The problem with any hyped technology, like Blockchain, is that its definition tends to vary depending on who you ask. So let’s start by establishing what it isn’t.

Blockchain ≠ Bitcoin

In 2008, following the financial crash, there was a drive to detach from the economic policies delivered through neoliberalism, and the first distributed Blockchain was created to harness peer-to-peer technology for managing transactions without involving banks. While Bitcoin seems to be synonymous in some circles with anarchy, it was established as a digital “gold standard” – not so much a currency as a commodity that can be easily transmitted worldwide but is nigh-on impossible to steal. While Bitcoin may be not seem relevant to those of us trading in stable currencies, in countries like Venezuela and Zimbabwe that have seen rampant currency devaluation, it’s a more interesting proposition. We are already starting to see pension funds buying crypto assets: brave investors with an appetite for the unconventional can follow an index of crypto-currencies including Ethereum and Ripple, which were designed for bank-to-bank transactions.

So what IS Blockchain and how does it work?

It helps to simplify the Blockchain concept by thinking in terms of centralisation and decentralisation. In theory, a single finance organisation could process all the invoices in the world, but the reality is more complex: who would be that body, in what country would they reside, and how would we know we can trust them? So in practice, decentralisation has been the norm, and the unifying technology of decentralisation has historically been paper: it works in every jurisdiction, it’s intrinsically linked to our legal code, and all you need is a signature.

The downside is that paper is time-consuming, expensive and causes friction within organisations, so we have been preoccupied for decades with digitisation, based on centralised applications. However, technology can only take us so far if not everyone uses it or, worse still, without standardisation, incompatible digital technologies create new bottlenecks.

Blockchain is a way of achieving decentralised consensus to enable secure transactions. It uses distributed ledger technology, a type of database that is shared, replicated and synchronised among members of a network, to record transactions – the records are the ‘blocks’ in an ever-growing list. Participants in the network agree, based on consensus protocols, on updates to the records in the ledger, without the involvement of a financial institution or clearing house. Every record is timestamped and has a unique cryptographic signature, providing an auditable history of all the transactions in the network. Each block is hashed (turned into a unique string of digits and characters) and each subsequent block, as well as storing its own data, stores the previous block’s hash, creating a tamper-proof chain of transaction histories.

Let’s break this down with a simple analogy. If I create a document, save it and send it to you, we each have a copy. I then need to wait until you make revisions and send a return copy before I can view your version or make other changes. That’s how most databases work today – two owners can’t update the same record at once. But with Google Docs, both of us have access to the same document at the same time instead of passing copies back and forth and losing track of versions.

Use cases for Blockchain

Because of its secure nature, some interesting applications for Blockchain are emerging. An unusual example is in the diamond supply chain. In addition to the ‘four Cs’, every diamond has 40 data points that define its uniqueness, like a digital fingerprint. The diamonds themselves can’t be altered without reducing their value, but records can be tampered with, with very low risk of discovery since diamonds accrue value over time and are therefore kept hidden. A traditional database is out of the question, since the risk of hacking to any centralised registry is enormous.  

Now, in a partnership between various institutions across the diamond pipeline spanning insurers, law enforcement and diamond certification houses, Blockchain is being used to create a tamper-proof digital ledger of the world’s most valuable stones. Each party can access and supply data around a stone’s status, including police reports and insurance claims.

Meanwhile, shipping giant, Maersk, is using Blockchain to take paper out of the marine insurance equation and improve security after falling victim to a widespread cyber attack earlier this year. Traditionally, physical contracts were signed multiple times, going from ship to ship and port to port. The distributed ledger is used to capture information about shipments, risk and liability, and to help firms comply with insurance regulations. It also provides transparency across an interconnected network of clients, brokers, insurers and other third parties.

What this means for the finance function

Blockchain enables money to move more easily, helping companies to unlock cash tied up in their supply chain. This can also be layered with ‘smart contracts’ – pieces of logic-based code that self-execute and self-enforce the negotiation or performance of agreements, enabling parties to trade and do business with one another without the need for a “middle man”. Blockchain can be applied to various P2P processes, such as to accelerate purchase order management, reshape invoice processing, accelerate settlements and reduce money-laundering.

It pays to start familiarising yourself early with this technology, before you’re required to start articulating the business case for Blockchain. To that end, there are plenty of useful resources on YouTube which visualise and simplify the principles. I’d also recommend this webinar which reviews Blockchain in the context of the Source to Pay cycle. And, of course, the Finance Insider and dedicated Blockchain Insider weekly podcast series from 11:FS, which follow the rise of this fascinating technology and the latest news, developments and trends within the world of Blockchain.