Use and Application of Blockchain
Introduction
Blockchain is undeniably ingenious technological invention– the brainchild being Satoshi Nakamoto.
So what is blockchain? Well, it allows digital information to be distributed but not copied, creating a new type of internet. It was devised originally for the digital currency, Bitcoin, but now the IT community is now finding other potential uses for this technology.
Blockchain technology is like the internet in that it has a built-in robustness. By storing blocks of information that are identical across its network, where it cannot be controlled by any one single entity, nor has it a single point of failure. To date, problems linked with Bitcoin have been due to hacking or mismanagement. In other words, these problems come from bad intention and human error, not flaws in the underlying technological concept. This is especially true considering the internet has proven to be relatively durable for almost two decades.
Blockchain network lives in a state of consensus, where it automatically checks in on itself, i.e., a self-auditing ecosystem of digital value, where the network reconciles every transaction as it happens. A transaction is referred to a “Block” where the data is embedded within the network. It would require considerable amount of computing power to override the entire network if attempts were made to alter any units of data/ information.
What are the benefits?
It is built on a decentralised ledger that is built and maintained by its users. Transactions take place over the network, peer-to-peer or through an exchange and are automatically recorded on the ledger. Essentially there is no need for any of the traditional IT infrastructure to exist and the costs associated with it. Treasurers who have been tasked with doing more for less, focusing on transaction banking costs and looking to reduce fees where possible may want to read on….
If cryptocurrencies worked as they should, it would avoid paying transactions fees, facilitate immediate payment and the ability for transactions to be kept open or private. If Bitcoins are to be accepted as a medium of exchange, there would needs to be a secure platform to make payments (like Swift) that embodies security, speed and scalability. Anonymity of cryptocurrencies is a real misunderstanding.
Blockchain technology permanently retains all information attached to any transaction. The associated data can create a forensic audit trail that can make financial history information readily available using the correct associated tools and applications, e.g., FBI arrested Ross Ulbricht in 2013, which created Silk Road, a bitcoin cryptocurrency market facilitating the sale of US$1bn in illegal drugs. Conversely, on a positive note, Ahmet Tanrikulu, the deputy chair of Turkey's Nationalist Movement Party and the country's former Industry Minister, drafted a report to propose a state-backed cryptocurrency dubbed "Turkcoin."
Blockchain Technology as an enabler:
Although the primary use of the blockchain is currently to enable cryptocurrency transactions, the underlying technology can actually facilitate the transfer of value of anything which is digital, i.e., cash, an invoice, business information and even data that is irrevocable and fully visible.
As we enter the digital era, the transformational power of blockchain technology is, in theory limitless and unexplored. Practical examples in using blockchain technology in treasury include:
Trade finance, which is in need of modernising where it is mostly based on paper, such as bills of lading or letters of credit using fax or post. Financial institutions and shipping companies have been experimenting with blockchain to create smart contracts between parties;
Clearing houses, custody providers and others are looking at what blockchain can bring to clearing, settlement and other intermediated functions;
Syndicated loans where it can be characterised as intensive paper administration, especially during the lifecycle of the loans, i.e., changing hands, early repayment, etc.…;
Digital signatures to help expedite documentation requirements for bank accounts under know-your-customer rules;
Sharing peer-to-peer verification and identity documents to ensure profiles are current;
Intra group invoice settlements between peer-to-peer subsidiaries; and
Peer-to-peer data file sharing (open, private/ need to know basis).
It is worth noting that larger Treasury functions are pursuing a wait-and-see strategy with blockchain, tracking other companies with the intent to move ahead when the time is right. Evidently this becomes increasingly tricky to manage as the technology evolves quickly with a steep learning curve ahead. Treasurers will need to convince a range of internal stakeholders if they want to embrace this technological revolution at some points, accompanied by clear evidence of real success before getting signing off.
For now it is clear that Blockchain is here to stay. As familiarity with the ledger-based protocol continues to spread, there appears to be immense opportunities for increased efficiency, transparency and security of financial processes. As this reality is recognised, I have seen a number of organisations, including financial messaging companies like SWIFT, Fintechs (Ripple) and numerous global banks (UBS, Credit Suisse and HSBC to name a few) who have introduced blockchain-based platforms and applications to the market.
Blockchain Technology in practice amongst banks:
Transactions are broken down into two phases: pre-transaction negotiation and payment settlement. In the pre-transaction negotiation phase, all banks involved in the payment exchange compliance and fee information with each other. Each bank involved signs off on processing the payment after verifying details of the sender and receiver (e.g., account numbers, fees and compliance checks) in order to eliminate failed payments.
It uses a two-way messaging system between the sending and receiving bank. When a payment is initiated information regarding that payment, including KYC data, bank fees and compliance information is sent to the beneficiary bank prior to payment.
Faster, transparent and more certainty over payments will manage corporate liquidity. Understanding when a payment will reach a supplier, as well as the fees associated with each payment, can free up crucial liquidity, push down the cost of transacting business and increase the Treasurers ability to maintain visibility and control over cash. This is particularly relevant for large multinational corporations that manage multiple pools of cash balances across multiple territories.
Blockchain as a disruptive innovator:
Treasurers should keep at the back of their mind blockchain technology application. In particular, the integration of blockchain technology with existing TMS and ERP systems without disrupting current organisational system connectivity, security, IT architectural fit to ensure it truly adds value. Blockchain technology is being offered as a SaaS by various small and large Fintech provider and the Treasurer is best advised that proper due diligence is undertaken as they would when adopting their core TMS, if they are looking to embrace it at some point.
Moreover, from a compliance and audit perspective, External Auditors will want to evaluate the system's internal control design and effectiveness. This will usually include efficiency and security protocols, development processes and IT governance or oversight. Embedding controls are necessary but not sufficient to provide adequate security, where the audit will be an examination of their inputs, processing and outputs.
Key questions, putting on my audit hat comes to mind… Will the organisation's computer systems be accessed at all times? Will the information in the system be available only to authorised users? Will the information provided by the system always be accurate, reliable and timely? In this way, the Treasurer can assess the risk associated with data/ information, whilst trying to minimise those risks with relevant internal controls.
Clearly, blockchain technology is in its infancy, but starting off small could be a good way to develop the know-how to think bigger. The level of investment will depend on the context of the company and the industry too. Financial services companies are already adopting. Manufacturing is not.
Irrespective what the context is, there is a strong possibility that blockchain technology will affect your business. The big question is when?
Dee Singh Kothari is a senior partner in Kothari Partners
Ideas expressed and/ or methodologies in this article are solely of the authors. The author nor Kothari Partner’s accept any liability for the incorrect application of these ideas either used by companies, employees or other individuals alike.
At Kothari Partners, we have worked with various UK and overseas listed and PE/ VC backed clients across various industries to consider how their business and finance services can bring them both cost reductions and performance improvement. Our approach is to help our clients understand their current situation, identify the value and decide on the scope, vision and set of strategies for what they could achieve for their business. We help plan their implementation and support them and deliver the solution/ change needed, so it is properly and permanently embedded in their organisation. We aim to help past and future clients by delivering high-quality work to their organisation, generate real efficiencies and free up time to support better business decisions.
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