Blockchain for EnterpriseEvaluating the potential of blockchain technology to radically transform business

Floyd DCostaFeb, 2016

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Source: CoinDesk, Mckinsey and Company

Blockchain technology has swiftly grown in the past few years alongside the popularity of BitcoinSince its launch in 2009 as the underlying technology powering the Bitcoin payment system, blockchain development has seen a growing number of applications

2009-12

2012-14

2014- Presen

t

The blockchain – a cryptographic ledger comprising a digital log of transactions shared across a public or private network – could be one of the most disruptive innovations since the advent

of the internet

Early Days• Blockchain regarded exclusively as backbone to Bitcoin• Bitcoin only adopted by marginal number of users• Overall ecosystem seen as experimental and obscure• Awareness limited largely to cryptographic community• Broader perception of digital currencies as fad or Ponzi

scheme• Pronouncements by financial industry dismissing

potential threats and opportunities

Turbulence and recognition• High-profile investments, public interest, “Silk

road” effect put Bitcoin in the spotlight• High volatility, criminal associations and mis-

conceptions make the Bitcoin ecosystem suspicious for important players

• Nevertheless, Bitcoin establishes itself as a legitimate value-transfer vehicle, averaging 50,000 transactions per day worldwide

• Multiple remittance payment and wallet provider start-ups emerge

Experimentation• Dissociation of blockchains from Bitcoin for many players

and increasing sophistication in approach to technology• Serious interest from regulators (Bank of England, Fed)

towards the technology (not just currency)• Venture capital and financial institutions see potential

disruptive effect of the technology and invest (e.g., UBS, Santander, Nasdaq)

• High-profile executives join and found start-ups• Announcements of prospective consortia collaborating to

and common protocols for adoption

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Source: Gatecoin, CNN Money, Coindesk, CCN.

Sensing opportunity, institutions and regulators are getting directly involved and experimenting with the technology

The first electronic value transfer protocol Main benefits of Blockchain technology

Open source value transfer

protocol

DistributedP2P

network

Secure math-based system

Financial institutions experimenting Blockchain >USD1bn invested in Blockchain start-ups

IrreversibleCounterfeit resilient

Auditable & traceable

Blockchain

Ventures

Accelerator

Automatic verification

Investments too continue to grow exponentially, with investors already having poured millions of dollars into Blockchain related firms.

4The financial crisis and rising use of cryptocurrencies are key factors driving the adoption of blockchain technology

Growth in Cryptocurrenc

ies

Growth Drivers

Blockchain Technologies

Recognition of Transformation

al ImpactFinancial

Crisis

Market at POC Phase

High interest

from Wall Street &

WEF

Effective Collaboration

With record US$ 1 billion invested in Bitcoin firms so far, the underlying technology that powers

bitcoin and other cryptocurrencies is bound to growThe recent financial crisis led to a significant loss of

customer trust and increased regulatory

scrutiny. Industry leaders opine that industries

which integrate blockchain technology

into their core payments infrastructure will cut

costs, appease regulators and even reduce the risk

of another crippling financial crisis

With the market largely at POC Phase,

Blockchain-based implementations can

replicate or complement existing infrastructure

The World Economic Forum expects 10% of global gross domestic product (GDP) to be stored on

Blockchain technology by 2027

Broad recognition of potential transformational impact for financial institutions with benefits estimated in tens of billions annually in infrastructure savings alone

Blockchain technology providers have adopted a collaborative approach to working with financial institutions, who themselves are major investors

Source: Accenture - Blockchain in the Investment Bank, McKinsey – Blockchain in Capital Markets, Press Releases.

5Open, secure and decentralized, blockchain technology can help smartly address many modern day issuesThe absence of the need for an intermediary is a key aspect of the technology, providing the opportunity for an array of network-validated digitized transactions

Source: FT - Banks see the key to blockchain, Consensys, McKinsey – Blockchain in Capital Markets, Press Releases

Blockchain technology can be highly effective in any venue where trading occurs, where trust is critical, and where people need protection from identity theft

For example, in Financial Services:• The technology has the potential to help

minimize counterparty risk, reduce settlement times, improve contractual term performance and increase transparency for regulatory reporting

Other sectors; select examples:• Public sector - managing public records and

elections • Healthcare – medical records; anonymous but

easily available• Supply Chain - build transparent, ethically

minded and community driven value networks for provenance & effective supply chain management. 

