Imagine you are an asset-based lender. After the loan closes you have constant visibility of the underlying asset (a tractor, for example) throughout its life cycle. You are able to track the value of the asset and automatically feed it into your loan portfolio that constantly analyzes risk. If the value falls below a threshold the system automatically triggers previously agreed-upon adjustments in the contract minimizing the risk to your lending portfolio.
This is just one example of the promise of blockchain technology for future business transactions. In the previous post we looked at the basic concepts of blockchain and its potential to revolutionize business transactions in the financial and other industries. Key benefits of this technology include:
- Visibility: All parties involved in the blockchain network have a continuous visibility of all transactions.
- Permanence: Once a transaction is finalized and recorded on blockchain, it is tamper-proof. An update can only be made in subsequent transactions to be linked back to the original.
- Security: Security is built into the design. Blockchain uses private and public encryption models for authentication and authorization of various parties involved in transactions.
- Scale: Since the transactions are replicated across distributed nodes, the network can be scaled using additional nodes.
- Reliability: Failure of a single node failure does not impact the operation of the network.
Industry characteristics for adoption
Before we drill into the specific use cases it might be useful to identify key attributes that make blockchain suitable for adoption.
Friction: If a transaction involves multiple mediating parties to complete, blockchain has the potential to reduce the friction by minimizing or eliminating the interim steps of mediation. A good example is cross-border payments. Currently, the transaction goes through several parties in various geographies to ensure compliance with government regulations and currency conversions before the payment reaches the end recipient. Blockchain can drastically reduce the steps needed before the payment reaches the recipient.
Shared Visibility: If multiple parties need to see and operate on the same data to complete the transaction then instead of sending information back and forth they can work on a “common, shared” view to complete the transaction quickly. An example would be multiple banks working on a syndicated loan transaction. Blockchain can significantly speed up the collaboration due to shared visibility.
Traceability: In certain cases, the lenders or a government agency may need to track an asset during the life cycle for audit or inspection purposes. Blockchain with its provenance capabilities can provide the much needed traceability. A good example would be tracking a vehicle (or even a bottle of wine) as it goes through various stages of its life cycle. Similarly, financial Institutions can monitor changes in the financial status of business entities or individuals for “Know-Your-Customer" (KYC) purposes.
Trust: One of the foundational elements for business transactions is trust. Trust can come from the legal and regulatory bodies that we have created over time. Blockchain looks to build trust based on inherent features like permanence, security, and visibility. In certain cases it can minimize the need of regulatory burden that the current system puts on the business transactions.
Automation: With the “Smart Contract” mechanism, blockchain can enable automation based on the preset triggers and rules stored within the contract document. An expiring regulatory filing, for example, can automatically trigger the renewal process with all the relevant information to ensure compliance.
Based on above attributes, the technology has potential to revolutionize many industries and use cases. With so much activity in the market it may make sense to look at blockchain initiatives within two distinct categories: 1) underlying technology platform that provides necessary capabilities of blockchain; and 2) specific application of a “blockchain network” designed for an industry use case.
Financial applicationsBy far, the biggest traction for blockchain is found in the financial use cases. This is not a surprise considering it all started with Bitcoin’s digital currency use case. Beyond digital currency, blockchain can be leveraged in many other aspects.
- Trading can benefit from shared visibility and automated management. The time for settlement of trades and disbursement of funds can be significantly reduced.
- Financial account management, disclosures, payments, and debits can be calculated and initiated with built-in computational logic using smart contracts.
- Compliance and regulatory reporting can be dramatically streamlined. Financial organizations can automatically deliver reports to regulatory authorities on a periodic basis. Another example could be automated continuation of UCC filings based on internal business logic of the lending systems.
- International trade can become much more transparent.
Supply chain applicationsBlockchain also has many use cases in supply chain and logistics.
- It can provide the trust and transparency in the buying and selling of goods including prevention of counterfeit items.
- Improve logistics and inventory management especially by leveraging active RFIDs and other IOT technology based sensors. This information can be automatically updated on a blockchain with visibility to all respective parties.
- Financial and insurance companies will be able to track the value of assets throughout the life cycle.
This is another area where blockchain can add a lot of value. While many jurisdictions have adopted digitization and e-records, there are still a lot of paper-based records across the United States. For many countries outside the United States the situation is much worse, with very little transparency and access to government records. Blockchain provides an excellent way to properly store electronic records with full traceability and transparency. This can help with:
- Land and property records management
- Court and bankruptcy information
- Regulatory or corporate filings
As long as there is consensus and published standards to store these documents, the government agencies do not even have create applications to publish the records or worry about interoperability or integration issues. The applications can be built on top of designated blockchain networks by third-parties.
With the secure access and shared visibility, blockchain can significantly speed up collaboration across:
- Academic and medical professionals to support joint research and publications
- Multiple banks working together for a syndicated loan
- Increased collaboration between service providers and end-users. For example, a user interface (UX) design can be iteratively validated with users.
One of the important capabilities of blockchain design is built-in security. It allows anyone on the network to define a unique identity supported by a combination of public and private encryption. This allows the parties to engage in transactions with a certain level of trust.
As we have recently seen, Facebook or Google can offer an identity service so users do not have to create separate usernames or passwords for every website they visit. In effect, Facebook or Google is providing the level of trust and validation. With blockchain platform it is possible to create a decentralized identity platform without depending on a single provider.
In addition to identity management, the technology can also support the management of electronic signature that can be stored within a blockchain network and can be unlocked to sign the electronic documents as needed.
Once we crack the code of identity management with blockchain, it will open up a host of possibilities of managing personal records including:
Health records: Consumers may be able to store their health records on a secure blockchain and allow select providers to access and update their medical history. Hospitals and providers may not have to struggle with the multitude of health record systems and lack of interoperability. The patients would enjoy the ease of managing their health records and portability.
Credit history: Given the news of Equifax's breach this may be a good time to ponder how we could leave our important credit histories in the hands of a single company that could not keep them secure. A distributed, open, and yet secure platform to control your credit history seems like a good goal to shoot for. Blockchain may just help make that goal a reality.
There are many other applications but I hope this gives you a good sense of the possibilities. Of the various industries, financial and compliance applications are predicted to benefit the most from blockchain and seem to have the highest level of interest and investment.