In our last article we explored why an enterprise would benefit from a permissioned blockchain. With many new startups looking to utilize a blockchain to leverage a tokenized incentive layer, we are currently more focused on the core benefits blockchains provide surrounding immutable data storage and automated contract execution. To quickly summarize, we concluded that permissioned blockchains provide:
- Trusted, identifiable validators
- Efficient consortium governance
- Customizable Consensus
- Legally binding smart-contract agreement
Most arguments have pointed out that the large majority of traditional systems are well functioning and that “blockchains” have no true underlying benefits. While these thoughts definitely hold significant weight in recognizing that current blockchains are not fundamentally necessary, here are a few examples of industries that have benefited from the integration of a permissioned blockchain:
Across the board, financial industries suffer from a variety of outdated processes when it comes to issuance, settlement and record keeping. In many scenarios, the existence of middlemen that were once necessary to validate and secure payments has become outpaced by the emergence of digital servers and systems that can perform these actions almost instantaneously.
Generally speaking, financial agreements are typically recorded by two or more parties in different operating systems. As a result, a large amount of the costs derive from the need to fix things when these different systems end up believing different things.
With the implementation of a shared blockchain system such as Corda, costs associated with record discrepancies are completely eliminated.
Imagine we had a system for recording and managing financial agreements that was shared across firms, that recorded the agreement consistently and identically, that was visible to the appropriate regulators and which was built on industry-standard tools, with a focus on interoperability and incremental deployment and which didn’t leak confidential information to third parties. A system where one firm could look at its set of agreements with a counterpart and know for sure that:
“What I see is what you see and we both know that we see the same thing and we both know that this is what has been reported to the regulator”
Using Corda, this is now a reality. Users have the ability write their validation logic in time-tested industry-standard tools that clearly define who needs to be in agreement on a transaction’s validity on a contract-by-contract basis.
In practice, this system allows financial institutions to issue bonds or debt with the entirety of the funds being traceable for the life of the underlying blockchain. Moving forward, it now becomes possible for any permissioned entity to ensure that the state of value is both verifiable and unique without needing to consult directly with the issuing party.
Additionally, the history of a financial agreement is embedded into the system and only made viewable by parties on a need to know basis, ensuring that complex legal agreements are kept secure, rather than publicly available with a wrapped layer of encryption as we’ve seen in permissionless blockchain solutions.
Traditional institutions such as Western Union have been known to suffer from money holds and delays of 3–5 business days in order for a transaction to be legally vetted, recognized, validated, and processed among the various divisions of the different banking institutions. In particular, any transfer over $1,000 will be put on hold until the sender answers additional questions required by federal law to make sure the person isn’t being defrauded, scammed, or committing some sort of wire fraud or money laundering.
Combined with the latency surrounding domestic currency conversion, there are a number of steps within the remittance process that cause transfers to be halted due to the necessity for human action and input. As a result, high volume transactions can become extremely costly for the transacter with fees ranging from 5–10%.
An intermediary bank is required when sending a payment in a currency that is not the domestic currency of the destination that the funds are being sent to. International wire transfers often occur between banks that do not have an established financial relationship. When agreements are not in place between the bank sending the wire transfer and the bank receiving it, a correspondent bank must act as an intermediary.
With the implementation of a shared blockchain system, a mutually agreed autonomous smart contract can be created. This allows cross-border payments to reach consensus in a matter of minutes and at a fraction of the cost. In practice, the blockchain acts as the intermediary.
Cross-border transfers can therefore be executed and settled almost instantaneously with the usage of trusted oracles that draw information from payment networks such as SWIFT. Oracles can use APIs to actively monitor currency exchange rates to allow for real-time fair value on international currency conversions.
Most importantly, blockchains are not subject to business hours. This goes to say that in the case of future international wire transfers, funds can be processed 24 hours a day, 7 days a week. KYC/AML standards still need to be adhered to, but it’s common for most financial enterprise solutions to code regulatory oversight directly into the blockchain to allow for potentially fraudulent transfers to be flagged for immediate review.
Before the electronic era, if you made an investment, you were issued a paper certificate or note of some kind, which served as documentation of your investment and outlined the terms of the investment. These paper certificates were called securities, and they were proof of your investment. Today, the term security refers to just about any negotiable financial instrument.
It’s important to note that when you place an order to buy or sell stock, you might not think about where or how a stock broker will execute the trade. Where and how your order is executed can impact the overall cost of the transaction, including the price the purchaser actually ends up paying for the stock.
Many investors who trade through online brokerage accounts assume they have a direct connection to the securities markets, but they don’t. When an order is placed, it is sent to a broker who in turn decides which market to send it to for execution.