Select Use Cases

6Blockchain technology could also play a pivotal ‘change-maker’ role and deliver large scale positive social impact

Source: ImpactGrid.org, Investrata Foundation for Social Entrepreneurship, McKinsey – Blockchain in Capital Markets, Press Releases.

“Virtual currencies and their underlying technologies can provide faster and cheaper financial services, and can become a powerful tool for deepening financial inclusion in the developing

world” - Christine Lagarde, Managing Director, IMF

Blockchain based applications could help provide financial services to the billions of those unbanked, unlock new forms of economic value as well as facilitate a host of coordinated social services in a transparent, secure and decentralized way

IncreasedAccess to Services

Micro-payments

Coordinated social

services

Select Examples

Provide financial services to the billions of people around the world who lack access to banks and currency exchange — without having to prove ownership of assets or meetother qualifications that are challenging in many countries.

Enables micropayments – that could unlock whole new forms of economic value

From coordinating multi-agency disaster relief and aid efforts to scaling social support and impact investing, blockchain technology could provide a transparent, secure and decentralized platform to smartly deliver positive social impact

7However, challenges remain and continue to hamper mainstream adoptionBlockchain applications are at the proof-of-concept stage, with areas such as existing market, legal and operational framework in need of further development

Lack of Awareness

Lack of awareness of the technology, especially in sectors other than banking is hampering investment and exploration of ideas

Cost & Efficiency

Speed and effectiveness with which blockchain networks can execute peer-to-peer transactions comes at a high aggregate cost

Security & Privacy

Many potential applications of the blockchain require smart transactions and contracts to be indisputably linked to known identities – thus raising important questions about privacy and the security of the data stored

Regulation

Although there are volumes of regulations for the financial markets, there isn’t a regulatory framework that defines ‘good practice’ for the blockchain

Organizatio

nOrganizations are developing their own blockchains and applications – this defeats the purpose of distributed ledgers, fails to harness network effects and can be less efficient than current approaches

Culture

It is estimated that a blockchain is about 80 per cent business process change and 20 per cent technology implementation – thus representing a total shift away from the traditional ways of doing things, placing trust and authority in a decentralized network – this loss of control can be unsettling

Other challenges include cyber-security risk

management, scalability in question due to block sizes, role of miners –

how to incentivise, fraud, volatility of the value,

and time taken to verify the transactions

As the ecosystem evolves and different use cases emerge, organizations across sectors will face a complex and potentially controversial array of issues, as well as new dependencies

Source: Accenture - Blockchain in the Investment Bank, McKinsey – Blockchain in Capital Markets, Press Releases. Deloitte Report on Blockchain, 2015, Press Releases

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While market-wide adoption will not happen overnight, enterprises can assess impact & engage in development

Assess impact and plan for the long termEvaluate. Invest in technology and expertise related to blockchain. Secure alignment. Press for industry-wide change.

Perform Comprehensive AssessmentPerform a comprehensive assessment of business, technology, and the legal implications of using the blockchain

Launch a few pilot projectsSet up a lab. Start small. Begin with select processes that could be showcased to a wider audience to highlight benefits and prime adoption.

The potential for rapid uptake once open questions are resolved, means all market participants must be aware of the potential and have a plan in place to respond

The blockchain revolution, in any industry, will require co-operation among market participants,regulators and technologists.

Source: Institute of International Finance - Banking on the Blockchain, Mckinsey - Beyond the Hype: Blockchains in Capital Markets

Participate in consortia and work with regulatorsCollaborate and work together to design solutions for specific use cases and processes . Form consortia and work with regulators early in the process.

