January 31, 2019
What Every Board Director Should Know about Blockchain
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This is not an article about governance. It is about the frenetic technology journey the World has seen in the last thirty years. Hundreds of significant “point innovations” have changed the way we live, move, pay and do business. Every day we keep receiving news about incremental advances and ground-breaking technology. Innovations such as the solid-state memory in the 70’s, the personal computer in the 80’s, the Internet in the 90’s, digital mobile phone technology in the 2000’s, high resolution, low cost LCD screens, sustainable energy sources, video-conference, GPS, electronic payments, Artificial Intelligence, and most recently self-driven cars. They have succeeded one another almost every month. Increasing application and adoption of these inventions drive prices down which feeds further innovation. Constant innovation has led to a universe of new products, services, and with it growing interdependencies in the global markets. In this journey, many corporations have disappeared either because their business was replaced or because their Board and Management Team failed to adapt to these disruptions. On the other hand, new companies have emerged and some have become global behemoths.
In the last couple of years of the innovation journey, Blockchain and the concept of “DLT” (distributed ledger technology) stands out as a more foundational or architectural development not only in software but in the way we could organize our companies. Blockchain is not a new “tech-dogma” creating herds of followers: it is a groundbreaking model changing the way we think about problem-solving and information sharing.
Ultimately Blockchain is on track to support, and subsequently provoke a broader adoption of the many other digital point innovations such as those above, helping to drastically reshape the landscape of multiple industries that were defined in the last thirty years by those very same preceding technology advances. As a Director of a Board, of any enterprise, Blockchain must have entered your peer conversation already. Don’t look at it as the buzzword that only the technologists need to understand. You as a Board Director will soon have to share the burden of decisions that will likely disrupt your industry in the near future. You will have to understand the fundamentals of Blockchain.
Computer systems need software and software code has been always written based on pre-computer accounting principles. Historically, accounting systems’ registry of numbers and values inspired the ledger, the same way that software has used the ledger as a method to preserve and store data. The original commercial approach of a "principal book of accounts" in a company, became the fundamental way you store data in a centralized manner in almost all computer systems. The computer architecture evolved and became more complex, but it is basically data stored by a trusted party and multiple users accessing that data, depending on their approved access level. The idea of a decentralized and distributed digital ledger creates a new paradigm. Instead of a single centralized ledger and multiple users accessing part of its data, there is emerging a new software architecture that relies on a totally different principle: distributed public or private copies of the ledger that are time-stamped and consolidate all transactions of a system. Distributed ledgers are inter-connected between all users and mathematically verifiable by every member (node ) of the network and have their transactional rules voted by consensus. This means that there is no need for a centralized secured depository of data as all stakeholders can verify the integrity of data stored in a block of data, and there is no need for all nodes of this community to trust one another. On the other hand, every block is linked to the previous block and all the previous blocks also have been verified. The system is secure: it is inherently tamperproof, it has integrity and transparency.
An anonymous person (or group of software developers) known as Satoshi Nakamoto (possibly chosen from one of the most common “Joe Smith” names in Japan) in 2009 implemented a core component of the digital currency Bitcoin using the principles of Blockchain. The first work on a cryptographically secured chain of blocks was described over 25 years ago by Stuart Haber and W. Scott Stornetta. The concept: what if we provide a group of stakeholders a copy of the original data ledger so no one has to be a single holder of data and thus the “trusted party”? If I fake or tamper my part of the ledger, all other users will be able to compare my data with their’s and challenge my data integrity. This would remove the need of a trusted party. This concept alone impacts almost every business in the world today. The adoption curve of Blockchain is starting to accelerate and Board Directors need to understand how to use the new paradigm.
It is easier to understand how this principle works in the growing sector of cryptocurrencies (money that instead of being printed in paper and protected by security seals, is instead a solely digital asset secured by cryptography). Take as an example the electronic money remittance system. Millions of people working abroad have driven the money remittance industry to reach a staggering $500 billion worldwide. It usually involves two parties, Person “A” sends $100 to Person “B”. In order to avoid Person “A” being able to send Person “C” the same $100, someone has to guarantee that after the transaction, that same $100 is now unavailable for subsequent use. Currently, this is the job of the Financial Intermediaries within any financial system. They are the trusted parties that handle this function and charge a fee for this role. Blockchain will change this. No centralized trusted party or intermediaries. The system is based on this very simple and radical principle; provide the ledger to all (public distributed and decentralized data).
In the above example, one can identify the disruptive impact of the DLT in the payment industry. There are hundreds of industries from supply chain to publishing, from copyright law firms to loyalty systems that will be impacted by Blockchain. There is a key to identify where Blockchain will disrupt your industry. Imagine a system in which instead of keeping data protected in a secret ledger, you keep the ledger open and just the identity of the users protected. Everyone has access to the ledger, but no one knows who the person behind an access or transference is. Instead of a name, there is an identity code. Using our previous example, every member of the “community” knows that “A” transferred $ 100.00 to “B”, but no one knows or can trace who and where they really are. Today, an electronic order initiates the transfer of funds, using one or more national currencies between two accounts. With cryptocurrencies the transaction is not “ordered” but done instantly amongst the parties, keeping their identities protected. Without explaining the hard-core mathematics behind a cryptocurrency, this is the principle behind BitCoin or Ethereum, their two most popular communities. They can be exchanged between people in a simple peer to peer transaction. They don’t need governments nor banks to function. A scary and disruptive technology that has pushed the largest global banks to try understanding the impact on their own business models. Other industries will have to exercise their impact simulations: where and when will your own industry be shifted by DLT?
So how, as a Board Director do I ensure my organization is informed and addressing the impact of Blockchain on our business? One way is to foster information sharing with disruptive technology startups and creating or entering data labs that allow them to work with your real day to day problems that they can test on their platforms. Banks and insurance companies have been tightening their ties to the new emerging innovation tech scene by building out internal departments, launching research labs and creating separated innovation hubs.
However, it is not enough to just build information-sharing partnerships with startups or creating labs to cross-pollinate experiences from other industries. Your Board must choose the right management and support it in building a long-term vision that not only drives the launch of innovation spaces such as external innovation hubs and digital factories but also allows your organization’s culture to be transformed from inside by these new innovations spaces.
Companies that have not started managing innovation such as Blockchain and adapted to its disruption, risk failure to fulfill their mission. Boards and management teams have to ensure that they are informed about Blockchain and have a clear understanding on its impact on their business model. The Board Director role has changed and the speed of disruption demands that every Director is now capable to discuss technology and innovation from an informed and impartial position.
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