Understanding blockchain

Introduction

Businesses of all sizes are beginning to look at the opportunities being presented by distributed ledger technology (for example blockchain). Notwithstanding some of the highs and lows of cryptocurrencies over recent years, solutions built on similar underlying infrastructure are slowly making their way into the commercial world and interest is growing. There is no shortage of investment in development of blockchain based ecosystems, but the next major leap forward will be translating that interest into real-world “mainstream” adoption.

It is conceded at the outset that the topic is vast and technologically, very complex! It is impossible in a short article to do little more than skim the surface. However, a key role of the inhouse lawyer is to be a stakeholder in making sense of the benefits and risks of innovation. It is from this perspective that we look at why blockchain is potentially important as a technology and the benefits it can deliver (as well as some of the key considerations).

What on earth is blockchain and why should I care?

You may be of the view that blockchain technology is the preserve of specialist technology businesses and large institutions with the resources and technical know-how.

However, solutions built on blockchain are, at their heart, a means of recording and sharing information securely – thereby enabling parties to interact and transact with unknown third parties with trust and confidence.

With this in mind, even if your business has no appetite or budget to engage with blockchain now, your customers and/or suppliers may well be already looking at it. In order to implement it in their businesses, they will be relying on (and in some cases requiring) their suppliers and counterparties to be in a position to adopt and participate.

How can it be used?

The commercial potential of blockchain and its possible benefits can only really be understood when considered in the context of a real-world use case.

While there are many examples, supply chain management is one of the most accessible. Here, in a nutshell, blockchain provides a digital backbone for a ‘tamperproof ‘ shared record of the supply chain. This carries potentially transformatory benefits such as:

• Efficiency – delays in supply chains can be minimised and paper-based processes can be replaced with end-to-end digital automated processes.
• Transparency – tamperproof end-to-end tracking minimises the risk of loss and introduction of counterfeit components. Further, when stock can be monitored at this granular level, the opportunities for ancillary activities (such as financing) then increase.
• Provenance and traceability – visibility of a component or materials origin. This is particularly useful for an organisation at the end of the supply chain looking to give ESG assurances to their customers.

It all sounds great – where are the issues?

Information, control and competition – As with all solutions built for sharing potentially commercially sensitive information, confidentiality and security are vital. The use of cryptography within blockchain solutions should in many ways be the beginning and the end of the discussion (the risk is designed out of the system through the way it is built). However, it will be essential, before agreeing to use a blockchain platform, to understand who is sitting behind the network and if anyone individual or group of people is controlling the code. The idea of the technology being decentralised should in theory mean that no one person or group of people controls it and therefore it cannot be manipulated. However, understanding these structures and governance will be vital in considering whether there are any issues associated with you sharing your commercially sensitive information within the same network as your commercial counterparties and competitors (even if that information is not in a readable form).

Operational adoption – At a more practical level, the automation of data transfer will be a key issue for participants on the platforms – it is clearly unrealistic to expect participants in a network to need to expend resources as part of the adoption process in implementing new systems in order to integrate. Understanding what your current systems do and the terms and conditions upon which you receive such systems will be a key step in assessing how easily you will be able to integrate.

Quality of input data – As with any record, the quality and integrity of the input data is key. Numerous examples of where development is taking place in this field deploy machines which capture data and directly share this with the blockchain ecosystem (commonly referred to as the “Internet of Things”). Other examples can include direct integration with your native ERP. This reduces the potential for human error or indeed interference with the data capture process. There is, however, no short cut to ensuring that the governance and oversight processes in place around those processes for capturing data are themselves stringent and incorruptible – without that, you are in no better position than you are today with a form of contractual confirmation.

Matching the digital with the physical – while the data may not be capable of manipulation, the component or material may be. Being comfortable that what you receive in the real world is a match to the digital record on the blockchain is a vital part of the process. Some of this will be achieved through process monitoring and disclosure during any procurement procedure. However, understanding how the digital and physical worlds meet in a way that is both incapable of substitution is vital in assessing the reliance you can place on the data provided.

So is it worth it?

Having barely scratched the surface on the opportunities and challenges presented by blockchain, it is difficult to reach any holistic or overarching conclusions. What can be said however is that this is a technology that is not going away. Blockchain has the promise of solving many real-world problems but mainstream understanding of both the benefits and risks is vital to engage participants and increase adoption.