While trade execution is usually seamless and quick, it does take time. Because price quotes are only for a specific number of shares, investors may not always receive the price they saw on their screen or the price their broker quoted over the phone. By the time an order reaches the market, the price of the stock could be different. In fact, SEC regulations do not require a trade to be executed within a set period of time, meaning it’s entirely up to your broker to ensure your order is executed in a timely fashion.
With the advent of smart contracts and instantaneous, autonomous settlement, enterprise-blockchains solutions will allow for stock trading to happen in real-time.
While it remains difficult to speculate on the respective trading fees associated with these enterprise solutions, it’s reasonable to assume that costs will decrease for the end user as systems are optimized. Furthermore, traders will benefit from peace of mind that with distributed ledger technology, it’s relatively easy for new stock to be issued and replaced in the case of a highly proveable event that value has been lost. Moving forward, blockchain technology could even challenge the role of notary offices due to the high security standards these solutions offer.
Every year, global corporations invest a significant amount of capital towards supply chain software and enterprise resource planning (ERP) to gain insight and clarity on their complex distribution channels. Seeing as it is common for companies to have multiple contract manufacturers, supply chains are vast ecosystems where products move between multiple parties before ever reaching the hands of consumers.
However, despite the heavy investment towards ERP and supply chain software, these companies only receive a fraction of the information about their product as it traverses global distribution channels. More importantly, coordination costs arise between companies as the data in these ecosystems is siloed. As a result, the validity surrounding the data is not entirely certain, leaving one party to “trust” the issuing entity.
With many enterprise blockchain solutions, a trustless ecosystem is created where information can be shared in real time amongst verified parties without having to appoint a trusted intermediary. This creates a much more efficient and frictionless ecosystem for corporate supply chains and significantly reduces the cost and time associated with coordination. Further examples of the benefits blockchains can provide include:
- Recording the quantity and transfer of assets as they move between supply chain nodes
- Tracking purchase orders, change orders, receipts, shipment notifications, or other trade-related documents
- Assigning or verifying certifications or certain properties of physical products such as determining organic or fair trade
- Linking physical goods to serial numbers, bar codes, digital tags like RFID, etc.
- Sharing information about manufacturing process, assembly, delivery, and maintenance of products with suppliers and vendor
Global trade requires a letter of credit written by the importer’s bank to the exporter’s bank to pay the agreed amount for the goods on a given set of contingencies. This process requires multiple checks from different entities before the letter of credit can be initiated (think risk, compliance and credit checks). Once the letter of credit has been sent, the importer must wait for the exporter’s bank to be informed before proceeding. All in all, this process can take up to five to ten business days and can be fairly costly for both parties.
With blockchain technology, smart contracts allow for this entire process to be completely automated.
As unique agreements are written into a distributed ledger, credit checks and the execution of payments are reduced from multiple days to a couple of hours, or even minutes. Moreover, blockchain technology allows for this multi-step verification process to occur on a 24/7 basis, rather than operating solely on business days.
This trustless automation process not only saves significant amount of time and cost for corporations, but it also provides suppliers with real time transparent data for more valuable insights. This data allows corporations to drive better forecasts and ultimately have more efficient inventory management.
In practice, many companies have already began experimenting with this technology. OriginTrail and Oracle are working on an integration between Oracle products and the OriginTrail network enabling trusted data sharing based on distributed ledger technologies. Oracle’s ERP systems and cloud services can be seamlessly connected with the OriginTrail network by utilizing benefits of different legacy as well as novel DLT technologies, based on industry standards.
The concept of “self-sovereign identity” becomes more and more refined as technology continues to progress. Seeing as most online transactions require individuals to disclose personal information before they can proceed or access services, it’s no surprise that regulation and open standards such as the General Protection Data Regulation (GDPR), Decentralized Identity Foundation (DIF) and World Wide Web Consortium (W3C) have arisen to try and reduce the amount of digital clones stored across the various platforms we visit in a given month to protect our personal data.
Best exemplified by the Equifax hack, our reliance on third parties to effectively secure our data has illustrated that our personal information is constantly exposed. Moreover, the currently model of data management isn’t sustainable for the long-term future.
As a result, distributed ledger technology proposes a unique solution to data protection. By creating permissioned blockchain solutions for encrypted information to be limited to few trusted parties, companies can benefit from enhanced security surrounding data storage.
Blockchain can be used to create a platform that protects individuals’ identities from theft and massively reduces fraudulent activities. The technology can also help businesses build strong blockchains that handle the issues of authentication and reconciliation encountered in several industries.
