Blockchain has been flaunted as a technology that could reshape the way businesses make transactions across the global economy. The platform is gaining prominence for its ability to securely share information and ensure data integrity.
This new technology was introduced for the first time in the world in 2009 through the rise of Bitcoin cryptocurrency. Since then, many other applications and use cases have emerged, some claiming to be revolutionaries.
Indeed, the removal of centralized institutions, the redistribution of trust and the creation of a global book of value are some of the promises of blockchain projects that have stimulated excitement in the market. Many business leaders ask: is the blockchain a rupture or a distraction?
Before jumping on the bandwagon or rejecting technology as a complete advertising campaign, it would be worthwhile for entrepreneurs to understand the usefulness and function of the blockchain, its advantages and limitations, as well as the considerations on # 39; adoption and implementation.
Beyond a simple database
Blockchain is commonly described as a distributed ledger – simply put, a decentralized database. Managed by peer-to-peer networks, blockchain allows you to manage transactions without a central authority.
Transactions are validated by the network before they are grouped in blocks. These blocks are linked chronologically to the previous block (hence the name "blockchain") and protected using cryptography. This grouping of blocks produces an immutable record of shared truth. In addition to preventing tampering with existing data, this structure only allows you to add transactions to the database. You can not edit or delete previously entered transactions.
Skeptics have claimed that blockchain is just another database, so what's the hype?
In recent decades, Enterprise Resource Planning (ERP) systems have been implemented as the backbone of data and the integration of business processes. The maturity of ERP systems has ensured that end-to-end processes such as procure-to-pay and order-to-cash are seamlessly integrated into a company.
However, the integration of end-to-end operations beyond the organization to cut a business ecosystem is not so simple. Each company has its own ERP and operational systems and rarely integrates them. When they do, it is through EDI (Electronic Data Interfaces) files that require time and effort to reconcile.
This is where blockchain technology makes the difference, with the potential to integrate data and processes between companies and corporate ecosystems.
Make an end-to-end supply chain and a logistic process of a manufacturing ecosystem, which typically involves the procurement of raw materials, production, transportation, warehouse, sales and support. Each phase of the whole process could be undertaken by different companies that use different systems and could continue to be so. However, blockchain can act as a platform that connects these different companies and their ERP or operational systems together.
Blockchain projects are moving beyond the demonstration of concepts and prototypes in production systems. Its permanent and chronological nature makes it suitable for recording, managing and tracking transactions.
Many current blockchain implementations concern time and notarial information, essentially to demonstrate history and origin. However, these are not optimized for commercial transactions. To fully understand the value of an end-to-end transaction on a blockchain, you need to switch from notarisation to tokenization.
Tokenization is the process of converting property rights of a real-world resource into a digital token over a blockchain. Resources, represented as digital tokens on a blockchain, can be bought, sold and traded but can not be duplicated, just like Bitcoin. In this context, the fiat currencies (currencies declared as legal tender) can be similarly symbolized.
Although tokenization is more demanding than notarisation because structured data is needed, it provides the critical function and benefit of the movement value, in addition to information, through the blockchain. With tokenization, the negotiation of economic contracts between the participants becomes possible on blockchain. The tokenisation of fiat currencies will then allow the completion of full-cycle economic contracts on a blockchain
Building a business case
Despite the potential of blockchain technology, its adoption will be as pervasive as the merits of corporate cases in doing so. Business leaders will need to carefully consider certain factors before entering a blockchain ecosystem.
First, at this time, the transition from prototypes to production systems will probably be expensive and time-consuming. Business leaders will need a clear business case to justify investments. Rather than relying on hypothetical advantages, corporate and operational stakeholders must be involved and consulted in order to determine whether real benefits can be realized.
Often, the litmus test is: can the proposed benefits be achieved by implementing a traditional centralized system instead of a blockchain platform, where the former risks being less complex and expensive?
Secondly, business leaders must learn to operate with a paradigm shift in mentality and process. Unlike an ERP system, on which CFOs and companies rely on a "single source of truth", a blockchain platform would have "multiple sources of truth".
Blockchain platforms have various protocols that govern consent and different architectures to determine access, depending on whether it is a private or public blockchain. Since specialized technical know-how is required, it is essential that entrepreneurs be given the right advice to determine if the blockchain platform will work as professed.
Third, transactions are performed on a blockchain through programs known as "smart contracts". This is an unexplored territory. Regulators have divergent views on how to deal with it. Business leaders will need to understand and comply with the regulatory and legal limits of a "smart contract" in their geography of operations as and when they evolve.
Clearly, blockchain technology has the potential to integrate entire corporate ecosystems, similar to how ERP systems have been able to integrate information systems for the entire company. Because blockchain technology mainly affects databases, it is a critical technology that will take time to mature.
Companies and regulators will also have to come to an agreement on how a blockchain ecosystem will work and be governed, and new rules and regulations will continue to be introduced and evolved as the ecosystem matures.
The industrialization of the blockchain has just begun. Its transformative impact will be truly felt when the blockchain networks are moving towards the way the web moves data.
The author is Partner and IT Advisory Leader at Ernst & Young Advisory Pte. Ltd.
The opinions in this article are those of the author and do not necessarily reflect the opinions of the global organization EY or its member companies.
This article is part of a series that CPA Australia offers you to share knowledge on current issues related to business, finance and accounting.