CIOs Are Turning to Blockchain TechnologyBy Samuel Greengard | Posted 08-29-2017
CIOs Are Turning to Blockchain Technology
CIOs are keenly aware of the complexity of managing digital transactions. As data, goods and money flow across organizations and supply chains, verifying the authenticity of dealings is a growing challenge.
In many cases, traditional approaches to auditing lack the level of visibility and security organizations require. "They're also extremely labor-intensive and often inefficient," observes A. Michael Smith, a partner at consulting firm PwC.
Enter blockchain. The distributed ledger system, created by Bitcoin, relies on sophisticated cryptographic methods to ensure that transactions are authentic and secure. What's more, by scattering the ledger across many computers, while allowing participants to verify and audit blocks easily, it's possible to take transactions to a more traceable and secure level.
As Arushi Srivastava, senior director of NTT Data Services, puts it, "The underlying secured distributed ledger properties of blockchain have much more to offer than simply a virtual currency exchange."
Blockchain is a rising star in the business world. According to market research firm Decision Databases, the global market for the technology will swell from U.S. $687.6 million in 2016 to more than U.S $5.7 billion by 2023. This represents a compound annual growth rate (CAGR) of 42.3 percent.
Equally important is the fact that blockchain has moved beyond a tool for financial services and transactions. It's filtering into areas as diverse as healthcare, retail, manufacturing, gemstones, agriculture and government.
"Companies are mostly building private blockchains now," says Paul Brody, global innovation blockchain leader at consulting firm EY, "but we're only in stage one. In the future, we will have private blockchains in public networks with a common infrastructure, all secured by encryption."
Blockchain Gains Visibility
It would be foolish to dismiss blockchain technology. It can produce cost savings, boost security and even fuel innovation. In recent months, a spate of companies have adopted the technology.
For example, in China, Alibaba is now working with the government to secure healthcare data through blockchain. In the U.S., Walmart recently established a consortium with food giants such as Dole, Nestlé, Unilever, and McCormick and Company to trace raw foods and other items through the supply chain. The initiative will make it easier to track food-borne illnesses and recalls across a complex supply chain that spans famers, brokers, distributors, processors, regulators, retailers and consumers.
In fact, blockchain use cases are nearly limitless. Although banks and financial institutions are early adopters—and have turned to the technology mostly to manage discreet internal processes—the technology can be used for everything from complex peer-to-peer transactional systems to helping track refugees that lack documentation.
PwC 's Smith says that the United Nations is considering this approach. Government entities might also use blockchain to verify that funds for public assistance recipients are spent correctly and that no fraud took place. This approach is already taking shape in the United Kingdom.
Already, many organizations are beginning to experiment with blockchain and are conducting proof-of-concept trials, says NTT Data Services' Srivastava. They may be interested in tracking physical goods through the supply chain, managing digital assets and transfers, securing electronic records and data, building a better contract management framework or improving regulatory compliance.
"By focusing on these use cases, the technology promises simplification in business processes, security via transparency, and efficiency via disintermediation of brokers and middlemen," she notes.
CIOs Are Turning to Blockchain Technology
However, embarking on a blockchain initiative can be daunting. One of the biggest problems, PwC's Smith says, is the fact that no standards currently exist. "Almost every company has a different approach to implementing [blockchain], and there are a large number of variants," he says. This makes it more difficult to implement the technology across organizations, and it introduces some risk for companies engaging in large-scale blockchain initiatives. It also makes regulation a challenge.
But other roadblocks may exist, Srivastava adds. These include the scalability of non-crypto-currency blockchains, multiple industry groups with different objectives, software vulnerabilities, investment costs, and finding the skills and talent required to put blockchain into motion in a significant way.
Putting Blockchain to Work
Formulating a strategy for blockchain is essential. Srivastava believes that the technology will disrupt businesses and entire industries, and early adopters will gain a competitive advantage. She suggests experimenting with payment systems such as Bitcoin and Ethereum and focusing on localized applications such as audit support and asset tracking ledgers.
"Let the business drive the investment, which means assessing the business use case to see if blockchain is the right solution," she says. "Blockchain is like any new technology. You can demonstrate several use cases, but only a handful of those can result in ROI in business value."
This requires developing in-house talent and investing in education and training about blockchain and how to develop and use it to maximum advantage. It means finding partners or joining an industry consortium. And, for many organizations, PwC's Smith says, there's a need to focus on legal, audit, risk and compliance (LARC) when building a blockchain tool or solution.
"People in these areas will need to be involved early on with any initiative," he explains. "Their input will determine the viability of any projects the organization pursues. It's important to understand what the costs, risks and rewards will be prior to spending a lot of money on an initiative."
Smith adds that there are two primary ways to approach blockchain: permissioned and permissionless. The former, which comprises most of the projects currently taking place in the blockchain space, requires enrollment. "Those involved in the ecosystem are all very closely controlled, monitored and defined," he says.
The latter encompasses true distributed ledgers, such as Bitcoin, that deliver a broad scope with little or no limitation on participation. He believes the permissioned approach is a wise choice for many organizations and situations.
"Organizations can save billions by moving systems onto blockchain, and it may never involve a true distributed ledger or anyone from outside of that organization participating," Smith says. For now, "The goal is to get some experience with blockchain and put yourself in a strategic position so that you can respond appropriately when the technology takes off in a big way."
"Blockchain will be a major game changer," predicts NTT Data Services' Srivastava. "It is moving from the hype phase to actual enterprise visions and discussions."
Samuel Greengard writes about business and technology for Baseline, CIO Insight and other publications. His most recent book is The Internet of Things (MIT Press, 2015).