Features
Michelle Perry 5 Oct 2017 12:23pm

Blockchain: Living up to the hype

Blockchain was hailed as a panacea to myriad ills until some organisations became disillusioned with the technology. But since the initial fall-out, many organisations have been quietly forging ahead to develop landmark applications that have the potential to transform business. Michelle Perry investigates

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The number of people who genuinely understand blockchain and its potential applications are few. This is understandable given the amount of propaganda about the tech. The hype swirling around blockchain has peaked however, and we are now nearing a plateau of realism where proofs of concept are becoming blockchain applications. That said, it is not the answer to the world’s problems that some claimed.

Blockchain – or distributed ledger technology – is a permanent digital database that is, in theory, tamper-proof. The technology has existed for around a decade but has until recently been defined by bitcoin, the digital cryptocurrency.

In this application the technology flourished because blockchain is most useful where transparency is needed, but where multiple parties do not know or trust each other.

Bitcoin was an attempt to disrupt the peer-to-peer payments structure, giving anyone with an internet connection the power to store and transfer financial value.

David Lyford-Smith, technical manager, IT & the profession at ICAEW’s IT Faculty and co-author of Blockchain and the future of accountancy, due out in November, says: “Blockchain is a system of universal entry bookkeeping: a transaction created by one propagates to everyone. Transactions are also permanent – unable to be deleted – and can even be programmable, creating automated ledgers. Blockchain could lead to savings in reconciliations and increased confidence in provenance, rights, and obligations. But there are some scaling and privacy issues to be resolved before it truly pays dividends.”

Distributed ledger technology has advanced from the most commonly known iteration – bitcoin – which is open to all. A blockchain network can be open and public, visible to all users and without confidentiality – like bitcoin – or it can be closed and private. Both types are valuable propositions depending on the end goal. But it is the possibility of a closed, secure blockchain infrastructure that is of greatest interest to the commercial world.

“There are lots of areas where a shared database between people who don’t trust each other on a low cost basis will make sense. There are estimates of massive amounts of cost savings for doing this,” says Chris Skinner, chairman of the Financial Services Club and founding member of the Whitechapel think tank. A number of public and private blockchains have been developed, including.

Evergreen, Ripple, Ethereum, Hyperledger and Azure. Ethereum, like Bitcoin, is an open source platform that anyone can join. It is becoming another popular public blockchain that can create “smart” contracts. Hyperledger, Evergreen, Microsoft’s Azure and Ripple are all enterprise blockchains.

The financial services sector was the first mover in developing pilots to find a way to use blockchain, because it could see the vast potential the technology had in removing the middleman and securing substantial cost savings. Indeed one of the biggest consortiums working on blockchain technology, R3, has raised $107m from some of the world’s top banks and other big name investors with the aim of developing a distributed ledger technology called Corda for a modern finance infrastructure. But some quickly became disillusioned and left the consortium. JPMorgan Chase & Co followed Goldman Sachs Group, Banco Santander, Morgan Stanley and National Australian Bank in quitting the group. All of the banks are, however, already involved in other blockchain projects.

Ajit Tripathi, director, disruptive technology at PwC, says: “There are a few interesting applications coming up in the public domain. It’s still relatively early days. On the private side a few organisations are coming together to create platforms. Most are in financial services but we are seeing a huge amount of interest from the non-financial sector too – telecoms, industrial, automotive and retail – to track valuable assets.”

The greatest challenge for the financial services sector is that it is a heavily regulated industry – finding agreement on industry-wide issues such as payments and clearing processes have to be resolved by industry players and governments before the technology can be applied.

“The problem is that a lot of what’s being focused on is the technology when it’s an industry issue,” says Skinner. “The technology can’t compensate for that, and that’s where a lot of projects have fallen down and a lot of people have become disillusioned.”

LIVE PROJECTS

One area that is gaining traction in blockchain applications is supply chain management. There are currently a number of live projects in this area. Danish shipping giant Maersk, in conjunction with IBM, has completed its first end-to-end digitised supply chain pilot using the Hyperledger blockchain framework to track its shipping containers. Out of 70 million containers shipped annually, Maersk aims to put 10 million of them on the blockchain by the end of this year. IBM estimates Maersk could save as much as $38bn every year by digitising its supply chain.

Barclays Bank has also trialled distributed ledger technology using the Wave network in supply chain management for bills of lading (lists of a ship’s cargo) and letters of credit for corporate clients. The bank plans to roll it out to other clients soon. The bills of lading application is slashing the length of time it traditionally takes for this process from days to minutes.