It can allow individuals the freedom to create encrypted digital identities that will replace multiple usernames and passwords while offering more comprehensive security features capable of saving customers and institutions valuable time and resources.
As identity continues to progress, it’s important to recognize how blockchain solutions can help advance the possibilities “self-sovereign identity” provides. While data privacy may not be a big concern for the average person, it’s imperative for the businesses we use on a daily basis to ensure that our data is being handled in an ethical, compliant and secure manner.
In 2016, the Savills World Research team estimated the value of global real estate at $217 trillion. Despite this immense market size, the real estate industry still faces multiple challenges and inefficiencies when purchasing, leasing, managing and analyzing real estate assets. Generally speaking, real estate involves several entities such as owners, tenants, operators, lenders, investors, and service providers who require access to trusted information alongside the ability to update or modify that data. Each of these entities create additional layers of friction as there is no common shared database where the integrity and accuracy of the data can be trusted. Moreover, these entities may lack trust among each other as participants are interacting for the first time (think leasing an apartment).
With these challenges in mind, blockchains can mitigate these frictions by establishing a common and trusted database for real-estate transactions and payments.
Commercial real estate (CRE) leasing transactions face a handful of challenges regarding inefficient property searches, lack of real-time data, time-consuming and paper-driven due diligence processes, complexities in managing leases agreements, property operations and cash flows.
In terms of property searches, CRE brokers, owners and tenants paired with buyers and sellers tend to use multiple listing services (MLS) to access property data such as location, rent prices, property value and features. As a result, the data is fragmented across multiple platforms and causes inefficiencies or discrepancies among the involved parties. Due to the lack of standardization, the accuracy and detail of the property data is completely dependent on the broker’s preferences.
With a blockchain based MLS, data can be distributed across a peer-to-peer network creating an increase in clarity and trust surrounding the property data.
In today’s climate, property owners regularly run into complexities around the management of their lease agreements, operations, and cash flows. With the advent of smart contracts, key terms such as security deposits and lease payments can be recorded on the blockchain and autonomously executed at predetermined dates.
Depending on the terms of the lease agreement, smart contracts can initiate rent payments from the tenant to the owner without having to hand-deliver checks, use complicated payment portals and/or wait for a bank to process the transaction(s). Once the transaction has been finalized, the lessor can transfer the possession of the property to the lessee with the eternity of the agreement being recorded on a distributed ledger. Upon the completion of a lease, smart contracts can initiate and finalize the transfer of the security deposit back to the lessor.
In the last example, the benefit of a blockchain implementation simply revolves around two parties, the lessee and lessor. Real estate transactions involve numerous payment and service entities which must be recorded, tracked, and executed on a regular basis. In CRE, not only must the cash flows be seen by the real estate owner, but also by auditors who must prepare and review financial statements, banks who need insight on financing decisions, regulatory bodies to ensure compliance and appraisers to accurately value properties.
With all of these entities looking for insights and data, real estate companies spend a significant amount of capital on accounting, compliance and cash flow management needs. With the advent of blockchain technology and the proliferation of smart contracts, all parties can receive real time data along with automated payments and transactions while simultaneously reducing the cost of value transfer and data accessibility.
Examples of Enterprise Solutions in Action
News of JP Morgan’s stablecoin, JPM Coin, quickly caught major media attention upon the announcement of the digital currency last week. As we would have guessed, JPM Coin is being built on Quorum, an enterprise solution we covered in our last article, and will be initially tested for transfers amongst institutional clients. The primary reasoning for the currency supports our earlier thesis of enhancing recording keeping.
When one client sends money to another over the blockchain, JPM Coins are transferred and instantaneously redeemed for the equivalent amount of U.S. dollars, reducing the typical settlement time.
JPM Coin is currently designed for business-to-business money movement flows, and because we are still in a testing phase, we don’t have plans to make this available to individuals at this stage. That said, the cost-savings and efficiency benefits would extend to the end customers of our institutional clients.
Nasdaq’s Private Market
Building off our thesis surrounding public stock trading, an entire new layer of complexity is added prior to companies going public. Nasdaq’s Private Market (NPM) plans to leverage Nasdaq Linq, a private blockchain solution built by Chain, to “combine a capital marketplace with an efficient end-to-end solution for controlling secondary transactions, disclosure management, capitalization table management, and stock plan administration.” The platform offers a secure online ecosystem for private companies to engage in equity-related functions in a seamless way to trim associated time and costs while minimizing potential errors.
Right now, blockchain technology is working simply to make existing solutions more efficient. However, in the next phase, applications of blockchain technology will be expected to satisfy needs that cannot be met with today’s technology.
