Thinking Strategically About Blockchain’s Potential
Ninth District Highlights - March 2019
Published March 25, 2019 | March 2019 issue
What do you know about blockchain and if, or how, it might affect you? In today’s world, I increasingly hear more and more about fintech, blockchain, Bitcoin, or any variation thereof. Due to what seems to be a fair amount of confusion on this topic, I invited a guest writer from our Payments, Standards, and Outreach group here at the Federal Reserve Bank of Minneapolis to begin answering some questions you may have and to provide you with some resources on this topic. If you have additional questions or are looking for additional information, please reach out to us and let us know.
Disclaimer: Opinions expressed are those of the author and not those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Any mention of businesses or individuals does not imply endorsement.
Should blockchain be on the minds of business leaders?1 While it might be tempting to answer a definitive yes or no, the practical response is, it depends. By understanding the landscape of blockchain adoption from a variety of angles, business leaders can make strategic choices about if, when, and how to engage with blockchain and distributed ledger technology (DLT).
In the 10 years since the publication of the 2008 white paper, Bitcoin: A Peer-to-Peer Electronic Cash System, the potential applications of its proposed “chain of blocks” system has expanded far beyond payments.2 Proponents of the multiparty shared ledger, where the participants themselves contribute to the operation, security, and resilience of the system without reliance on a single “owner,” have enumerated hundreds of use cases in various industries from land registry to health care. However, in the past year or so, what was once a multitude of potential use cases have contracted as business leaders ask themselves if blockchain delivers improvement over traditional solutions to their business problems.
Clearly, deciphering what a new technology is and what it does is paramount to the efficient use of time and resources for anyone seeking to capitalize on its potential. Yet one of the key issues affecting the progress of blockchain is its complexity. Put simply, there are many misunderstandings about blockchain. “[A] primary cause of failure (of an enterprise blockchain project),” notes a former vice president of Gartner, Ray Valdes, in a 2017 article, “is a fundamental lack of understanding around the basic concept of blockchain technology, which results in a misalignment of its capabilities with the business problem that the enterprise is seeking to solve.” 3
Nevertheless, where organizations have demonstrated some success, they often cite the potential to reduce manual document or information transfer processes among multiple parties. Blockchain could, in these cases, offer business leaders opportunities to gain efficiencies in certain business processes.
For instance, in the financial services industry, one bank launched a platform for private equity transactions on a blockchain. Then in 2018, the bank announced that an accounting firm now has access to its blockchain ecosystem and a “golden copy” of the fund’s transaction data. In this situation, both entities claim that blockchain improves efficiency and marks a step toward future innovation.
Additionally, some real-world applications outside of banking and finance have begun to scale. One example is a program launched to track certain foods through the supply chain in an effort to reduce the impact of food-borne illnesses. Notably, where organizations with significant market presence begin to move toward a new technology or process, others may be forced to comply. For example, a major retailer recently announced a requirement for some of its suppliers to begin entering product data onto its blockchain by September 2019.
In light of these developments, the question of whether to investigate or potentially invest in the technology may become top-of-mind. In that case, first understanding the technology and its limitations well enough to develop an appropriate use case is key. Second, business leaders may consider monitoring the following:
- Announcements on earnings calls. When companies begin announcing how investments in blockchain are resulting in cost savings or increased revenue opportunities, this may be an indicator of growing adoption.
- The pace of standards development. International, national, and industry-led efforts are under way and signal the desire for many stakeholders to work together to stabilize and expand adoption of common practices to achieve secure and efficient use of the technology.
Paying attention to the emerging landscape of blockchain through a strategic approach will help business leaders decide next steps for if, when, and how to engage with this new tool.
1 The term “blockchain” will be used throughout this article. Generally, blockchain is considered one well-known type of distributed ledger technology.
3 Pettey, Christy. “7 Strategies to Gain Value from a Doomed Blockchain Project.” Gartner, April 5, 2017. https://www.gartner.com/smarterwithgartner/7-strategies-to-gain-value-from-a-doomed-blockchain-project/