Provenance is a blockchain platform that tracks produce from origin to plate. The company, which now has over 200 retailers and producers using its platform, including the Co-Operative Group, creates transparency and traceability in businesses’ supply chains. “The technology is moving fast outside financial services where there’s less regulation and restrictions so we will see a trickle followed by a flood. The market is changing and moving a lot faster,” Tripathi says.

The data on blockchain funding is evidence of this accelerated push. According to EY’s research in 2015, venture capital investment into public and permissioned blockchain start-ups (via public funding rounds) was more than $360m. By last year that had ballooned to $1.02bn in more than 400 blockchain start-ups.

This young technology is slowly evolving to prove that it is a valuable proposition but it is clear that its recent successes are where organisations either have internal control over the transactions to be put on a blockchain, or have reached agreements with all parties involved in a process, and this has typically been in less regulated areas of business.

For example, the Estonian government is working on a number of projects to secure and audit public services by registering digital assets on the blockchain with software security company Guardtime. The Estonia government signed a deal this year with Guardtime to secure the health records of over a million Estonians.

In China Alibaba Group’s finance arm, Ant Financial, has created a private blockchain to record all charity donations on its “Ant Love” charity platform linked to Alipay – the Chinese PayPal. In the US post-trade provider Depository Trust & Clearing Corporation successfully tested a blockchain-based technology for the clearing and settlement of repurchase agreement transactions earlier this year. In May DTCC announced that it will also go live with its blockchain-powered credit default swaps reporting platform in early 2018.

“It’s where someone controls everything, like in Alibaba and DTCC and Barclays, in a small community they can use blockchain effectively internally. But where there are second and third parties you get into a harder discussion. I’m still hopeful that barriers across borders can be broken down but also sceptical,” says Skinner.

Some of the myths around blockchain technology have already been smashed but there remain many challenges and risks to companies exploring the technology. The main challenges for organisations are to work out why and if they need a blockchain database, because it is possible that the problem can be solved by restructuring processes, bringing in new skills or with a simple database.

“Although the technology is moving incredibly fast, it’s a few years away for SMEs. If we can’t make tax digital by 2020 then we won’t be seeing widespread use of blockchain for SMEs any time soon,” says Howard Gross, founder of Gross Klein and chairman of the ICAEW Practice Committee.

Despite the promises of huge savings, the true cost of implementing an enterprise-wide blockchain is as yet unknown. Small trials are costing companies millions. For SMEs these investment costs are way beyond their reach. There are also questions over running costs and the time-lag between sending out data and reaching what is called “consensus” in the blockchain community. Solving the maths puzzle that blockchain relies on requires huge amounts of computer power.

“I would say ‘back off’ to any client looking at it. Let everyone else make the mistakes and then learn from them. At the small end of business the advantages aren’t so clear. And at the regulatory end there may still need to be changes,” says Gross.

For now the technology remains the preserve of those with deep pockets, but the pace of change is such that within a decade it could be an off-the-shelf product. In which case, it is something that all professions, sectors and businesses should be considering for the future and working with industry players to understand if structural change is needed or new rules required before the technology can be applied.

BLOCKCHAIN AND AUDITING

Blockchain is already disrupting the work of accountants, but its reach is still unclear. Bitcoin is no longer the only cryptocurrency and more are expected to develop as blockchain evolves. In time cryptocurrency may be the only currencies, so where does that leave auditors?

In 2014 Ripple Labs underwent a type of audit to prove the tech company had more bitcoins than it owed using the company’s digital wallet. The process was neither watertight nor entirely transparent. However it set the wheels in motion for how distributed ledger is set to transform auditing.

Earlier this year Deloitte completed a blockchain audit in an internal test case. The firm looked at permissioned blockchain protocols and applications with professional auditing standards in a pilot test. Deloitte’s Rubix – a group exclusively researching and developing blockchain applications in the firm’s Toronto offices – conducted the test. The team used existing auditing guidance to the permissioned blockchain application built on Ethereum technology.

At the time Will Bible, partner, Deloitte & Touche, said: “As this technology evolves, it’s only a matter of time until our clients tell us they are moving portions of their business onto blockchain infrastructure. Moreover, as a leader in delivering audits of the highest quality, we need to get ahead of the curve on quantifying and defining how an auditor could provide a level of assurance on a permissioned blockchain application, contributing to the trust and confidence in the network.”

Fully automated audits may one day be reality.


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