolation and the need for verification, much as the internet freed communication and information from centralized control. Think email versus the post office, or Amazon vs. the department store. Moreover, blockchain has the potential to replace the trust-providing function of traditional institutions like banks, escrow agents, and even the county courthouse.
So what is this transformative technology? Some of us remember the bound ledgers used for accounting. Those ledgers were generally private and guarded to protect their accuracy and security. When conducting business, each organization kept its own separate record and needed to independently verify information that might not be in their possession. This often led to mistakes and discrepancies. Like those paper volumes, a digital blockchain ledger records transactions, i.e., transfers of value or information between two parties. A blockchain ledger, however, is distributed and decentralized across a peer-to-peer computer network. It is simultaneously shared and trusted.
Participants in the network confirm transactions without a central authority to certify them; the trust is built-in. When parties enter into a transaction, the transaction is broadcast across the network of computers. The network validates the transaction, using collectively pre-agreed, trusted consensus protocols. Once validated, the transaction is recorded in a new block of data, which is in turn added to the existing blockchain. Once added, it is permanent, immutable and resides across the entire network, virtually instantaneously.
The first assets recorded on a blockchain were digital currencies, and Bitcoin was the first of these. But this technology has the potential for significant impact in a number of industries by reducing or eliminating the need for intermediaries that record and secure data. With blockchain, associated cost structures of intermediation would also be eliminated or reduced. Organizations in financial services, health care, real estate, as well as governments are exploring or have already implemented blockchain solutions. In fact, according to IBM, between 2013 and 2016 non-currency assets using blockchain have grown 16-fold to $1.6 billion.
Financial institutions, saddled with layers of inefficient legacy systems, are at the forefront of implementing state of the art uses. For example, over 100 banks, other financial institutions, regulators, trade associations, professional services firms, and technology companies have joined the R3 Consortium to develop a distributed ledger platform. R3 intends to address the problem of multiple generations and layers of antiquated systems, which create inefficiency, risk and excess cost, especially because of their difficulty in working in an integrative way across multiple platforms.
J.P. Morgan recently announced a new blockchain-based payment-processing network to speed up transactions between global banks while reducing cost. BNY Mellon is applying the blockchain to transfer assets in securities lending, and the Japan Exchange Group is exploring blockchain for trading in low liquidity markets.
Blockchain can improve health care services. With patient health records in a blockchain environment, all the healthcare providers in a person’s network can receive permission, once verified, to access, view and update the same, single record of that person’s history. This blockchain deployment can reduce miscommunication and lost information, lower cost, and improve quality of care and outcomes. An IBM survey of 200 healthcare executives in 16 countries found that over 1 in 6 expect to have a commercial blockchain solution deployed at scale in the near-term, starting with a focus on medical and health records, clinical trial results, and regulatory compliance.
In 2017, the state of Delaware, where 60% of U.S. companies are incorporated, became the first state to enact legislation allowing the use of a blockchain-based corporate registry system, including maintenance of shareholder lists and stock issuance records.
Before signing the corporate blockchain bill into law, Delaware’s governor, John Markell launched an initiative to use blockchain to improve the state’s efficiency. New York, Illinois, and Texas are also piloting and testing blockchain applications for improved efficiency. Voting is the focus of ongoing testing or completed pilot projects in New York, Texas, Denmark, Estonia, Ukraine, South Korea, and Australia.
Among national governments, Estonia is the most advanced in using blockchain to serve its citizens. Estonians can verify the integrity of their records held in government databases, and use other new blockchain-based digital services like electronic tax filing and business registry. There is also a blockchain-based voting service for shareholders of companies listed on Estonia’s NASDAQ.
Blockchain can readily be applied to real estate information, which is already on the public record, such as titles and deeds. Consider how a public ledger would improve the efficiency of home purchases and reduce the associated costs, like the title search, that establishes the provenance of property ownership. Once a real estate transaction is verified, it can be added to the public ledger permanently and immutably. Much of the civic exploration of blockchain use is in this domain.
As a leader, make sure to educate yourself and your teams about the potential of blockchain and this transformational and powerful technology. Attaining some level of knowledge is your responsibility. For board members and those in or near the C-suite, education is particularly required so that you can participate in forward-thinking strategic conversations. Help your organization develop a strategic roadmap for capital investment and technological implementation of blockchain systems within the enterprise. Leaders must avoid the risk of having dramatic change on the horizon and not gauging the terrain ahead.
Understand what digital skills and capabilities exist within the senior team, and fill gaps as needed. Your organization may already have a repository of information. Start with the CIO to get blockchain conversations on the table. The CEO, must assure that regular conversations occur among the board and senior managers about what’s happening in the field, and where the organization is currently and where it’s headed strategically.
Projects that utilize blockchain technology, especially with the public, can’t rest exclusively in the hands of technologists. Leaders must simplify the user experience for employees and consumers in order to drive rapid adoption. The employee’s role is critical. Steering your organization through the uncertainty of such a potentially disruptive technology needs alignment at all levels of the company. Your organization needs to be prepared.
Reputation is everything. In the future, reputation systems built on blockchain technology may serve as an enduring witness of organizational or individual behavior. Ledgers that used to be a system of accounting for business can through blockchain contain a record of accountability and trust for business and government alike.
For leaders, the greatest risk is to not take action and one day become overwhelmed by a tsunami of change. Invest your time now, as blockchain implementation may accelerate faster and scale further than the internet did. Success in blockchain adoption, especially with the public, will not necessarily depend on who has the best technology, but on who is the most nimble in creating the most robust and trusted network in the minds of the users.