Many technologies have come and gone over the past decades. Some were hyped concepts that flopped (beenz, anyone?). Others that started from humble beginnings became ubiquitous. While every technology faces its own adoption trajectory, the majority go through fairly predictable stages. The leap from niche to mainstream happens in what some strategists call the “bowling alley,” where a technology’s success in one industry (the lead pin) creates opportunities in tangentially related markets (secondary pins).
As someone engaged with blockchain projects since 2016 in CGI’s Trade Innovation Lab (and countless emerging technology projects before that), it feels as though blockchain is now making the leap from experimental to production-ready solutions. What’s more, it’s poised to spill over from financial services into a wide range of industries. This year will be the test of whether pilots can be turned into production.
In this blog, I break down distributed ledger technology (or “blockchain” for simplicity) into its defining properties, show how these properties are being applied in trade finance, and describe how they can solve problems in other industries.
Breaking down blockchain
Before going further, a quick definition is in order. At its core, blockchain is a ledger (a record of transactions) that‘s shared among a network of users. Any transaction within this network is recorded, and this record is shared among every user. Because everyone has the same version of the truth, it becomes difficult for an individual to tamper with a transaction. Blockchain not only allows a network to specify that a transaction has taken place; it can also build in rules (contracts) for each transaction.
Three key properties lie at the heart of this innovative technology:
- Disintermediation of trust
- Immutability of the record
- Logic of the smart contract
These properties also define blockchain’s advantages compared to existing record keeping approaches. (See my colleague Sean Curry’s blog for more blockchain basics.)
Disintermediation of trust
Ordinarily, organizations and individuals without a commitment to each other lack the mutual trust necessary to transact. In any transaction actors must trust that:
- The commitment to transfer value between the parties will be met
- The veracity of ownership over the transferred value
- The legitimacy of the value being transferred
We historically have managed trust by transacting through neutral, centralized authorities such as banks. But, these central authorities represent a single point of failure, and market incentives may drive them to act in a way that is anything but neutral.
Blockchain protocols solve this trust issue by replacing the central counterparty with a shared, distributed ledger arrangement. In practice, we’ve seen central banks from around the world explore how distributed ledgers can be used to streamline cross-border transactions and payment processes. A good example is an early use case that included CGI and Ripple, but there are other more recent examples from Southeast Asia to Saudi Arabia.
While banking has been at the forefront (the lead pin, if you will), many companies are now exploring how blockchain can reduce inefficiencies in their industries. For example, blockchain could revolutionize stock exchanges as shares could change hands within minutes instead of days. In fact, NASDAQ developed an exchange for private securities called Linq in 2015. Another use case is the insurance claims process where a blockchain could document property insured and pay claims more quickly.
Immutability of record
Blockchain’s use of cryptography is a key factor making it unique. Within a distributed ledger arrangement, cryptography is used to maintain an immutable consensus ledger of all past transactions. This not only imparts confidence and trust in the parties, but also in the provenance of the asset or value being transacted.
In my work and research, I see financial services organizations using immutability to enhance fraud detection and pinpoint instances of money laundering. This beginning-to-end visibility is being embraced beyond banking. Sectors that rely on authenticity of components, such as retail, consumer packaged goods, and manufacturing—can now track components throughout the supply chain.
To me, this providence feature is going to change the world as we know it: improving quality control, giving auditors and regulators greater transparency, and providing increased validation of goods and services (and even people’s identities). Buying decisions will be much easier when you know the source and journey of your goods.
Think of smart contracts as “if-then” statements, or scripts within each transaction executing an agreement automatically once certain conditions are triggered. Smart contracts can embed contractual logic that makes execution autonomous. Obligations coded and organized via smart contracts are easy to replicate and have benefits of security, verifiability, transparency and immutability of the blockchain.
In banking for instance, smart contracts are being used to transform older EDI systems and mainframe environments. By using application programming interfaces (APIs), banks can have one foot in the “old” world and one in the new. By blending complex, staged smart contracts within the quote-to-cash cycle of most corporates and particularly manufacturers, banks are able to position their products and services, such as a letter of credit, in novel ways. Plus, by leveraging new technologies via APIs, banks can retain their existing infrastructure investment and position, yet be nimble enough to compete with newer entrants and existing rivals.
Beyond just banking, let’s look at the basic commercial mortgage loan process. Numerous stakeholders are involved: gathering, staging, reviewing and approving information. There are builders, contractors, architects, landscape designers, and inspectors, all of whom must go through numerous approvals to complete different phases of the project. Blockchain technology can streamline the flow of information, approval and funding, as well as provide better project management and accountability.
These examples are just the tip of the iceberg, giving a glimpse of how blockchain as the lead pin becomes a catalyst for digital transformation across industries. My colleagues and I are exploring blockchain from many angles, from its use in government to the challenges of blockchain energy consumption. Stay tuned for my next blog, where I’ll continue the theme of technology adoption and examine key barriers that blockchain must overcome to gain widespread adoption and deliver mainstream value.
About this author
Director, Consulting Services
Nancy has 25+ years’ experience in banking and trade and is a recognized thought leader in blockchain and distributed ledger technologies (DLT). As director of CGI’s Trade Innovation Lab, she is helping to lead and shape the strategic direction of the CGI Trade360 SaaS platform ...