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Software & Systems

Blockchain Not Compelling Enough for Corporates?

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February 16, 2016

Blockchain’s speed and efficiency may not trump existing trust between trading partners.

financial system softwareCorporates tend to be slower than the financial industry when it comes to adopting new technology (and both are slower than consumer adoption). And that slow uptake appears likely to be the case with blockchain technology, no thanks to their banks that are moving full steam ahead to explore the technology’s benefits.

A study released in February by the Aite Group, based on in depth interviews with bankers, corporate executives and technology experts, found that most corporates are unfamiliar with potentially groundbreaking blockchain technology, and those that are will most likely take a “wait-and-see” approach to adopting it.

Senior analyst Enrico Camerinelli, the report’s author, notes that one reason corporates are late to take on the blockchain debate may be a “simple lack of interest.” This is likely because they haven’t had the sort of eye opening event experienced by their bankers, similar to one Cypriot banks endured when depositors turned their fiat currency into bitcoins to usher their deposits out of Cypress when a one-time levy was of 6.75% was proposed to rescue the country’s banks. Bitcoin initiated the use of blockchain technology, which banks and technology firms have since sought to separate from the controversial crypto currency.

Blockchain transactions are called “trustless” because the parties involved use “smart contracts” that automatically execute the transaction only if specified conditions are met, and while they may not know each other they exchange value with certainty and no need of third-party validation. However, says Mr. Camerinelli, corporates typically have a high level of faith in their immediate suppliers or customers, so a trustless blockchain adds little value.

Further, there has been a clear shift to “open account business,” when a seller ships goods and the necessary shipping and commercial documents directly to a buyer, who agrees to pay the seller’s invoice at a future date. The open account process is typically used between established and trusted traders, Mr. Camerinelli said. This is prompting banks to seek to re-engage with buyers and suppliers by developing a blockchain-based alternative.

However, “if open account transactions are founded on trust and keep banks out of the picture, why should corporate trade partners want to get them back with a blockchain?” Mr. Camerinelli says, “Since open account transactions are based on the principle of trust between parties, why the need for a trustless distributed ledger technology?”

Mr. Camerinelli says his research suggests corporates will require use-case evidence before their existing business-to-business partnerships can fully adopt blockchain applications. Blockchain would have to provide a clearly beneficial alternative to current processes, and that may be challenging. For example, he says, no company runs totally digital flows from end to end, so transitioning data from paper-based documents to blocks in a digital chain will require significant convincing.

Mr. Camerinelli notes that trade finance is often viewed as the area that would benefit most from blockchain applications, but trade finance partnerships area now established on trust, so there’s little reason to change. In short, blockchain applications are presented as replacing intermediaries, which safe-keep trading records, with a decentralized ledger that no one single counterparty owns or controls. But corporates probably don’t want their business transactions shared, for all to see.

“The untold truth is that the last thing corporations may want is to give total visibility of their trade transactions,” Mr. Camerinelli said. “There is the problem of revealing too much information: A company does not want its competitors to know where it’s getting goods. Commercial confidentiality is the most important element to preserve.”

Global financial institutions let it be known in 2015 that they were actively exploring blockchain technology, and so far their intent appears to be to make their internal processes more efficient, and eventually pass on those efficiencies to clients, such as corporates. Mr. Camerinelli says a flaw in this scenario is that “a necessary condition for a transaction to run on the blockchain platform is that all interested parties must directly participate and be involved.”

Blockchain’s speed, accessibility and transparency are highly attractive elements for corporate treasurers, but the process it introduces is very different from current practice. If a corporate treasurer were to execute a payment transaction using blockchain, for example, the treasurer’s identity would have to be registered, fiat currencies moved to a digital wallet previously generated, a private cryptographic key uniquely created, and the transaction electronically signed before it is passed to the distributed ledger, Mr. Camerinelli says.

Such actions would be new for treasurers and require them to change their daily habits, he says, adding “this demands …. That before launching any blockchain-related program, a bank must be very clear and extremely convincing about what is in it for its corporate clients.”

So far, he argues, banks haven’t done that, and that similar to the bank payment obligation (BPO) project that remains “still at the starting grid” because banks have not relayed its benefits to corporate clients, they risk a lack of demand for the blockchain-powered services they create. Of the 95 corporate executives Aite Group recently interviewed, of which 66 were supply chain and treasury managers, more than 80% said they were unfamiliar with the term blockchain.

Mr. Camerinelli says banks can advertise that the benefits of blockchain applications will ultimately benefit corporates, but this demands that “before launching any blockchain-related program, a bank must be very clear and extremely convincing about what is in it for its corporate clients.”

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