How Blockchain Benefits Business

Blockchain technology has had some bad press over the past couple of years, largely due to the frenzy caused by speculation in the unregulated market in the Bitcoin cryptocurrency. But also due to the perception that cypherpunks, working in the blockchain space, are generally anti-business and out to kill off banks and undermine the system.

This has been a distraction. Blockchain, the technology behind cryptocurrencies, is a rapidly maturing, reliable, and essentially safe form of digital interconnectedness, that is set to revolutionize many of the ways we do business – and now is the time for senior leaders to take notice.

“A business leader needs to understand what the technology can do, what it can't do, what the limits are and what the opportunities are,” says Andreas Park, Associate Professor of Finance, Rotman School of Management, University of Toronto.

Blockchain is a decentralized, distributed, digital ledger that is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the consensus of the network.

Along with machine learning and AI generally, blockchain is something any progressive business should make at least part of its digital strategy. As organizations look to the future, and particularly as they consider replacing tired legacy systems, they need to be thinking about the potential benefits of using some form of blockchain or distributed ledger technology. “Even if they go against a distributed ledger system and go for a centralized ledger, they should set that up in such a way that it could interface with a distributed ledger in the future. I think this is critical,” says Park.

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Join Andreas Park on Rotman’s Transforming Finance: Machine Learning & Blockchain program, to put machine learning and blockchain technology to work for your organization.

Date: 28-29 March 2019│ Format: In-class study │ Location: Toronto

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The ultimate benefit for businesses, and the reason it should be a strategic priority for leaders, is that blockchain technology can enhance performance and improve profit margins. It can profoundly streamline business processes and transactions, strengthen supply chains, boost customer relationships, reduce costs, and open up new opportunities for business expansion.

Blockchain, by allowing businesses to store data at various locations in a distributed manner, can greatly simplify business interaction. Park quotes the example of gas pipeline networks, normally a process where multiple parties own portions of the network and where it is very difficult to keep track of all the databases that record the flow of the gas. “What blockchain does is simplify the whole thing enormously. So, instead of having reconciliation periods which last for 30 days, you can do this in a day or two.” And for those on the network who have the right to read and write permissions, “it makes life extremely easy.”

The basic concept of blockchain as a distributed database can apply to many types of process management situations. A lot of interactions can be automated that could not easily be automated before, because they used different systems that were difficult to connect. Furthermore, payment and financial transactions can be controlled through these distributed databases. In fact, the whole value chain can be better connected.

Blockchain can simplify a company’s interactions with its customers. If added to an enterprise database, such as SAP, it can link advanced analytics to high-speed transactions to provide accurate, real-time, instant responses. The technology also enables companies to easily expand their reach to potential supplier firms and customers, alongside expanding and simplifying their accounting systems.

A blockchain is information plus transaction or direct transactional infrastructure. This is the philosophy underlying this whole idea

Then there is Bitcoin which is essentially just a currency which lives on a public blockchain used for financial services and financial transactions. Although investing in Bitcoin, or other cryptocurrencies, may be a risk too far for most businesses, cryptocurrencies can provide an unrivalled way to transact financial deals across boundaries and to trade financial assets without incurring the time and cost of currency exchange. Longer term, in a Utopian future, devotees even dream of blockchain providing the basis for an international reserve currency – perhaps one to match the Dollar.

This technology also affords the possibility to issue new securities. “In an automated world, you can imagine that security offerings from firms could be organized very differently to how we do this nowadays,” says Park. “There could be a database of some form where institutional investors can express their interest and where a firm's issuers can express their interest, and they can be matched.”

The coming of the internet suddenly provided access to a mass of information that was previous stored in inaccessible silos. Now, as Park points out, “A blockchain is information plus transaction or direct transactional infrastructure. This is the philosophy underlying this whole idea… I think this is something which every issuer needs to know.” Companies need to know this too, because, in as much as they want to raise capital in the future, this is something to look forward to.

In order to make long-term strategic decisions about the many potential uses of blockchain technology, business leaders should consider their firm’s multiple business interactions and the different parties they commonly deal with, and decide what part of their data, that they would be happy to share, would be useful to share. Importantly, they should see this not just as an operational simplification, but also as a way to use their data to open up new opportunities, to get additional customers and additional reach.

On the flip-side, leaders also have to consider to what extent sharing data exposes their company to risk from further competition. They also need to think about cybersecurity; although in most cases data on centralized databases is likely to be more vulnerable than data on distributed databases. A distributed database doesn’t offer a single point of failure – hackers need to break into multiple databases each individually secured. Public blockchains like Bitcoin and Ethereum themselves have not been hacked, as the technology for the blockchains are remarkably secure. What has been hacked is usually the users’ entry points for exchanges – the entry and exit points are the problem and the users are the problem.

For the senior leader, the question arises, how much in-depth technical knowledge do I need to have? Or is this like driving a car – you don't necessarily need to know how the engine works, just how to drive and where you aim to go. According to Park, while leaders don’t need to know exactly how the engine works, they need to understand the basic architecture. “I think they need to have some understanding of the protocol of a blockchain, because as a distributed ledger there are certain features of how you write to the data. There are questions about the functionality of it, and I think the more a business leader knows, the more he or she can assess what employees are talking about and be educated in the discussions that are happening within the enterprise.”

Understanding the basics is also important in that it enables business leaders to get the most from banks, consultants, and other intermediaries. Despite the designs of the cypherpunks and despite the banks’ resistance to change, banks will still be there as part of the payment system and companies will need to closely interface with them. Also, as when SAP first arrived, a new breed of consultants will emerge ready to help. While, as Park points out, cypherpunks currently occupy this space, “a new breed of consultants will be needed; grown-ups who have a deep knowledge of business and commercial relationships as well as of the blockchain technology.”

Business leaders also need to get to grips with machine learning, another aspect of AI. These tools have been developed by computer scientists to detect complex patterns in data. Advances in data collection and computer processing power now allow businesses to make full use of these powerful tools. The recent push to employ machine learning in business is not about replacing humans with ‘thinking machines’. Rather, it is about processing vast amounts of data with statistical machine learning tools to support humans in making better predictions – unlike econometrics, which looks backward to understand causality in data (What drives what?).

The predictive potential of machine learning, linked to the transactional power and reach of blockchain technology will revolutionize how we do business. Enterprises large and small can use these technologies to enhance their performance, and business leaders who can effectively use machine learning to make informed decisions about strategy, investments, employees and customers, and also know how to efficiently deploy blockchain technology will hold the keys to future business success.

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Andreas Park is an Associate Professor of Finance at the University of Toronto’s Rotman School of Management, the Institute for Management and Innovation, and the Department of Management at UTM, where he is the department’s associate chair. He currently serves as the Research Director at Rotman’s Financial Innovation Hub in Advanced Analytics. He holds a PhD in Economics from the Cambridge University. Andreas teaches courses on FinTech and financial market trading trading, and his current research focuses on the economic impact of technological transformations such as blockchain technology on financial markets.