9With Blockchain-as-a-Service [BaaS], businesses can additionally leverage all the benefits of cloud computing BaaS allows customers to evaluate different Blockchain technologies in a ’fail fast and cheap’ ecosystem as well as the opportunity to mix and match technologies in a Dev-Test sandbox

Here are a few of the many considerations that any enterprise would need to look into when evaluating blockchains and associated platforms:• Security - A good first step is to look at the

security of blockchain systems. Its important to consider the potential for disruption and the measures for protection required

• Scalability - The platform should be able to handle large increase in users, workload or transactions without undue strain

• Extensibility - How easily can the platform be extended to have other supplementary services/applications built on top of it.

• Cost - Identify the different cost components for starting up and running a blockchain application, evaluate potential sources of additional blockchain-related costs and calculate the impact on Return On Investment (ROI)

Considerations

Source: CoinnDesk.com, Capgemini - Blockchain: A Fundamental Shift for Financial Services Institutions, Consensys, Ethereum, Microsoft, IBM

• Blockchain-as-a-Service allows businesses to leverage all the benefits of cloud computing while evaluating / deploying Blockchain technology

• Flexibility• Capex-free • Scalable / Elastic• Pay as you go • etc

• …. allowing businesses to • Spin up a Blockchain network in one

click• Spend less time creating and managing

a blockchain networks and more time designing and developing apps

• Swiftly pilot and validate use cases • Rapidly scale and roll out blockchain

based services

Benefits

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10 Extras

11It’s important to analyze the existing requirements before embarking on the blockchain journey

• What is the business case for implementing a blockchain? How do we make it pay?

• What are the bottlenecks in the processes we are replacing with the blockchain?

• What are the main drivers of cost in our implementation of the blockchain?

• Where can we pilot new blockchain approaches on the edges of our business?

• Have we thought about impacts on our strategy organizational structure, business processes, governance, talent and legacy systems?

Culture, Cost & Efficiency

• How do current regulations impact our application of blockchain?

• What will a regulator want to know about our application?

• How do we work with the regulator to bring our application to market?

• How are we applying security to our application and is privacy a priority?

• Who has access to the ledger and how is access controlled?

• How are updates to the software or application agreed and made?

• Have we thought about what our customers think about our application beforehand?

Regulations, Security & Privacy

• Is a blockchain right for my organization? And, if so, how are we thinking about applying it and what would this mean organizationally and culturally?

• To whom do I turn to in my organization to explain blockchains?

• With whom do I interact within my organization to collaborate and deliver? What are my competitors and peers saying about blockchain?

• What problems or opportunities does my organization share with others in the sector?

• What are the bottlenecks that might prevent us from working together?

• What are the common standards we require?

Awareness & Organisation

Source: Blockchain Enigma. Paradox. Opportunity – Report by Deloitte

It would also be short-sighted to completely discard the existing set up with well established safety mechanisms and the legal certainty they carry

12SMEs and large enterprises alike can evaluate, start with small investments and look to pilot the technology

Step Parameter Considerations

Security A good first step is to look at the security of blockchain systems. Its important to consider the potential for disruption and the measures for protection required

Decentralisation

The design of protocol with respect to how the actors and participants interact with each other, the governance and scenario analysis

PrivacyConsider how the platform protects information that may compromise the privacy of customers and users – Eg: the platform’s cryptography, tools used to collect, analyse and report, etc

Scalability The platform should be able to handle large increase in users, workload or transactions without undue strain

Usability Assess how easily the user can interact with the blockchain. The lesser the effort and friction, the better

ExtensibilityHow easily can the platform be extended to have other supplementary services/applications built on top of it. Also asses integration capabilities with existing systems

CostEach blockchain application will have a set up and operating expenses. Identify the different cost components for starting up and running a blockchain application, evaluate potential sources of additional blockchain-related costs and calculate the impact on Return On Investment (ROI)

Operational Impact

Analyse integration points between blockchain solution and existing systems, develop a new operating model for blockchain. Also assess the need for a new support model

Community Support

Take inventory of different community groups, resources and services available for sustained growth. Note the service models required and available. A risk analysis might be needed.

Before embarking on the journey, businesses should evaluate blockchain technology platforms on a wide set of parameters – For one: Illustrated below is Capgemini’s 9-step approach

Source: Capgemini - Blockchain: A Fundamental Shift for Financial Services Institutions