During the “Blockchain Demystified“ series, we took a closer look at blockchain in general, the underlying technology and other relevant topics. We also looked at how blockchain supposedly impacts the financial industry (banks). But if we read in the news that blockchain will disintermediate banks, what about Corporate Treasury? How are the financial departments of MNC’s impacted? Are they impacted at all? By popular demand, in this fifth part -of what was originally a series of four- we take a closer look at the areas of concern to Treasury.
Part 1. What is blockchain?
Part 2. Transparency, Security and Governance.
Part 3. Thoughts around the regulatory environment on blockchain.
Part 4. Impact of blockchain on the financial sector.
Part 5. Blockchain and Corporate Treasury.
Straight to the point, does Corporate Treasury need to get involved in blockchain?
Similar to this question: does one need to get involved in web technology in order to use internet banking? The answer is “no”. And as internet technology constantly improves, our daily life is affected, but we are oblivious of what these improvements technically entail.
Along these lines, blockchain is “just” the technology. On this technology, platforms are built, that can be used for applications. Ethereum is just one of many of such platforms. It is a public blockchain-based distributed computing platform, featuring smart contract functionality. Applications running on Ethereum will probably eventually replace those applications in use by Corporate Treasury today. But that does not mean exposure to the technology underneath.
When banks switch to blockchain, the applications that clients use on a daily basis will remain to function. How they technically work, will probably change significantly, but unnoticeably. New technology will also lead to new features in existing applications. This will be noticeable.
It is quite comparable to mobile phones. Usage of the first generations was limited to just making and receiving phone calls. When internet was introduced on mobile phones, manufacturers had a hard time assessing and predicting this evolution. The user experience lagged behind. Limited to only being able to use the numeric keyboard and black & white LCD display, surfing the net was an awful experience. But look at where we are today. We use latest generations smartphones, and cannot imagine how we ever could do without. The same can be expected for blockchain.
Blockchain is still evolving technology. From a maturity perspective blockchain is out of the infancy phase and is moving towards the point where it is getting more useful.
The hype cycle is a branded graphical presentation developed and used by American information technology (IT) research and advisory firm Gartner for representing the maturity, adoption and social application of specific technologies. The hype cycle provides a graphical and conceptual presentation of the maturity emerging technologies through five phases.
Blockchain is currently at the Peak of Inflated Expectations. This means that we have seen a rapid increase of interest, all the way to the point that everybody talks about it. However we are at the verge of a strong decline – Trough of Disillusionment – that will eventually balance out – Slope of Enlightenment. Once we reach the Plateau of Productivity, blockchain technology has become so common that we do not even consider what technology lies underneath the applications we use.
“Most people overestimate what new technology can do in one year and underestimate what it can do in ten years”. – Bill Gates
Practicality and Confidentiality
Where Corporate Treasury will definitely benefit, is in the realm of executing business logic, aka Smart Contracts. These are self-executing contractual states, stored on the blockchain, which nobody controls and therefore everyone can trust. In this context consider Documentary Credits, Letters of Credit, Guarantees, but also Acts of Sale, Marriage Certificates and all other authentication of documents.
To illustrate Smart Contracts, please use the link below for a short video on this topic. Please excuse me for introducing an ING commercial, but as the Chinese say: one image is worth a thousand words. (Click here)
Many feel that by storing contracts on the blockchain, they potentially give everybody insight in their business. Isn’t confidentiality a common blockchain problem? The answer is “no”.
First of all, a blockchain does not have to be public. Blockchains can run between trusted parties, in closed networks. In this case outsiders do not have access at all. It reduces the need for some of the security measures, like mining; which solves an additional issue, mining significantly influences (reduces) the blockchain’s settlement frequency.
Second, not all underlying transaction details need to be in the blockchain (irrespective if the blockchain is public or not). Ideally the blockchain only contains those elements of the dataset that all parties involved need to agree upon. Other information, like KYC information, payment details, shipment information, specifics of the asset transferred etcetera, can be exchanged off-blockchain, bilaterally.
But this doesn’t mean that the transaction details are less secure and can be tampered with. This is how. Let’s assume an asset is transferred from the sender to receiver. The blockchain will only contain those elements relevant to validate this transaction, not the transaction details like details of the sender, the recipient, the asset and more. These details are exchanged off-blockchain. However the blockchain will contain a – so called – hash-code. This hash-code is the result of the encryption of the earlier mentioned transaction details.
The receiver can now verify if the hash-code in the blockchain matches the hash-code of the transaction details sent off-blockchain. How? Because sender and receiver use the same encryption methodology. The hash generated by the sender (using the original transaction details as input) should match the hash generated by the receiver (using the received transaction details as input). Only if the hash-code matches, the receiver is certain that the transaction details are equal to the transaction details as intended by the sender. If anyone were to tamper with the transaction details during the process, the hash-codes will not match, consequently the transaction details should be rejected.
As background, a video on hash-codes and more: (Click here)
Projects. Preparation for, and adaptation to blockchain.
Some insights for those that need to explore blockchain themselves, and cannot leave it to financial institutions, FinTechs, etcetera.
“The urgent” always trumps “the important”. Important is making sure that you water the plants in your vegetable garden, ensuring a future harvest. “Urgent” is when your house in on fire. Consequently you use the water for the purpose of extinguishing the fire. Blockchain is at best in the “important” category. And as it pertains to projects and priorities, most MNC’s are building a house that is permanently on fire.
In deciding if a blockchain project makes sense, two important elements need to be considered. First of all, it should be very clear what the problem – that needs solving – actually is. Second, you need to have an answer to the question “why would you particularly need blockchain to solve the problem”? Contrary to what you may think, most of the projects do not require blockchain. And can be addressed using a simple “regular” database. If it is only immutability that you’re after? There are other ways to achieve it. If it is “distributed” that you’re looking for? There are other ways to achieve it. Do you want to use encryption and security? There are many ways to achieve it. Is it in the sweet-spot of immutability, distributed, encryption and security with the additional aspect of trust and a relatively low settlement frequency? Blockchain is game.
About the author
Norbert Braspenning – Managing Director Asia-Pacific – of ING Bank N.V. (wholly owned subsidiary Bank Mendes Gans N.V.). Norbert Braspenning is responsible for establishing and building market share Asia. As a vital resource to his prospective clients, he provides a vast knowledge of accounting, system, operational, legal and tax issues related to ING’s liquidity management solutions. Braspenning is a lead liquidity management solution expert with proven abilities to succeed collaboratively within a multi-cultural, complex organizational environment. In this post Norbert Braspenning expresses his personal insights, expert views and opinions with respect to the topic(s) discussed.