Blockchain: Why directors should take notice

November 14, 2017

By Horacio Barakat

The Bank of England and the People’s Bank of China are discussing issuing their national currencies on the blockchain. Walmart already uses blockchain to track pork production in China. And MIT researches are developing a system using blockchain to secure electronic medical records.

Is blockchain worth the investment and will it live up to the hype?

With the billions currently being invested in blockchain technology, it seems to be a matter not of if, but when. One thing is for certain – it’s imperative for businesses to learn and prepare for what could be the inevitable move towards the blockchain or they will risk getting left behind.

Blockchain, also known as distributed ledger technology (or DLT), is the technology behind bitcoin. The idea for the peer-to-peer digital currency came from a paper published online in 2008 by a Satoshi Nakamoto -- a person or group of people whose identity is still unknown.

Blockchain, in its simplest form, is a record of transactions.

A few attributes however make it unique:

  •        It is distributed, meaning held simultaneously by all parties or nodes in the network,
  •        It is encrypted and secure,
  •        It is immutable or permanent,
  •        And it is decentralized, meaning there is no central authority or governing force that rules.

The blockchain operates on a consensus. All participants can look at the distributed ledger, each transaction gets put into a block, and if all participants verify that the block is valid and correct, it is added to a chain.

Once verified by all participants, the chain is immutable –- no one can update it without the permission of most others.  Because it’s a consensus model in which every party confirms a transaction, it gets more secure the more people you add to the blockchain. When a transaction is completed, all participants get a copy simultaneously and in real-time.

In a public blockchain, its purest form, the software is open source, and anyone can become a member.

Bitcoin is one popular example of a public blockchain. Different companies however are experimenting with different forms of the technology. A blockchain used in financial services can be private, or a hybrid model between a decentralized version and a more traditional centralized model.

A few of the many reasons that companies, and in particular financial institutions, are so interested in the technology is that blockchain has the potential to eliminate the dependency on fiduciary roles to settle financial transactions while also making financial contracts automatically enforceable and increasing the speed of settlement of transactions.

There are many potential uses for blockchain technology, but the two types of activities that could be most impacted are fiduciary activities and processes that require a lot of hand-offs or a long supply chain. In the current way of doing things, numerous contracts might be involved, with each entity keeping its own records. On a blockchain, everything is digitized and recorded, and everyone involved refers to the same distributed copy. No one can change it without the consensus of the other participants.

To be sure, there are risks that board directors need to think about when deciding whether or not to advance the adoption of distributed ledger technology within the organization.

  •        First is the significant investment required to adopt this digital system and overhaul existing infrastructure when there is no absolute certainty that blockchain is the way forward.
  •        Another is the lack of an industrywide standard for the technology – there are many different variations for blockchain protocols that different entities use.

Companies can access the technology in a myriad of different ways: by investing and partnering with blockchain startups, joining consortiums, or utilizing open source applications like Hyperledger, Ethereum, or Quorum, among others.

Skeptical or not, the move towards blockchain is indeed being explored and experimented with. It is the topic of conferences and the subject of billions of investment dollars per year.

The Australian Securities Exchange, or ASX, is deciding if it will replace its post trade clearing and settlement system with a blockchain version and, as I mentioned, the Bank of England and the People’s Bank of China are discussing issuing their national currencies on the blockchain, rendering the currencies more traceable. 

The Delaware Blockchain Initiative, which became effective this past August, lets corporations maintain shareholder lists, along with other corporate records, using blockchain technology.

Some see blockchain technology going much further. A blockchain could be a secure place to store electronic medical records or prevent music piracy with artists providing their music directly off a ledger. Property deeds could also be put on a blockchain, and indeed Walmart is already experimenting with blockchain to track China pork production. Walmart, along with other food retailers are working with IBM “to explore how to apply blockchain technology, also known as distributed ledger tech, to their food supply chains,” according to a recent Fortune article. 

To get the true value of blockchain however, you need the network effect, something our CEO Rich Daly speaks of often in financial services technology. The more people and companies that use blockchain, the more valuable the technology becomes.

Horacio Barakat is vice president of corporate strategy for fintech leader Broadridge Financial Solutions. Recently BR The company successfully completed a blockchain pilot  to enhance transparency in the proxy voting process along with J.P. Morgan, Banco Santander, and Northern Trust. It also recently  announced the successful completion of a pilot with Natixis, Societe Generale and another large US bank that leverages blockchain technology to enhance the operational efficiency and auditability of bilateral repurchase, or repo, agreements. In addition, Broadridge has invested in leading blockchain startups such as Digital Asset Holdings.