Blockchain offers a new method by which to record information in a manner that is more open, but also secure, and share it with multiple users. Whilst it was developed for cryptocurrencies, the potential applications go far beyond this, given that the accurate recording and distribution of information is central to a lot of how companies operate. The attributes that make it useful for other applications include:
There are a number of areas that companies are trying to exploit this technology to the benefit of stakeholders:
It is commonplace for companies to have supply chains involving hundreds of suppliers, with individual products passing through multiple parties before reaching the end-consumer. This can lead to real challenges for companies who wish to ensure that their own expectations on conduct and quality, such as product safety, environmental or labour standards, are maintained throughout the supply chain.
Using blockchain technology, companies are able to record the journeys of their products more accurately and more cheaply. With all suppliers invited into the network, every time a product changes hands within the supply chain, its precise location and time-stamp is documented by creating a new block, with the ledger creating a permanent history of every product from its manufacture through to its sale.
Given the number of suppliers involved, a centralised process would be cumbersome and would need to involve intermediaries to liaise between parties. However, with a blockchain network each party is synchronised in the information it receives, with each transaction validated by other users on the network. Having an accurate record of where a product has come from and who has been involved can be invaluable for responding to product recalls or understanding the exposure from issues being found with a specific supplier.
Food giant Walmart recently described how adopting blockchain within its live food business reduced the time to track produce from six days to two seconds. Chinese e-commerce giant JD.com has also announced similar plans to use blockchain technology to monitor their meat supply chain against the use of illegal drugs by pig farmers, which is a real issue in the region.
On an electricity grid, electrons generated from renewable sources are indistinguishable from those generated by fossil fuels, which is an issue for end-consumers who may have a preference for green energy. To keep track of how much clean energy is produced, a system based on tradable certificates works by renewable-power plants logging their output in a spreadsheet, which is then sent to a registry provider, where the data gets entered into a separate system and a certificate is created. A second set of intermediaries broker deals between buyers and sellers of these certificates, and yet another party verifies the certificates after they are purchased. This whole process increases inefficiencies in the system and reduces the attractiveness of investing in green power.
By comparison, blockchain technology offers the opportunity for smaller-scale energy producers to trade energy peer-to-peer with consumers in their local area, rather than submit their power into the grid. Such an initiative has been launched by the British energy company Centrica, within its local energy market programme.
An automated system could take data on the amount of energy produced from renewable sources, record this, broker a price and then send it out to homes on the local grid while recording incoming payments for energy purchased. Through the use of smart contracts, which execute automatically when pre-set conditions are met, transactions can be made and recorded on the blockchain without a central distributor. This simplifies what is an otherwise complicated multi-layer system, with power producers, transmission system operations, distribution system operators and suppliers all contributing to transaction costs.
For financial institutions the current “Know Your Customer” (KYC) process, which involves performing a thorough background check on clients in order to detect fraud or suspected money laundering, can take days or even weeks to satisfy the increasingly stringent demands of regulators.
Using blockchain technology, the process of monitoring customer activity in real-time can be substantially improved by providing more timely information to all of those involved. Due to the shared nature of the ledger, a database of all client activity and background information would be available to those on the network, with any updates to a client’s status or fraudulent transaction could be communicated and updated in near real-time.
It also allows for better co-operation with different financial institutions, who can all join the same network, as cryptography can be used to ensure that only transaction information is shared without revealing confidential information on individual customers. To do so, financial institutions will need to think hard about how confidential information is shared, but with the right data governance and access controls, these concerns can be overcome. Ultimately, the risk of non-compliance due to delayed or inaccurate reporting would be greatly diminished.
Protecting confidential data is more important for companies than ever before. By storing data across its network, the blockchain and its use of a distributed ledger eliminates the vulnerabilities that come with data being held centrally. Without a single point of entry, it is more difficult for hackers to either steal the data or corrupt it for ransom purposes.
The use of a distributed platform also adds resilience to a company’s operations against a Distributed Denial of Service (DDoS), being one of the most common types of attacks. DDoS attacks attempt to make online services unavailable by overwhelming servers with traffic from multiple sources, causing the infrastructure to become overloaded. As the infrastructure behind the blockchain is distributed amongst many users, it does not have a single point of failure, so if one user goes down then the integrity of the network is maintained, as long as at least one of the users remains connected.
Shareholders’ ability to exercise their voting rights is an important tool in fulfilling their stewardship responsibilities and holding companies to account. However, the current proxy voting system can be cumbersome and inefficient, with vote instructions being transmitted through a series of disconnected intermediaries. The currently proxy systems do not easily allow for auditing or reconciliation of votes at shareholder meetings, as many of those within the instruction chain, such as sub-custodians, custodians and company registrars, have separate record-keeping systems.
The 2018 voting season saw blockchain used at a shareholder meeting for the first time, with proxy distributor Broadridge Financial Solutions providing just such a service at Banco Santander’s 2018 AGM. By using blockchain technology a company can create a distributed ledger for each shareholder meeting, with all shareholders eligible to vote at the meeting added as members into the network. Each time a vote instruction is made, an additional block is added to the blockchain containing the specific instructions. The main advantage would be that is it tamper-proof and since there is only one record-keeping system, it removes the need to reconcile different databases. Overall this can give more confidence in the integrity of the vote results from that meeting.
Despite the potential benefits that can come from implementing blockchain technology to address business issues, as an emerging technology there are still many risks connected to its deployment that need to be resolved before the full potential of blockchain can be realised:
Unlike the cryptocurrencies that gave birth to its underlying architecture, more companies seem to be taking blockchain technology seriously and reflecting that in their investment. On the face of it this seems to be for good reason, with what is promised being a fundamental shift in how we store and share information. There are already a wide range of applications currently in development, including many that address traditional ESG problems, with the initial results on improving efficiency looking promising.
That being said, investors should be aware of the scale of the task at hand in trying to integrate relatively early stage technology into long-established processes and business ecosystems. The issues identified can and probably will be overcome with additional research, development and co-operation, but this process will be expensive, take time and, as industry standards emerge, ultimately result in there being winners and losers.
What is clear is that, given the current level of investment and its wide range of potential applications, blockchain technology is not going away. It might not grab the headlines in the way that its cryptocurrency cousins have done so before it, but in the background (or rather back-office) and behind-the-scenes it could provide exciting opportunities in helping companies tackle the sustainability issues that their businesses face.