Hype is a built-in feature of business technology.
Sometimes, technology impact on business is minimal; Apple releases a new watch, Google designs computerised eyeglasses, Microsoft’s Windows 8.
Sometimes, technology goes unrecognised and then changes the world; the impact of Google’s search engine, iTunes network effect, the rise of the mobile.
Often, the technology comes from established companies recognized for innovation: the Apple iPhone. Just as often, the technology comes from a garage and a drop out University kid: facebook.
These high-profile successes colliding with an age of government-supported global entrepreneurship have caused technologists to be more sensitive than ever to how technology can literally change the world overnight.
As a result, there is a renewed and vigorous interest in technologies from hot startups. So much so, that the number is impossible to curate organically – a methodology has to be installed.
BlockChain is driving tremendous activity because it’s such a fundamental solution to many business problems intersected by a workable technology.
BlockChain is viewed as game-changing; the Economist publishes it on their front page, the FT regularly features high-profile BlockChain figures and 40 banks join a consortium to prepare themselves.
But here’s the reality: no-one knows how to use it yet.
It’s so early that it hasn’t even hit the Technology Adoption Lifecycle. It’s at that part right at the beginning where the technology exists but doesn’t have a clear, unambiguous proposition for even the most enthusiastic early innovators agree with.
Regardless of sector or industry, whether it’s in the payments space, insurance contracts, bond issuances, trade finance documentation, the world really hasn’t said ‘this is what we’re looking for’.
It may be obvious that it’s revolutionary – and it’s easy to create applications for the BlockChain, theoretically. It’s such a fundamental improvement – trusting computers to tell the truth where human intervention is impossible – that it’s actually difficult not to fall over and land on a viable BlockChain application if you ignore the retrofit problems an organisation has.
The result of this paradigm shift means that companies are awash with opportunity. Having too many decisions to make is worse than having none. Cash is being thrown at the technology; new jobs are created to explore the space, large companies announce investments into startups, intra-preneurs and senior managers fund proof-of-concepts.
Given this situation, if the company wanting to use BlockChain is to be successful then the onslaught of interest has to be managed. The ideas flowing from all parts of the business are generating a large number of potential applications and having some way of sifting through these to determine potential winners is necessary to stem losses placed in poorer investments.
Right Tool for the Job
Large organisations have large sets of problems. Collecting the best minds together to solve these problems generates a large set of use cases where BlockChain technology may be appropriate.
However, BlockChain is not the only technology that can solve a problem, there are more mature and stable solutions out there. For example, a shared database can be used instead of a distributed ledger and public key cryptography can be used to sign an email to guarantee the sender’s identity.
How is BlockChain determined to be the most effective technology; to quickly implement at low risk and low cost?
One way is to define a methodology that applies various tests of applicability of the technology to the use case being examined.
The methodology contains a series of factors that need to be identified which indicate a good fit for the use of BlockChain. These factors can be applied quickly to the use case to determine potentiality that can then be followed up with a deeper investigation.
It’s worth noting that the factor triage approach doesn’t cover whether the technology will be successful, only whether the technology will work for a particular circumstance and a particular problem.
Factor One: Identification
Q: Do you need to be 100% sure of who you are transacting with?
Undiscovered fraud typically involves having some inability to recognise participants. These may be entities representing themselves as another entity or hiding the fact a particular entity was involved.
For example, a classic insurance fraud occurs where a broker purchases one vehicle insurance contract from an insurer but resells it to multiple consumers. When insurance needs to be claimed, the broker manages all communications between the claimant and insurer but uses the name of the person that the insurance contract identifies, rather than the claimant.
Proving counterparty identity in a transaction is therefore an activity facing renewed enthusiasm from internal risk officers as well as external regulators.
The BlockChain solves this problem by the insurer signing a Smart Contract on the Chain which uses the BlockChain identity of the consumer themselves. This can be extended by identification of the insured object being recognised by the BlockChain itself.
This record allows the customer, the broker and the insurer to have shared records of the insurance contract.
When the customer wants to make a claim, the insurer can validate them and their insured property against the BlockChain, removing the ability of the broker to make claims on behalf of different contracts.
Factor 2: Reflecting Ownership of Assets
Q: Does an asset need an owner (or other stakeholders) and do multiple, untrusted external entities need to know who that owner is?
As transactions typically require the guarantee of value exchange, then assurance of the authority of value ownership/management is required to execute that transaction to minimise fraud.
For example, when purchasing a property, absolute proof of ownership is required before that property can be transferred to another entity.
The property itself also needs to be identifiable as an asset. This is currently done in the UK through a complex set of documents managed by a government agency, the land registry, and expensive solicitors to check the property ownership among other things.
