An Executive Blockchain Briefing

During 2015, the Bitcoin discussion broadened to the underlying technology of the blockchain and its broader uses. When it was just Bitcoin, it could be regarded as a niche for those disenchanted with the banking system and government control of money. The blockchain is different and has awakened tremendous attention to its potential for changing how business is done. The technology is difficult for a non-technical executive to understand. The average age of an S & P 500 CEO is 55. I believe to make true progress with adoption of the blockchain’s potential, we need the executive level to understand what it is and embrace the opportunity strategically for their company.

When the Internet Protocol Version 4 (IPv4) was finalized by ARPANET in 1983. It was a small technical group without much publicity. There wasn’t even much public awareness that we ran out of Internet addresses on Feb. 3, 2011 (being solved by IPv6). By contrast, today there is a global technical community connected online that is awash with shared information about Bitcoin and the blockchain.  This flood of coverage reaches many non-technical executives as well as the public and raises awareness that there is something big developing, but what is it?

There are many specialized words like hash, miners, stack, public key, etc. that are important to the technology, but not important to the executive. The executive needs to understand two significant developments being made possible by the high speed Internet and blockchain technology and begin to incorporate them into their strategic thoughts:

  • Central shared ledger (or account)
  • Distributed transaction authentication (in the absence of any authority)

 

Central Shared Ledger (or Account)

Up until 1960 or so, business and bank accounts were manually maintained. Maybe not handwritten anymore, but manually entered and kept. Business/banking transactions were communicated by telex with agreed standards through correspondents (middlemen with shared trusted relationships). Well-known examples are Letters of Credit for international trade and S.W.I.F.T. for international bank payments (from 1973).

Once a transaction was confirmed through the correspondents, each party would make the appropriate ledger/account entries on their respective internal books. The originator would reconcile with their bank, the bank would reconcile with their correspondent, who would reconcile with their client. There would often also be a need for both clients at the transaction ends to reconcile with each other (if they had “accounts” with each other) and match the bank advice with their customer’s communication. Different reference numbers added to the challenge. With the advent of the computer, recordkeeping moved to in-house computers, but the accounts and systems continued to be specific to each organization. Reconcilement, while improved, was still a tedious process. This was even true within a single complex corporate organization with different business units keeping records and accounts with each other such as parts manufacturing, assembly, sales, etc.

With the increased telecommunication speeds and ultimately the Internet, telexes and faxes have been replaced with digital communication of transactions. However, the ledgers and accounts have remained specific to each organization and under their control and security. The reliance on correspondent intermediaries continues as does the multiple reconcilements. The blockchain promises to change this and create single shared ledgers or accounts for transactions to eliminate the need for correspondents, trusted intermediaries, and multiple reconcilements.

If you have two accounts with B of A in the same location, you can move money from one to the other instantaneously. This is because it is a transaction solely on B of A’s local account records and needs no intermediaries to complete. However, if you want to transfer money from your B of A account in Charlotte to pay USD to a supplier who banks locally with Banca Nazionale del Lavoro in Firenz, Italy, its going to take some handoffs and time as it goes via the bank correspondents. If B of A in Charlotte and Banca Nazionale del Lavoro in Firenz were both part of a connected shared central ledger for USD settlements, you can see how it could eliminate the middlemen and simplify reconciliation.

The simplest way to think about this is that for USD, everybody has an account at the same bank and it only takes an accounting entry on the bank’s ledgers to move money from or to anybody. That is a shared central ledger and is why Bitcoin can be transacted anyplace immediately (or at least 10 minutes for the distributed authentication to take place). Bitcoin’s blockchain is the substitute accounting and security that would otherwise be a Bitcoin bank.

The ability to combine high speed network communications with tremendous computing power at low cost will allow the creation of thousands if not millions of shared ledger “settlement accounts” without the need to go through correspondents. This is one of the main opportunities of “Fintech” and the Shared Central Ledger applied to payments, exchanges, contracts, trade, etc.

Distributed transaction authentication (in the absence of any authority)

This is more technical and also less imminently pervasive than the Shared Central Ledger. This is what allows Bitcoin to maintain transaction integrity without a Federal Reserve or other oversight. Very simply, the Shared Central Ledger for Bitcoin, since it is not overseen by B of A or anybody, has a “pre-reconcilement” period of about 10 minutes for everybody participating in the Shared Central Ledger to check transactions being added to the ledger before they are posted.

Once this group of transactions (or block) receives the required confirmations from the participants, the block of transactions is posted to the Bitcoin Shared Central Ledger and the participants informed. The updated ledger is then “distributed” to all participants so they have the latest version to check the next group of transactions (or block) against in 10 minutes or so. The posted and distributed ledger cannot be altered without 51% consensus and serves as a historical record of all transactions and the parties involved (their Bitcoin addresses anyway).

Of course it is more complicated than this with “miners” racing to solve complicated algorithms that assure the integrity of the block and earning new Bitcoins, etc. The blockchain database construct of decentralized consensus authority underlying Bitcoin is visionary artwork. However, this is not important for the executive to delve into anymore than he/she needs to understand the difference between IPv4 and IPv6 that allows a web address now to end with .me.

What should an executive do at this point? 

The executive does not need to wait for “standards” and “agreed protocols” to begin strategic implementation roadmaps for their company.   There is no need to wait for something new out of Menlo Park. The opportunity for the executive, now, is to take a strategic level understanding of these new capabilities and find a way to gain internal corporate efficiencies, the results of which can be controlled and realized now.

Every large company is seeking cost efficiencies from technology. Every large company has tremendous flows between accounts within the group.   It could be component production and assembly. It could be geography and currencies. It could be legal entities. It could be acquisitions that have been made. There is a very large opportunity to introduce the Central Shared Ledger with only controlled participants for a variety of internal document and settlement handoffs.   This could even be one of the steps to move certain processing from mainframes that some believe will be hard to find talent to develop and maintain in 10 years.

There is no need to create a system to handle global untrusted token exchanges on a distributed consensus basis. Take the appropriate parts of the currently available technology and lead the path to implementation. Go for where the money is now by realizing cost efficiencies available with the new technology. Doing this requires a confident, entrepreneurial executive. This is a top down strategic initiative. It is about understanding enough of the current technology available to ask the right questions, get the right people, and set a strategic course for the company that will pay off.

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