The Growing Commercial Applications of Blockchain Technology
Thompson Hine Article
Date: July 27, 2017
A blockchain is a decentralized and immutable ledger. It provides an unalterable record of all transactions that have ever taken place on that ledger. No one party to the blockchain controls the ledger and no one party can record a transaction on the ledger. Blockchains can be either public or private, but in either case all members of the ledger (the public in the case of public blockchains and multiple parties in the case of private blockchains) maintain the entire transaction ledger together; the ledger cannot be edited single-handedly by any party or group. The genius of the blockchain lies in its openness – all entries exist in complete transparency and any change must be agreed to by all users.
In a world of ever increasing and complex data entries and record keeping, blockchain technology addresses, among other things, two related concerns: “double spending” and the need for trusted intermediaries. Sellers want to be assured that a buyer has the required funds and that it has not promised the same funds for their transaction to another transaction. This problem is typically addressed by using various intermediaries such as banks and letter of credit and credit card companies. The need for these trusted intermediaries adds cost and time to the completion of a transaction, particularly in the case of cross-border transactions. The blockchain ameliorates these concerns by virtue of its incontrovertible and decentralized structure. Once a transaction is added to the blockchain, it can be viewed by all parties and cannot be revised or reversed. If Party A pays Party B $5, the ledger is updated for all to see and Party A cannot then try and use that same $5 for a subsequent transaction. Without the need for trusted intermediaries, commercial transactions can happen immediately and without the cost of a middleman.
One of the most popular uses of blockchain technology is Bitcoin. Bitcoin was created by Satoshi Nakamoto, a still-anonymous person or group of persons, largely in response to the 2008 financial crisis. The idea behind Bitcoin was to create a unit of value that could be traded transparently and anonymously by anyone, anywhere. While Bitcoin remains popular and has inspired numerous cryptocurrencies in its wake, individuals and firms inspired by the underlying technology have started to think outside of cryptocurrencies, utilizing the blockchain for the movement of any asset, the recording of personal and public data, and even for state and corporate governance.
While there is no shortage of grand aspirations for the blockchain, there are several commercial uses already being implemented and utilized by firms worldwide. One popular application, and a term that has also garnered considerable buzz, is the “smart contract.” A smart contract is an agreement between parties, detailed in computer code, that utilizes blockchain technology. Once the smart contract is uploaded into the blockchain, it executes according to the rules imbedded in the code and cannot be changed by any one party. This removes the need for intermediaries that would traditionally hold assets in escrow, ensure the credibility of the parties or enforce the obligations of an agreement, which could considerably lower transaction costs and streamline global commercial activity.
The blockchain is also being utilized in supply chain management. Currently many global supply chains are subject to incredible amounts of paperwork across varying jurisdictions, which creates the potential for errors, waste and fraud. The blockchain’s very nature as an immutable, decentralized ledger makes its use in logistics a perfect fit. Walmart, working with Tsinghua University and IBM, has completed two pilot programs, tracking pork products in China and tracing produce in Latin America. This supply chain tracking technology has even greater potential when combined with smart contracts, creating a logistics system that defines and executes delivery, shipment and payment protocols, in each case automatically and based on predetermined rules, removing the need for a trusted intermediary and facilitating the transparent transfer of goods along the supply chain.
Blockchain technology is also enticing to the financial services industry as a potential replacement for current payment systems. Financial services firms may also look to the blockchain for use in “know your customer” and anti-money laundering procedures and to otherwise reduce fraud.
In addition to these more commercial uses, the blockchain as a repository for data is gaining considerable attention. For example, a bill passed by the Delaware General Assembly and signed by the governor on July 21, 2017 clarifies that companies can use blockchain ledger technology to maintain their records. The fact that one of the most sophisticated corporate governing bodies in the world is addressing the use of the blockchain shows the potential it may hold.
Lastly, another recent use of blockchain technology that is gaining popularity is the initial coin offering (ICO). In an ICO, a startup creates a private blockchain. It then offers “coins” (sometimes called “tokens”), which represent assets, or blocks, on the blockchain (and are created on the blockchain itself). Coins, once issued, can be used as currency (sometimes called cryptocurrency, of which Bitcoin is an example) to buy a good or service that the startup is promoting or to purchase any third party good or service, or may be sold on the open market for another cryptocurrency or traditional currency, such as dollars or euros (known as a “fiat” currency). The benefit for a startup to engage in an ICO and use coins is the ability to raise capital without compliance with federal or state securities laws. At the moment, coins created in a blockchain are not viewed as securities. In an ICO there is no private placement memorandum, registration with the Securities and Exchange Commission or disclosure other than a “white paper” that describes the project, the coin, the use of the coin and the exchange value of the coin for either another cryptocurrency or fiat currency. ICOs are generally sold in crowdfunding structures.
The blockchain has great potential to transform firms, industries and even entire ways of engaging in commerce. While many are still skeptical of the effect that the blockchain will ultimately have in business, the action being taken by some of the world’s largest companies, and the increasing number of ICOs, shows that there is a very real interest in the blockchain and what it can be used to accomplish.
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