Which blockchain initiatives are taki…

I was recently asked out to fill out a questionnaire on blockchain trends and one of the question was to rank the top 3 reasons / challenges we are seeing to blockchain adoption in mainstream and the options for answer were the usual – budgets, management
sponsorship, technology , culture and the like. While these are challenges we see with adoption of any new technologies, blockchain is a little bit unique and in this blog, we will look at the reasons why some blockchain engagements are moving beyond POC/
experimenting into actual production systems while others get shelved or remain in the labs. Just to provide a scale of projects / programs that don’t survive beyond POC,

Deloitte
recently published insights on this that indicates only 8% of the 27,000 (approx.) blockchain projects in 2016 survived or remained active. Even of these 8%, many would not be making to enterprise grade solutions.

Blockchain’s key features of shared ledger, immutability, timestamped audit trails and cryptographically secured transactions offers many opportunities that can be broadly classified into two buckets – creating efficiencies via streamlining existing processes
by sharing information that currently sits in silo and building new products / services using the power of technology and remove intermediation. In this blog, we will look into details of each of these opportunities with some examples and then look at where
the key challenges are for adoption. I conclude here that the projects that are taking off and becoming real first are those that create new revenue streams for organizations. This is not only because when there is a battle between cost savings and revenue
enabler, top management lean towards the latter for budget allocation.

Why are organizations experimenting with blockchain?

The first category of blockchain applicability in creating efficiencies is broadly in two areas – streamline existing processes and using its tamper proof audit capabilities for automatic regulatory compliance.

Streamlining existing processes

This is one area where the maximum number of projects have started and been shelved. Blockchain’s capability to create a shared distributed immutable ledger between various participants caught the eye of many IT leaders (who have been following distributed
databases closely) as this combined the power of distributed storage with cryptography and therefore the inability for any one party to change the state of the ledger without consensus. Shared ledgers will mean that need for reconciliations between various
parties is reduced,  manual or email based information and document exchange can be digitized away with online forms/documents that can be stored in an immutable ledger. Some key examples of such applicability are Settlements in Capital Markets, Syndicated
Loans in Banking, Supply Chain and Trade Finance in trading. There are huge opportunities for efficiencies in all these processes and I would argue that one should look at digitizing as the first opportunity (applying AI technologies) followed by placing the
data/information onto shared ledgers. There have been many POC / pilots in this space to use blockchain but very few that are moving into production. There are also many enterprises that are waiting for the existing software products to upgrade to a ‘blockchain’
version (
SAP
,
Oracle
all have announced blockchain enablement on their products ) instead of investing into creating new blockchain based systems (similar to when internet hit the client server versions many years ago).

Automatic regulatory compliance

Interestingly and somewhat contradicting to the common belief that lack or uncertainty on regulations hinders blockchain adoption, there have been several projects that have been initiated to apply blockchain to seamlessly comply with new or even existing
compliance requirements. KYC / AML compliance enjoys the most talked and experimented with project in the space closely followed by announcements on GDPR, MIFID II and even some FDA regulations. This is indeed a very interesting applicability of the fact that
blockchain provides with a clear timestamped immutable audit trail of all transactions and a great source of data linearity. By virtue of having your information persisted onto a blockchain, you get automatic compliance and all you need is to create a node
for your auditors/ regulators and hey you are sorted. Tremendous effort can be saved in trying to collect and report on all the right information to your regulators and even makes any potential litigation efforts minimal. This is a space to watch out for and
one that could take off when blockchain adoption increases across other categories.

The second category belongs to the early believers and leaders who can see beyond the horizon and into the future of how a blockchain enabled world would look like and enabling new products / services / business models.

New Business Model Cases

Another interesting category which enjoys maximum number of announcements from start-up organizations on applying Blockchain is one creating new business models. Cross border remittances is a great example of this category. Start-ups like Ripple, Abra and
Venmo have made money transfer seamless for immigrants cutting multiple costs on the way. This obviously means that large financial institutions will lose out on market share in the space and the associated fees which has forced these organizations to look
at blockchain and start experimenting with it. Even SWIFT has joined the bandwagon to reinvent itself with Blockchain. But these initiatives at organizations like SWIFT, DTCC will take a while before they become mainstream programs / projects. Blockchain start-ups
will continue to innovate in this category and early believers will continue to adopt but it will take another five to eight years before this becomes mainstream for any large enterprise.

Generating new revenue opportunities

Technology innovations sometimes open opportunities to create new business ideas and revenue streams – the last big one was the internet itself. Blockchain has this capability of helping to create new products and increase top line for companies. It has
also arrived at a time when gig economy is taking off which leads to companies creating new products to cater to the needs of this new generation of consumers. Some examples of blockchain applicability creating new products are peer to peer renewable energy
trading in the energy sector, flight delay insurance or micro-insurance in the insurance space, cryptocurrency based funds and assets in capital markets and new token based loyalty programs. All these new products could very well also be launched using traditional
technologies but blockchain offers them the ability to provide seamless and truly digital customer experience because of the shared ledger among the various parties involved in the servicing of the product. This coupled with clear auditability and therefore
reduced operational costs is a win-win for businesses.

 

New revenue generators will take off first. Why ?

By now, I assume you have also already concluded it makes sense to back blockchain programs that will bring new revenues to companies. In this concluding section, I call out the key reasons why this is the case.

Blockchain is an ecosystem solution

Unlike other technology advancements like AI, Cloud, IOT and analytics that can be implemented within your own enterprise to seek efficiencies, blockchain requires that suppliers, competitors and regulators collaborate and agree to come onto the same platform
and create an ecosystem that delivers a new experience for the end customer. Creating such an ecosystem for existing processes can be a complicated, time-consuming and costly proposition. This is one reason enterprises find it more rational to use blockchain
for a brand new product or service as it is much easier to bring together several organizations with a common goal to create something new and generate new monies.

Integration complexities

Blockchain technology is still evolving and there are very few integrators and solutions available to connect it up with existing infrastructure. While trying to apply blockchain to existing processes, this remains a huge challenge and without this integration,
there will be no efficiencies. Whereas a new idea calls for new systems to be built and it is a lot easier to take a decision to build it on blockchain if there is no baggage of existing systems. So enterprises looking to start on the blockchain journey will
tend to sway towards programs where one could start on a clean slate.

Scalability questions

Almost every research and analyst paper on blockchain will conclude that the technology still has huge scalability challenges, yes the technology is in its infancy and will take a few years before the scalability questions are addressed. Existing products
and services will have a lot of data and a lot of customers and an expectation on throughout or processing time that could be hard to beat with blockchain at the moment. This puts off many experiments on blockchain in trying to apply it for efficiencies. A
new product or idea is just kicking off and likely to have a smaller client base and throughout requirements – by the time the customer base, data and throughput requirements increase the technology would have caught up too . So a good category to place your
bets on.

The network effect and ROI confusion – top line Vs bottom line

We already touched upon the need for several organizations to collaborate to setup an efficient blockchain network. Another key reason why initiatives only focussing on cost saves don’t take off is the difficulty in clearly being able to calculate who invests
how much and who reaps how much benefit when applied to a current inefficient process. While it is equally difficult to create the cost and revenue sharing model for a new business, the idea of being able to increase top line brings together businesses to
solve this problem more amicably. Bottom line saves on the other hand goes to the shareholders and therefore lot more complicated to agree.

So, many predicted that 2017 will be the year of blockchain and now the same people have said that 2018 will be that year. From my perspective, blockchain adoption is definitely on the rise and POCs and Pilots will continue to be announced in the other streams
but only those programs that create new products and services will move to production first. 

 

Crypto Destroyer

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