Blockchain: ‘Fraud’ or Fortune?

What directors need to know about the technology behind Bitcoin.

By Eve Tahmincioglu

Whether it’s JP Morgan’s CEO Jamie Dimon publicly eating his words about blockchain, or Kodak attempting to resurrect its photo dominance with the technology, the promise of what is essentially a more secure, shared online database is getting hard to ignore.

Blockchain — the technology behind cryptocurrencies such as Bitcoin — has been hailed as the next big disruptive business force, already being tested in everything from tracking Chinese pork to making insurance underwriting more efficient.

“2017 was the year of enthusiasm,” says Christian Catalini, assistant professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management, about blockchain. “2018 is the year of more mature deployments and the slow adoption in real-world uses.”

But he warns, “Markets are overreacting and people are flocking to anything with ‘blockchain’ on it. It’s important to cut through the hype.”

It behooves directors everywhere, he adds, to understand the technology and figure out what it means for their organizations.

So why all the blockchain-mania? For business operations, much of the interest focuses on its potential to provide heightened levels of efficiency, transparency and security for a host of business transactions without the need for an intermediary.

There are endless articles trying to explain what blockchain is, but the consensus describes it as an open, online ledger/database dispersed among a network of computers.

What's Blockchain?

At its core, blockchain technology is a network of computers that are connected by complex algorithms.

Parties to a transaction on a blockchain see the same information at the same time. When the parties agree to the terms of a transaction, those terms are recorded on the blockchain. Once recorded, the terms become a permanent record that cannot be altered. Each party has the same copy of a mutual ledger which provides an audit trail of who did what and when. Blockchain technology allows parties who normally would not trust each other to transact business directly, securely and efficiently, without the need for a trusted third party intermediary.

Blockchain technology is now used to track the provenance of diamonds, digitize the rights of gold ore, organize a decentralized community of bike ownership, record ownership rights in land, intellectual property, and other items. The list goes on and on. 

Last summer, the State of Delaware amended its corporate law to expressly authorize corporations to maintain their stock ledger on a blockchain. As support for blockchain technology grows, it will become increasingly more important for directors of corporate boards to engage with this subject matter. The technology may be complicated, but the concepts are straightforward.

—Andrea Tinianow, Esq., the founder of the Delaware Blockchain Initiative and Chief Innovation Officer at Global Kompass Strategies, Inc., a global management consulting firm.

It’s different than a typical database that’s housed on one computer, server or the cloud and accessed by individual computers, smartphones, etc. In the blockchain, there’s essentially a carbon copy of the ledger/database on all the devices looking to use/access it and it can’t be changed without sign-off from all parties in the network.

Zealots in the blockchain universe like to say the technology is immutable, unable to be changed, because of its unique structure, and is thus unhackable. Many tech experts, however, are dubious of claims it can’t be compromised but do see it as more secure than many existing systems.

“Blockchain’s going to be a game changer,” says Patricia Oelrich, an independent board member with the Federal Home Loan Banks Office of Finance and a board member of the Association of Audit Committee Members, Inc. “But I think boards in general are struggling with ‘what it means to me.’”

There is a lot of confusion out there about blockchain, partly brought on by the mad scramble by investors and businesses to figure out if they’re missing the boat on Bitcoin, the cryptocurrency. News reports and attitudes about Bitcoin and blockchain’s promise seem to change daily.

Indeed, after deriding the technology last year and calling it a “fraud,” JP Morgan’s Dimon told Fox News last month that he regretted what he said, adding that: “The blockchain is real.”

And Eastman Kodak’s shares recently skyrocketed after the company announced it was launching a new image-rights service based on blockchain.

In a release, the company said it was using blockchain technology to create KODAKOne, an image-rights management platform, and KODAKCoin, a photo-centric crypto-currency “to empower photographers and agencies to take greater control in image rights management.”

There is also a lot of blockchain interest when it comes to tracking products, especially in the food safety arena.

