Blockchain: How to Position Your Company for the Inevitable

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.

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.

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.

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.

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.

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.