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Research Briefing

Blockchain: How to Position Your Company for the Inevitable

We don’t doubt blockchain technology’s potential to be transformational, but technology and business leaders must resolve some rather gnarly issues.
Abstract

Blockchain applications promise to smooth out the many friction points in today’s business transactions. We don’t doubt blockchain technology’s potential to be transformational, but before it becomes widely applied, technology and business leaders must resolve some rather gnarly issues, including (1) the lack of standards, particularly in data formats and how different types of transactions are defined; (2) immature technology, which currently limits security, capacity, and processing speed; (3) regulatory uncertainty; and even (4) immature and undisciplined internal transaction processing systems that must link seamlessly to blockchain applications. This briefing addresses what companies should be doing now to build blockchain capabilities.

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Blockchain applications promise to smooth out the many friction points in today’s business transactions. Relying on algorithms to provide the functions of trusted third parties, blockchain applications will enable trading partners to transact directly with each other. By copying a single, immutable record of transactions onto each node in a network, trading partners will share one version of the truth, eliminating the need for validation and reconciliation. Ultimately, blockchain applications should lead to faster, lower-cost, more secure transactions within and across organizations.

Blockchain technology is often compared to the internet in terms of its power to transform business and society. In recognizing the potential benefits of blockchains, companies have invested billions of dollars in blockchain research and experiments,[foot]“Blockchain in Review: Investment Trends and Opportunities.” CB Insights, October 2017.[/foot] generating thousands of proofs of concept across industries. In addition, companies, regulators, re- searchers, and nonprofit organizations have created numerous groups and task forces to define standards and develop code. Yet MIT CISR research has found that there are currently very few enterprise blockchain applications in production.[foot]The 2017 MIT CISR Exploring Blockchain research project interviewed thirty executives at thirty-eight companies globally between February 2017 and March 2018. We interviewed executives from (1) companies that are currently exploring blockchains, (2) professional services firms that sell services to these companies, and (3) startups that want to disrupt the companies. Another study found that 90 to 95 percent of companies were still conceptualizing blockchains, conducting proofs of concept or piloting applications. Only 5 to 10 percent of pilots were pro- gressing to production. Tanmoy Mondal and Saurabh Gupta. 2017. “HfS Blueprint: Enterprise Blockchain Services 2017.” Hfs Research, November 17.[/foot]

Despite companies’ and groups’ exploratory efforts, MIT CISR research has found very few enterprise blockchain applications currently in production.

We don’t doubt blockchain technology’s potential to be transformational, but before it becomes widely applied, technology and business leaders must resolve some rather gnarly issues, including (1) the lack of standards, particularly in data formats and how different types of transactions are defined; (2) immature technology, which currently limits security, capacity, and processing speed; (3) regulatory un- certainty; and even (4) immature and undisciplined internal transaction processing systems that must link seamlessly to blockchain applications. This briefing addresses what companies should be doing now to build blockchain capabilities.

THREE TYPES OF BLOCKCHAIN USE CASES

As leaders map their companies’ efforts to prepare for a blockchain future, they should recognize three distinct use cases with different risk/reward profiles and approaches: Efficiency Improvement Innovations, New Value Propositions, and Consortium-Led Platforms (see figure 1).

Efficiency Improvement Innovations

Global companies, particularly in the financial services sector, are exploring blockchain applications to introduce efficiencies in their delivery of existing products and services. Blockchain technologies allow a company to address bottlenecks or customer hassles caused by the need for transparency or trust. Because they are narrowly focused, efficiency improvements can usually be developed quickly. They avoid many of the toughest issues associated with blockchain adoption because a company can design, build, and govern such applications within its own walls.