In a BlockChain world however, the house ownership would be represented as a digital asset. The owner would be ‘signed’ as owner of that asset so anyone could prove unequivocally that an entity owns the asset.
This removes the need for a third party to ‘own the records’ of ownership and removes the need for a different third party (the solicitor) to prove the identification of all parties involved.
Factor 3: Multiple Transaction Sources
Q: Does your Use Case require transactions from multiple sources?
There may be entities wanting to create financial transactions from different source systems or individuals that need to be resolved into the same ledger.
If an organisation is offering a payment solution, something akin to ApplePay, then there are many organisations that need to transact using the same system.
The BlockChain uses its identification mechanism to recognise individual transactions and update asset ownership records accordingly. This way a network of transactions is easily reflected in the BlockChain.
Factor 4: Absence of Trust
Q: Do you trust the counterparty unquestionably?
Most transactions are made with entities that have limited past relationships and therefore there is not a high level of trust. Often transactions are made between suppliers and buyers in differing countries making the whole process more risky.
In the trade finance world the process of payment is mediated by a gate system which authorises transactions through a complex set of documents ranging from letters of guarantee from a bank through to shipping notices from couriers.
This makes managing the process very manual, expensive and reasonably risky for those involved. Contracts can be forged, identities can be stolen and bank accounts can be quickly emptied by small mistakes in the transaction.
BlockChain solves this by giving absolute confidence that a transaction has occurred between two recognised entities.
If all parties have identities on the same BlockChain, and documents are represented on the BlockChain as well, then there is no requirement for a third party to check that an event has occurred, such as the receipt of goods.
Signing is achieved by the use of a public/private key combination. This is where an asset (in this case a ‘goods ready’ document) which is represented on the BlockChain is created by the supplier when the goods are ready to be collected for delivery to the buyer. The supplier uses their private key (which only they have) to lock (or ‘sign’) the document. Anyone with the public key of the supplier can then read the document and authenticate that the is the author.
The courier monitors documents on the BlockChain. They see that their customer (the Supplier) has raised a ‘ready for collection’ document, authenticates that it’s actually them and reads the pick up location from that document.
Factor 5: Expensive Intermediation
Q: Does your Use Case utilise a third party or parties to transfer value?
Intermediaries are used to bridge trust between multiple entities without prior trusted relationships. This usually resolves into some sort of escrow agreement where the central party holds the assets of both entities and makes the exchange upon a certain set of actions.
This occurs in virtually every transaction in the financial markets from cross border payments via a correspondent bank through to the sale of securities on an exchange.
When purchasing a corporate bond, an entity must physically purchase the certificate and store it somewhere. In the case of modern bond markets, that certificate is held by a third party. That house charges a fee for holding and transferring the name of registration.
With a BlockChain solution, the escrow facility is not required as if both entities in a transaction recognise the BlockChain as an arbiter of ownership, then no third party is required to make the exchange.
With a BlockChain which supports Smart Contracts, the bond certificate can be reassigned automatically on receipt of payment without any human intervention and possibility of fraud.
By creating a Smart Contract and setting a bond certificate as its asset, the owner scan also set a price for that bond. If the Smart Contract is paid then it can write the name of the new owner onto the bond certificate.
When paying against a coupon, the bond issuer can then pay the value of that coupon into the Smart Contract, and the Smart Contract can then pay the certificate owners.
Factor 6: Regulation
Q: Does a third party need to have detailed access to records for regulation or a guarantee of some kind?
Any organisation is subject to a certain level of regulation. Whether this is a financial standards body, governmental revenues, public requirement or even internal stakeholder such as reporting income vs. expenditure, there is a need to make data available.
Often that data is expensive to produce, has a risk in reporting it incorrectly and, more often than not, has little direct value to the organisation in terms of profit and loss.
Today, Governments have a renewed vigour in ensuring transparency of activity to ensure organisations are behaving in a legal and in some cases, responsible, fashion.
One of the most critical regulatory reports is disclosure of a bank’s finances, particularly those that trade on a public exchange. The report must be of a particular format and calculate data in a specific way. Obviously, there’s room to interpret these formats.
This makes it sound simple. However, when you consider a bank has thousands of income sources, a complex set of aggregate and detail ledgers and several historic IT systems that store data differently for example, you begin to understand the real scale of the problem.
BlockChain solves this.
The BlockChain publishes assets, ownership and transactions. By publicly announcing these to the BlockChain participants, anyone with sufficient permissions can view a transaction and build their own view of what has happened within an organisation from a regulation point of view.