Walmart is experimenting with it to track pork supplies in China and mangoes in the United States.

The retail giant partnered with IBM and Tsinghua University in Beijing last year to pilot the use of blockchain to trace food items more efficiently in the event of a foodborne illness. Tests conducted by Walmart found that “blockchain reduced the time it took to trace a package of mangoes from the farm to the store from days or weeks to two seconds,” according to a joint press release from the three organizations in December.

“2017 was the year of enthusiasm,” says Christian Catalini, assistant professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management, about blockchain. “2018 is the year of more mature deployments and the slow adoption in real-world uses.”

Blockchain could also be a game changer for the insurance industry.

Blockchain technology could completely upend the insurance value chain, according to a recent PwC report titled Blockchain, A Catalyst for New Approaches in Insurance. Here is how:

  • Development/acceleration of new products/markets for whichDevelopment/acceleration of new products/markets for which business models were difficult to define until now.
  • New approaches to underwriting, contracts and claims management, particularly through a combination of smart contracts and the Internet of Things (IoT).
  • Overhaul of the modus operandi of insurance agreements.
  • New reinsurance approaches, particularly internal reinsurance via smart contracts.

Transformation of asset management with automated settlement and delivery of intangibles.“Blockchain promises cost savings and it promises to produce those cost savings in a more secure fashion,” says Joe Calandro, a managing director at PwC and a fellow at the Gabelli Center for Global Security Analysis at Fordham University.

Calandro cautions, however, against thinking it’s foolproof. “If history taught us anything, nothing is immutable. If someone wants to crack it they can.”

But, he adds, blockchain makes it harder for nefarious players because hacks can be identified quickly given the shared distributed system.

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There are privacy issues.

“On a distributed ledger, it’s very difficult to keep private data,” explains Emin Gün Sirer, associate professor and co-director of the Initiative for Cryptocurrencies and Smart Contracts at Cornell University. “If your business relies on private data in some way, you don’t want to be putting it on an open blockchain.”

While most uses for blockchain are focused on open source-type systems like Bitcoin, the technology can also be implemented with a permissioned model, expected to be the norm for businesses. Using the closed model, “each participant has a unique identity, which enables the use of policies to constrain network participation and access to transaction details,” according to Blockchain for Dummies, IBM Limited Edition.

Before jumping on the blockchain bandwagon, Sirer suggests directors join blockchain consortiums that are now being formed in an array of areas, including supply chain, fintech and insurance.

And, he adds, boards who haven’t already done so need to bring in the company CIO and other top tech managers, to talk to directors about blockchain, what’s being done and what the plans are for the future.

A report from Gartner found that while the majority of directors have heard about blockchain, many don’t understand its full potential. To bolster the education process, the consulting firm put a checklist together for CIOs on what they should recommend to directors if they see merit in building or expanding blockchain in their organizations:

  • Propose that the board commission a scenario-planning exercise by engaging senior executives to map out how three possible futures for blockchain will affect the enterprise’s business.
  • Advise the board to take a hard look at the company’s value chain and its sustainability by analyzing which parts would need to change as blockchain propels a transition to a frictionless market.
  • Introduce to the board a plan to conduct a fresh business and competitor analysis by taking into account the business dynamics and risks that smart contracts and blockchain make possible.
  • Encourage innovation by organizing visits to at least five blockchain startups related to your industry in the next six months, so that you can more effectively update the board on cross industry blockchain developments.

Federal Home Loan Banks’ Oelrich has been doing all she can to educate herself about blockchain, including attending presentations and reading up on the technology.

From the board perspective, she notes, “what we should be asking as part of the tech strategy is where blockchain is today and where it might fit into the tech strategy down the line.”

Directors, she stresses, “can’t stick their head in the mud. You’ve got to know what’s going on out there. The problem with tech today, it can slam you real fast if you’re not on top of it.”


Issue: 
2018 First Quarter

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