Figure 1: Types of Blockchain Use Cases
  Efficiency Improvement New Value Proposition Consortium-Led Platform
Strategic Goal Improve performance of current products and services to better serve customers Introduce new business models for peer-to-peer trading Coordinate transactions among trading partners to benefit all parties
Gatekeeper The company An independent business unit The consortium of trading partners
Action Steps Identify bottlenecks resulting from verification processes Partner with, invest in, or acquire a promising start-up; or test a new business model via a spin-off Join working groups to help design and influence or monitor emerging standards

For example, BNP Paribas built a blockchain application to improve speed and reduce cost in settling cross-border cash transfers for its large, global customers.[foot]BNP Paribas’s blockchain journey was described in M. Lacity, K. Moloney, J. M. Ross, “Blockchain at BNP Paribas: The Power of Co-Creation,” MIT Sloan CISR Working Paper No. 428, March 2018.[/foot] The traditional process for transferring funds from a customer’s account in one country to an account in a different country—even for the same customer—is fraught with uncertainty, because it involves multiple third parties to complete and verify each transfer. The time needed to complete a transaction varies from a couple of hours to a couple of days; costs range from a few cents to tens of dollars per transaction.

BNP Paribas’s “cash without borders” blockchain application automatically intercepts requests for cross-border transfers between BNP Paribas customer accounts and passes the requests to the internal blockchain. The blockchain interacts with the bank’s systems of record to complete each transfer. An algorithm completes the entire transfer within BNP Paribas. In the company’s proof-of-concept test cases, the blockchain's part of the transfer was completed in less than a second with the entire transaction requiring less than two hours.

The big opportunity in cross-border transfers is payments across multiple organizations. But delivering on that opportunity will require cooperation across many banks (see Consortium-Led Platforms, below). Blockchain innovations that improve efficiency are much less complex—the impacts from such applications are likely to be incremental, but the investment in developing them is small. The issue companies will wrestle with is whether a given efficiency improvement application will generate sufficient benefits—in cost savings, time savings, or learning—to justify the opportunity cost associated with allocating critical technical resources to the desired improvement.

Action Step: Identify inefficiencies that result from the need to verify, validate, or reconcile transactions or workflows. Companies can introduce blockchain applications where a lack of transparency—or trust in partners or their data—is costing the company time or money. In doing so, BNP Paribas found that it makes sense to co-create such applications with key customers to ensure near-term benefits and long-term under- standing of how blockchains can generate value for customers.

We believe that if the idea is good, we should be able to convince at least one or two clients to do co-development.
JACQUES LEVET, HEAD OF TRANSACTION BANKING, EMEA AT BNP PARIBAS CNB

 

New Value Propositions

Blockchain technology is creating new markets via value propositions based on increased transparency and the enabling of peer-to-peer transactions. Such applications may benefit customers by reducing or even eliminating the profits of middlemen or brokers.

This is happening in the relatively staid energy industry where new companies are creating blockchain applications that introduce new approaches to buying energy. For example, the start-up company LO3 Energy created a platform comprising hardware and software that allows neighbors to buy and sell solar panel-produced electricity from and to each other, circumventing utility companies.[foot]MIT CISR interview with LO3 Founder and CEO Lawrence Orsini, December 21, 2017.[/foot] By December 2017, LO3 had installed sixty smart meters in a Brooklyn, New York neighborhood, and five hundred consumers had downloaded the company’s Brooklyn Microgrid mobile application. The grid is operating in a shadow market until all the regulatory requirements have been met, which is expected in early 2018.

Alternately, Ameren, the electricity utility provider that services the US states of Missouri and Illinois, invested in Omega Grid, a startup that aims to build a blockchain-enabled energy grid.[foot]“Startup companies selected for the Ameren Accelerator,” Ameren Investors website, July 28, 2017, .[/foot] Innogy, the Germany-based electric utility, spun off a separate company—Share&Charge—from its corporate innovation center that relies on a blockchain-based application to create a market for individuals to buy and sell capacity from electric car charging stations.[foot]Alex Lielacher, “Innogy Charges New Electric Car Fleet Using Ethereum Blockchain,” Bitcoin Magazine, May 5, 2017.[/foot]

Action step: Create an independent business unit or acquire a start-up to test new value propositions built on blockchain capabilities. Many of the ideas for new value propositions will disrupt traditional revenue streams or customer relationships. Thus, established companies will be legitimately reluctant to experiment with them in their core businesses.

But blockchains have the potential to offer newer, better value propositions, so even as companies continue to reap the benefits of existing business models, they should be alert to—and experimenting with—emerging business models.

