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Many organizations look to the blockchain because technology has the potential to solve many of the day-to-day problems of the financial function. Some organizations have proofs of concepts, but very few have a blockchain in operation and many are stuck in the research phase.
In a global survey of 600 executives, PwC found that while 84% of organizations have a certain involvement with blockchain technology, only 15% have a live project in progress.
"The projects are stalled for a variety of reasons," said Steve Davies, global blockchain leader at PwC and author of the Blockchain Is Here report. What's your next move? The main barriers to the adoption of blockchain are the uncertainty about how the technology will be regulated and a lack of trust among potential users of the technology, because it is not clear how the blockchain works with other systems and how it can be increased .
"[But] you can not afford to sit down and wait. You have to do experiments. In a sense, blockchain is just another technology, but its effect will be very profound, "said Davies.
In fact, Gartner predicts that the blockchain will generate more than 3 trillion dollars in corporate value by 2030, which could mean that up to one-fifth of the global economic infrastructure could be running on blockchain-based systems within that period .
With the right strategy, companies should be able to implement blockchain without their projects stopping.
The main barriers to the adoption of blockchain are the uncertainty about how technology will be regulated and a lack of trust among potential users in technology
To overcome the uncertainty, PwC and V. Gowribalan, FCMA, CGMA, Chief Investment Officer of GRIP Investments, a startup in Dubai that is exploiting blockchains for investment management and financial services, are suggesting the following steps:
Understanding what is blockchain
A well-designed blockchain stores records in blocks that are connected to each other using a cryptographic technique that creates a distributed, digital ledger.
The ledger can be shared and verified by anyone with access, eliminating the need for costly third-party verification.
The cryptographic "signature" on each block connects to the previous block in a way that makes the blockchain virtually tamper-proof after the blocks are created.
For the financing function, technology has the potential to reduce costs and increase speed in different areas.
Perhaps the most notable is the elimination of the need to reconcile intercompany data and transaction records, because all parts of the blockchain have access to the same digital ledger.
In some blockchains, digital tokens represent goods like cash (think of the bitcoins in the original blockchain).
The PwC survey suggests that the financial services industry is considered a leader in blockchain applications, but the activities represented on blockchains also include commodities, finished products and membership rights. Enterprise Resource Planning (ERP) platforms, which are the engine of corporate operations, are beginning to integrate blockchain technology.
But a blockchain is invisible and the lack of understanding of technology remains a key obstacle.
"People listen to blockchain and think of the bitcoin, which has been spotted by bad actors, but it's a lot more blockchain than bitcoin," Gowribalan said.
"The blockchain behind bitcoin is decentralized, but we can use it and its merits without 100% decentralization," he said. "And most financial entities will not be able to use decentralized chains but will opt for authorized networks."
A blockchain can be decentralized so that it is distributed between machines or servers (nodes) without any single stakeholder having control over the blockchain, or centralized as regular databases, with a single stakeholder having control over the blockchain.
People listen to blockchain and think of bitcoin, which has been tainted by bad actors, but there's more to blockchain than bitcoin
Blockchains may also be unauthorized, allowing any stakeholder to view or make additions to the blockchain, or may be authorized, with restrictions placed on which interested parties can view and make changes.
Develop a business case
The key to developing any blockchain solution is understanding what problems you are trying to solve and if blockchain is the way to solve them.
"First of all, you need to know the process inside. You have to identify bottlenecks in the process and once you've identified this, then the blockchain should be considered with all the other alternatives," said Gowribalan.
PwC has developed a list of criteria that organizations can use to check if the problem they are trying to solve can be solved by blockchain:
- Do more parties share data?
- Do multiple parts update data?
- Is there a requirement for verification?
- Do intermediaries add complexity?
- Are interactions sensitive to time?
- Do transactions interact?
"If you answer yes to four out of six of these criteria, then show that blockchain could be a good idea," Davies said.
First of all, it is necessary to know the process inside it. You must identify bottlenecks in the process and once this is identified, then the blockchain should be considered with all other alternatives
Choose your blockchain carefully
Since there is no single blockchain type and there are several blockchain solutions, you need to make sure that you choose the right type of blockchain for your purpose.
"Do not fall victim to the clamor, you can end up choosing the wrong system or evaluating the technology without understanding the main advantages," said Gowribalan. "Do you need an authorized network? Decentralized or centralized? Look at the chain.Many chains perform different functions."
Blockchain types differ depending on whether they are public, private or quasi-private, that is, managed by a consortium of interested parties.
Blockchains can be authorized or authorized, decentralized or centralized. The type of blockchain you need will depend on the case. For example, security and financial regulations may mean that an unauthorized and decentralized blockchain is not suitable for an organization.
To ensure you have the right technology, someone with blockchain experience, whether in your team, a third-party consulting company or a company providing off-the-shelf blockchain solutions, such as IBM, would be essential to ensure you choose the blockchain right for your organization.
Build an ecosystem
Blockchain works best when more stakeholders are involved. Creating a community within an organization or industry that understands technology and its potential can help improve trust between companies, as the standards and rules that define the blockchain model can be processed by all the people involved.
The PwC report suggests that interested parties decide:
- Rules for participation.
- How to ensure that costs and benefits are shared fairly.
- What risks and control frameworks can be used to address shared architecture.
- What governance mechanisms are in place, including continuous monitoring and validation, to ensure that the blockchain functions as designed.
Deliberate planning
Blockchain must be designed with care, not only to solve organizational problems, but to ensure that it adapts to existing processes. Otherwise, these processes may need to be revised to lay the groundwork for the blockchain.
"The best work we have done is to work not only with the technical team, but also with operations and management, and to choose problems and weaknesses and build a solution around it," said Davies. Organizations must also think about the implications of privacy, cyber security, compliance and the way they work alongside a blockchain, he added.
Navigate the uncertainty
Blockchain is still new, and regulation is still very limited. This could change in the future, which means that organizations must not only monitor the evolving regulatory framework but also be actively involved in its development.
Asking regulators to ask questions and make recommendations about regulations can be helpful for companies and for the community as a whole.
"In addition to directly regulating the technology itself, the laws on use and data protection can radically change the functioning of the blockchain.It is vital to engage with regulators to help shape how the environment evolves", said Davies.
Regulatory approaches to blockchain differ from country to country, according to PwC. Singapore and Switzerland are trying to accelerate the application of blockchain technology by adjusting tokens, while in the United States regulatory efforts are driven by individual states rather than by the federal government.
In the EU, data privacy protection rules make blockchain public initiatives difficult. China has banned cryptocurrency, but supports regulation to increase blockchain demands.
PwC suggests that companies should work with regulators to define emerging blockchain policies and best practices and monitor evolving regulation.
Copyright © FM Financial Management. All rights reserved
About the author
Richard N. Williams is a freelance writer based in the United Kingdom. This article appeared for the first time in FM Financial Management, published by the Association of Certified International Accounting Professionals. The AICPA combines the strengths of the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA).
