Understanding the Potential of Blockchain Technology
Blockchain is creating a lot of buzz in the industry. You’ve likely heard talk about blockchain and cryptocurrencies, such as Bitcoin, but did you know blockchain has the potential to do so much more?
Essentially, blockchain is a single database shared among many participants where each change to the database is monitored and, ultimately, approved by each participant. The database is secured by cryptographic techniques and entries are recorded chronologically. Blockchain solves for the limitations inherent in existing database architecture while improving security and accuracy. These are fairly straightforward concepts, but blockchain brings them together in a way that can be applied to a vast number of business processes.
Blockchain is an effective tool that can be used in virtually any application or industry. For example, blockchain has the potential to make big changes in agriculture. The transparency blockchain brings to the supply chain makes it easy to verify if a product is made sustainably, organically or by a specific producer. This transparency would also make it easier to identify contaminated food in the event of an outbreak. Today, when a recall occurs, it can take days or weeks to determine the source of contamination. Blockchain improves traceability, which in turn improves food safety.
Blockchain is also impacting the banking industry. Banks and the banking system are designed to protect individuals from risks they are unwilling or unable to take. For example, employers generally don’t distribute envelopes of cash every pay period that employees take home and tuck under their mattresses. Similarly, people don’t want to loan their grocery money to a business to buy inventory. Banks stand in the middle of these transactions to make our economy more efficient. They spend a great deal of money on technology and operations to validate, reconcile and ensure the safety of transactions between participants. However, this is precisely what blockchain is designed to do. Looking at blockchain through the lens of risk intermediation immediately leads to applications in payments, loans and credit, and clearing and settlement. This doesn’t necessarily mean banks will be displaced by blockchain applications. The role of banks could change from ensuring the integrity of the financial system on behalf of their customers to ensuring the integrity of their digital presence.
From a banking perspective, blockchain can be used in any application where something of value needs to be tracked and validated with transparency and auditability. Take residential property transactions, for example. Completing a home transaction requires the collaboration of real estate agents, banks, title companies, escrow agents, insurance companies, inspection services and more. A blockchain-based network allows participants to share only the information required to complete a step or task in closing on the home and the information can be shared immediately with full auditability. This reduces the time to complete the transaction - purchase contract to the recording of the deed - from weeks to days while reducing expenses for all participants.
Even though blockchain technology is evolving, it isn’t revolutionary in and of itself. IBM aptly describes blockchain as “an operating system, such as Microsoft Windows or MacOS” upon which “many applications can be run.” What will be revolutionary are the apps people are building on top of the blockchain foundation. Currently, companies are in a “test and learn” phase with blockchain and we will likely see more point solutions for specific business processes come to market in the next few years.
If you’re a small- or mid-sized business wondering how to leverage blockchain technology, I suggest focusing on processes that are labor intensive or where data accuracy is paramount. Then decide if you are willing and able to drive or facilitate change in your industry or supply change. Being a change agent is a unique set of skills that won’t fit every firm, but the rewards could be great. If being a trailblazer is not in the cards, ensure that you stay abreast of developments around blockchain applications in your industry. This is a technology where early adoption may give you a distinct competitive edge.
If you’re interested in learning more about blockchain technology and how it could impact your oranization, I encourage you to read this article by Harvard Business Review.
About the Author
Jason Hagan leads Wholesale payments strategy and product development for First National Bank of Omaha. He joined the bank in 2013 to develop and implement the bank’s payments and partnership strategy. Jason also leads the Wholesale Bank Investment process.