It’s often not easy to envision or understand a new technology when we first hear about it—especially when the technology is not something that you can see, hold or touch.
Everyone can see what a smartphone is, and most finance professionals understand the impact that related technologies, like mobile and social, have had on the way we conduct business.
Emerging technologies are a different matter.
My colleagues have already written primers on new technologies such as machine learning, artificial intelligence and robotics process automation. Today, I’d like to take a closer look at blockchain—another new concept that finance teams are only beginning to grasp.
When writing about complex ideas, my editor likes to say, “Explain it to me as if I’ve never worked in in a technology company.” So, let’s start with a simplified example.
A Simplified Blockchain Example
Imagine that you have a child in university, and every month, you send them a living allowance. There are a number of ways you can do this, but the most common is transferring money from your bank account into your child’s. There are two records of this transaction: a debit recorded in your bank account, and a credit in your child’s account.
In most circumstances, neither of you can see the other’s bank records. Banks keep separate ledgers on their customers’ behalf, and they spend a lot of time and money ensuring that these ledgers are accurate, and private.
But what if you didn’t want the ledgers to be private? What if you wanted both you and your child to have access to a single ledger, with all transactions visible to you both?
In the past, this would require setting up a joint bank account. Blockchain offers a different approach.
Now imagine that, every time you send the monthly living allowance, you laid down a “block” with the transaction information carved into it (date, time, amount, and so on). Both you and your child can see the block, confirming that the money was sent and received. Your spendthrift kid couldn’t come back to you a week later claiming that “the bank screwed up” and the transfer never came through.
Every month, you lay down more blocks, which form a “chain.” Together, they create a record of all transactions with your future college graduate. When you get old and infirm, you can point to the chain, show your kid how much money you paid for college, and demand that they invest a similar amount in a high-quality nursing home.
This is, more or less, how blockchain works. Each block is a record of a monetary transaction. The chain is a shared accounting ledger that is visible to all parties across multiple networks, or “nodes.” Every new transaction is verified by all nodes and, if valid, added to all copies of the ledger—in other words, a new “block” is added to the “chain.”
The chain is cryptographically secured, so nobody can change a record once it has been inscribed. And even if you were to find a way around the cryptography, the records are visible to all members—making it nearly impossible to change a block without someone noticing. The most you can do is lay down new blocks.
The Implications for Finance Leaders
Modern financial structures evolved from Venetian traders in the 15thcentury, and later, Dutch bourses in the 17th century. Double-entry bookkeeping has been with us since those very early days, and has helped build the institutions upon which our modern financial world rests.
The concept for exchanges and transactions of all kinds—including money, commodities, stocks, loans, and products—have required each participant to track every transaction using its own ledger. Most of the time, this works very well. But occasionally, ledgers get out of sync—leading to audits, mistrust, and increased scrutiny.
The difference with blockchain is that all parties use the same ledger, which is visible to all participants. Ledgers can never be out of sync when there is only one of them.
Why Blockchain Matters
This new approach to monetary record keeping offers multiple benefits, including:
While bitcoin and blockchain are often discussed in tandem, they are not the same thing. Bitcoin is an application utilizing blockchain; blockchain does not require bitcoin. Nevertheless, bitcoin has proven, on a global basis, how blockchain works and has driven rapid interest in the technology—especially in the financial services industry among banks and credit card processors.
But the disruption opportunities of blockchain will not be limited to financial services. Consider other industries that move products through distribution, or even utilities that measure and track the use of electricity, water, and sewage. Short term housing rentals, car sharing and food production from farm to fork could experience disruptions driven by blockchain.
Examples of rapidly evolving blockchain applications include online voting, medical record keeping, provenance of art and historical artifacts, non-profit banking service for regions and populations not served by traditional banking, and process automation for generic, time-consuming back-office activities.
Other potential applications of blockchain include intercompany transactions for financials, distributed procurement through a network for vendors, and loyalty management programs for consumers.
More Efficiency, Transparency and Trust
Think about the problems and situations you encounter today that require multiple ledgers and systems. Some of those systems add cost, complexity, and control with little or no additional value. With blockchain, you might soon have the potential to securely and safely extend these systems outside the enterprise, reducing friction when transacting with trading partners, or even with customers.
Both finance and technology organizations are only just beginning to look closely at blockchain and imagine future applications. Even during these early stages, there is the potential to deliver more efficiency, transparency, and trust—with less risk, cost, and complexity.