Bitcoin and Cryptocurrency – terms that are the flavour of the month – have got many investors salivating as an alternate asset class. However, did you know that the underpinning technology behind many of these Cryptocurrencies could have bigger ramifications for the business landscape than the currencies themselves?
The name of this technology is Blockchain, which is a type of Distributed Ledger Technology (DLT). The technology is similar to a traditional database but with a few key differences which open up a realm of new business profitability and possibilities.
But before we look into these key differences, we must first ask ourselves why we need databases as a secure store of information.
Primarily, we use databases to reassure clients that the information they provide will be kept valid, up-to-date and secure, thus creating a trusted environment for business to take place. Some examples of the types of institutions that have flourished using data and records in a secure and trusted environment include legal firms and banks and a range of others. The manpower required for these institutions to provide trust and valid information for their clients is costly and time consuming.
What if we didn’t need the manpower to provide trust? What if it was inherently built into the databases that we stored the information in? This is what Blockchain offers us.
Now back to the differences. The first difference is that the Blockchain database is shared between all organisations or ‘peers’ that have been granted access to the database. These peers then hold and automatically compare and validate the data held in each of their databases to ensure that no fraudulent or erroneous changes have been made. While doing this, the database also updates the peer’s database with the transactions that are deemed to be valid automatically. This allows for real time data-sharing as well as the ability to identify by whom and what changes were made.
Traditional databases and accounting systems are set up as silos for data and require multiple versions of each database to be manually updated and provide users with the ability to exchange and use information. Thus increasing the risk for potential error, tampering of information and higher costs.
How does the Blockchain validate these transactions? Interestingly enough, this leads us to difference number two. Blockchain helps to validate which transactions are legitimate. The network uses a consensus mechanism that requires the majority of the peers to agree that the transaction is valid. Once the transaction or group of transactions are validated, they are timestamped and then stored in chronological order as an uneditable ‘block’ on the Blockchain. This consensus mechanism leads us to another benefit of Blockchain technology – security. Since the Blockchain consensus mechanism uses cryptography and requires validation from the majority of the peers to change information in the database, it is significantly more difficult to tamper with data than traditional databases held in singularity.
Blockchain still doesn’t make sense? Let’s try to simplify it further. Imagine you have a record book in a room of 10 people, each with a different coloured pen that will be used to write and date entries. As each entry is written into the record book, it must be agreed upon by the group of individuals and ticked off by the different coloured pens to ensure that it is correct. In the case that a change is to be made in the record book, the change must be agreed upon by everyone in the room and ticked off with 10 different coloured pens. If unauthorised changes are made, the person who made the change will be identified by their pen colour and their entry will be ignored unless everyone agrees. Blockchain takes care of this whole process automatically. Another example is Google documents. If you aren’t already benefiting from the security and flexibility that Google documents provides, check it out for yourself.
Now that you understand what Blockchain is, let’s focus on what Blockchain can do for the business community.
In supply chain management, Blockchain allows shared databases to be in place between multiple suppliers, manufacturers and retailers which provides real time, accurate information. With access to stock and inventory levels, accurate and automated demand-based orders can be placed quickly. It is important to note that while this is a shared database, it is not necessary for all parties to have visibility to all areas, and this can be customised to suit intercompany supply chains. Furthermore, all parties can source the origin of goods, thus, providing the consumer with auditable records on how the good were sourced, handled or modified. Imagine a world where you could scan your organic mandarin at the shopping centre and view the where it was grown, how long ago it was picked and under what conditions it was farmed. This is real opportunity for creative marketers and producers alike to position themselves as organic, high value retailers for their customers.
For commercial transportation, Blockchain opens up the possibility of ‘smart contracts’. These smart contracts are contracts written in code that automatically execute when certain conditions are met. These conditions are built upon the trust that Blockchain guarantees the neutral parties involved (in this case, the trust is the code in the Blockchain). For example, when a truck is transporting goods, their payment is released when they deliver the goods between the wholesaler and the recipient. These contracts have already been trialled successfully with international shipping, so it will only be a matter of time until they become available to the wider business community.
The processing of transactions happening at one input point on the Distributed Ledger Technology (Blockchain) and the ability for multiple users to access all other databases, drastically reduces the amount of time and money invested in transactional compliance, as this is being verified by multiple peers in the network. Having the purchasing and sales functions linked to the same database as the accounting software will enable the removal of transactional processing altogether. In turn, this leads to an age where potentially real-time financial reporting will be available to management.
The ability to verify transactions with no human cost also leads to a rise in payments technology, especially to overseas parties at ultra low fees due to the lack of human processing. Start-ups in this space such as Transferwise cut out the banks and allow you to send money internationally with much lower fees. Another advantage is the lightning speed at which the transaction takes place due to the removal of the human in the equation.
Finally, within the tax landscape, the government is looking into Blockchain technology to implement the sharing of information between government departments. This could allow the ATO access to large amounts of data that it previously did not have, allowing them to police taxation much more efficiently and accurately…something we all need to be aware of. Additionally, there are also tax implications for cryptocurrencies that will clarify over time as the asset class evolves. If you have purchased and sold any type of cryptocurrency you may be liable for capital gains tax.
Currently mass usage of this technology is in its infancy, but in the future it will put its stamp on businesses across the globe.
If you have any questions about Blockchain, please get in touch with Tom Burden here.