In the future, there will be needs that society and capital markets don’t yet realize that they have. Nasdaq believes that blockchain technology will be there to solve those yet-to-be-identified needs.
OriginTrail and Oracle are working on an integration between Oracle products and the OriginTrail network to enable trusted data sharing based on distributed ledger technologies. The protocol is designed to be a neutral, open protocol for building transparency within global supply chains. It works by tackling issues of data interoperability and interconnectivity between data silos and “walled gardens”.
Using Hyperledger Fabric, Oracle’s ERP systems and cloud services can be seamlessly connected with the OriginTrail network. By utilizing benefits of different legacy and novel industry standards, these DLT technologies will have the power to fundamentally transform how every partner does business by making interactions more secure, transparent, efficient, and cost-effective.
The Oracle Blockchain Cloud Service provides customers with a development platform to build their own networks, and to quickly integrate with Oracle SaaS and third-party applications they already use in addition to other blockchain networks and Oracle PaaS services.
Bext 360 is a Denver-based company using blockchain, artificial intelligence, and the Internet of Things (IoT) to improve supply chain management for a range of commodities, such as coffee. Bext360 will create machines that allow for automated sorting and grading of coffee beans with farmers being able to accept real-time payment through the usage of a mobile application. All sorting data will be stored on an underlying blockchain, making it easy for distributors further up the line to clearly track and see where their product came from, and the grades they had received along the way.
Bext360 utilizes the Stellar network, a distributed, decentralized protocol for real-time transactions, to record timestamps, value, or amounts. This process makes it possible to accurately process payments and credits. Through the use of Stellar’s network, all parties involved in the transaction — companies, farmers, and co-ops — can access the data transparently, and farmers can be paid in real time.
This process provides critical capital to entrepreneurs by making it less expensive for lenders to monitor and collect on capital equipment loans. This investment stimulates new businesses by providing capital to process commodities in the market of origin. Additionally, Bext360 machines will collect data on the quality and efficiency of farming practices and then analyze supply chain dynamics to create new business opportunities and efficiencies.
As we’ve explored the concept of “self-sovereign identity”, it’s not enough to simply provide a new system for managing data storage. Companies such as Transmute are actively working to provide firms with a new form of digital identity that easily integrates existing solutions to make for a truly next-generation experience. With Transmute, companies can:
- Manage verified IDs across the network safely and with confidence.
- Maintain compliant user-company relationships through mutually tracked consent.
- Facilitate workflows based on relevant roles and permissions.
- Establish responsibility and build reputation by strategically leveraging immutability and digital signatures.
- Authenticate with greater confidence using network-verified credentials.
- Use verified credentials to power real-time authorization without expensive integrations.
- Integrate with existing technology in real-time for a single view of the user.
- Enjoy convenient reporting and compliance with current regulations thanks to audit logs.
In time, it’s safe to assume that an industry standard will evolve surrounding the proper management and handling of digital identities. With companies such as Transmute providing the framework for this future, consumers can have peace of mind that major slip-ups such as the Equifax hack will be a thing of the past.
Ubitquity introduced a recording and tracking system for the real estate industry by leveraging permissioned blockchain technology. The solution adds transparency to the process, ownership and property information, and reduced search time. The decentralized nature of the technology increases the confidence in the information being recorded and the overall real estate ecosystem. With its blockchain platform, Ubitquity aims to strengthen the existing counterpart: the physical or paper records in real estate.
The Delaware based company has worked on a handful of client implementations including: title companies, municipalities/land records offices. For one, Ubiquity partnered with Brazil Real Estate Registry Office in 2017 in order to improve the land and property ownership process. Given the fact that Brazil faces high rates of corruption and fraud within the land titling system, the pilot program significantly improved the efficiency and confidence on integrity of the land ownership data.
Following the successful pilot in Brazil, Ubiquity was able to work with AIC Title Services for recording aircraft titles and registration documents for the aircraft company’s documentation and title recording process.
With Ubiquity and a permissioned blockchain, the company has a proven track record of improving the slow legacy systems for real estate companies in terms of data integrity and recording processes.
As we start seeing more tangible adoption of enterprise solutions, it’s refreshing to recognize that the value proposition for blockchain technology far surpasses the cryptocurrency ecosystem. The industries and examples described in this article are simply the tip of the iceberg. At the core of any industry handling complex data, it’s evident that a blockchain-standard can not only enhance data storage practices, but also revolutionize the way these enterprises collect, share and learn from new information.
Here at Fitzner Blockchain Consulting, we are extremely excited to see new enterprise solutions develop and help apply their benefits to various sectors.
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Fitzner Blockchain Consulting is a leading management consulting firm that specializes in blockchain-based systems and their design