Nobody is suggesting that we’re going to put utilities out of business. What we’re suggesting is that it’s time to evolve a business model that hasn’t changed for a hundred years.
LAWRENCE ORSINI, CHIEF EXECUTIVE OFFICER, LO3

Consortium-Led Platforms

The transformative power of blockchains can be witnessed in consortium led platforms that simplify and provide transparency across trading partners. Traditional competitors can work together to define standards for blockchain applications that address industry-specific risks, costs, and delays. The

biggest, best-known consortia—such as Hyperledger, Enterprise Ethereum Alliance, and R3—have a broad reach and ambitious goals that have not yet scaled. However, smaller consortia are starting to address more focused issues within individual industries. These smaller consortia are making progress on the technology, funding, governance, and regulatory issues associated with consortia agreements.

For example, the Center for Supply Chain Studies is coordinating the efforts of fifty companies in the pharmaceutical sector—including pharmaceutical manufacturers, distributors, and retail pharmacies—to define standards for a platform intended to help the companies adapt to new US government regulations.[foot]Phase 1 of the DSCSA & Blockchain Study was completed in Fall 2017, and Phase 2 is underway. Current Studies, Center for Supply Chain Studies.[/foot] These regulations will require the entire US pharmaceutical supply chain to trace certain drug classes on one shared electronic system by 2023. The group has developed reference models for sharing and storing data on a blockchain, as well as the access rights and rules by which parties may transact. Participants have been tackling tough questions about shared governance, industrial espionage, counterfeiters, shared intellectual property, and investment.

I think one of the things I learned was that blockchain technology really isn’t the issue. We probably learned this lesson many times with technology, but we learned it again, it’s more of the operations and regulatory issues that have the most impact. Also, the learning curve is high. There is a lot of sensitive data and companies need to be assured that it is safe and confidential in order to even imagine placing it in a shared technology. So it really was around protecting the confidentiality and security, regardless of the specific technology being used.
BOB CELESTE, FOUNDER, CENTER FOR SUPPLY CHAIN STUDIES [foot]MIT CISR interview with Bob Celeste, September 9, 2017.[/foot]

Action step: Join working groups to help design and influence—or at least monitor—emerging standards. Working groups, including consortia, open source projects, and nonprofits, are defining blockchain standards and developing open source code bases for business applications. As of August 2017, Deloitte identified forty major consortia, of which twenty-six were focused on financial services, ten were cross-sector, and three were in healthcare.[foot]Peter Gratzke, David Schatsky, and Eric Piscini, “Banding together for blockchain,” Deloitte Insights, August 16, 2017.[/foot] Companies we spoke to in our research joined several working groups when they first began exploring blockchains, then pared to a select few. To comply with antitrust regulations, traditional direct competitors may need a neutral third party to coordinate the creation of standards and develop blockchain applications.

A BLOCKCHAIN MINDSET

Established companies will need to change more than technology and processes to generate benefits from blockchains. They will need a new mindset about how they develop and use technology.

Blockchains are not one person’s story ... you cannot build one prototype and produce an outcome. We have to work with all sorts of people, competitors, academics, startups, so it’s a different mindset.
PHILIPPE DENIS, HEAD OF BNP BLOCKCHAIN LAB [foot]MIT CISR interview with Philippe Denis, April 6, 2017.[/foot]

To be able to develop blockchain opportunities, companies will need to get comfortable with open source projects, shared governance models, legal agreements that execute automatically, and data residency on nodes controlled by other parties. Companies should take action on at least one of the three types of blockchain use cases to position themselves strategically. This will guide companies on how and where they can reap the benefits of powerful new blockchain technology.

 

© 2018 MIT Sloan Center for Information Systems Research, Lacity, Moloney, and Ross. MIT CISR Research Briefings are published monthly to update the center's patrons and sponsors on current research projects.

 

About the Authors

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Mary Lacity, Visiting Scholar, MIT Sloan Center for Information Systems Research (CISR)

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Jeanne W. Ross, Principal Research Scientist, MIT Sloan Center for Information Systems Research (CISR)

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