The clink of glasses cuts through the cacophony of friends and new acquaintances chattering around the room. Waiters move smoothly through the crowd offering trays of sushi to the assembled guests. Looking at the selection of rice parcels on offer, a woman picks up her phone and scans a barcode on the tray. Within seconds, the app shows her where the tuna on this sushi has been fished, and confirms its sustainable, regulated source. She smiles, picks up a piece and pops in in her mouth. “Delicious.”
Fact or fiction? At the ConsenSys Ethereal conference in New York in November 2018, the provenance of the tuna on the sushi served for guests was authenticated through an Ethereum application. The tuna scenario is a commonly cited exemplar of how a distributed supply chain ledger can deliver value over and above that already achieved with traditional technology. In the fully realized future, transparent records which can be independently authenticated via an immutable, independent source will give regulators confidence. Prime entry from sensors in the widening Internet of Things will mitigate human error and reduce the risk of deliberate falsification of records, ensuring that raw materials originate from a regulated source and that goods are transported under the right conditions. Hashed identity and qualification records will allow secure and reliable verification of current permits for people at every stage. It is a compelling vision of the future value of blockchain, and the building blocks are already in place in the present.
Business Adoption of Distributed Ledgers
The journey toward realization of a digital currency did not happen in a vacuum. The evolution of software tools, process automation and the World Wide Web, and the strides both in developing strong cryptography and bringing it out of government control, have had enormous relevance to business. Peer-to-peer networks developed before cryptocurrencies, and enterprise has always had to deal with mutually suspicious groups and maintaining the security of commercially sensitive and personally confidential information, but blockchain adds a new dimension. The publication of the Bitcoin white paper inspired not only cryptocurrency enthusiasts but also innovators who identified the underlying structure as a solution to some of their business problems.
Professor Mike Smith was one such innovator. During our wide-ranging discussion, Smith told me that after reading the Satoshi whitepaper in 2011 he found that the concept resonated with him. He dabbled briefly in mining and narrowly avoided the 2014 collapse of the Mt Gox cryptocurrency exchange, but a business challenge crystallized for him the real value of blockchain. A Scandinavian data protectorate approached one of his clients with an informal complaint that data the business collected for mental health assessments was being altered after collection. This was not the case, although data smoothing is common practice in multiple industries. Smoothing is used to expose trends and key indicators in data sets that may be noisy or peppered with extremes. Smith’s focus, however, has always been on retaining raw data in its original form, both for its base integrity and the future usefulness of the information.
The challenge was to prove to the complainants that the data was stored exactly as collected. Smith had already tested the principle that 256-bit hashing produces a unique string from any data, and therefore started out by concatenating all the timestamped data sets collected in a single day and generating a hash. The hash of the second day’s data was then recursively hashed with the previous day’s string to give each day positional integrity in a chain: a timestamped blockchain. Finally, the hashes were broadcast on three different websites, because “multiple transmissions of data keep people honest.” The regulators were able to verify that the data was unchanged, and the complaint was quietly shelved.
This simple application is reflected in the most successful uses of blockchain: it is a great example of a problem being solved in the most appropriate way. The greatest threat to the reputation of distributed ledger technology is enterprise defaulting to blockchain as a silver bullet, manipulating the solution to fit, and losing sight of the original problem in the process.
Do You Really Need a Blockchain?
The cry that is guaranteed to strike despair into the heart of a responsible software developer is “we need a blockchain.” When an organization sees a problem cantering toward it from the horizon, a knee-jerk reaction is often to look to the newest technologies for a solution. A classic example of this is the reaction of the Philip Hammond, then Chancellor of the Exchequer in the British government, during the protracted negotiations around the United Kingdom’s proposed exit from the European Union (Brexit) in October 2018. Faced with the almost insurmountable challenge of securing a frictionless land border between the UK and European Union on the island of Ireland, he clutched at the straws of emerging technology as a way to maintain the existing freedom of movement and avoid imposing border controls in a historically difficult location.1 “There is technology becoming available,” he said. “I don’t claim to be an expert on it, but the most obvious technology is blockchain.” He is not alone in making the erroneous assumption that a new problem has to be solved by new technology. The reputation of blockchain as a valid option in a broad toolkit of potential solutions has suffered from fundamental misunderstandings as to its nature and its limitations.
City Web Consultants is a software development company with experience in deploying a range of traditional and emerging technologies to meet client requirements. Its founder Adam Clarey has over the years watched a string of new concepts and ideas move from a state of overhyped excitement to disillusionment when the promise is not realized. Occasionally the business is approached by people who just have their eyes on making magic internet money at little risk to themselves. Some proposals have no business model to speak of, driven by a desire simply to use the technology and present a “solution” where there is no problem to solve. Others have a genuine business proposition but have jumped at a buzzword rather than working through the logical process of identifying the most appropriate technology to deliver what they need. Blockchain is unlikely to be the solution: in most cases, the real challenge is to define the client’s processes more clearly. Clarey is generally skeptical of the hype. “I have yet to come across any real-world project that truly benefits from using blockchain over any traditional technology,” he says.
The excitement that overtook blockchain, as distinct from contemporary technologies, was largely due to the fundraising opportunities in the ICO gold rush. Clarey reflects on the madness of that period:
During the boom of 2017 so much silly money was being pumped into blockchain / crypto projects that people’s greed got the better of them. Those “investors” overlooked the basic business models and/or underlying technology within these projects as [an ICO] was seen as a way to make large returns on their investment… I lost count of how many times I heard “blockchain will be the next internet.” Silly rabbits. Since the bubble burst and people got burned, investors and businesses are now far more cautious and critical. Money is only flowing where there might be a genuine use-case for the technology.
The decline in easy ICO fundraising has brought good projects to the fore, where transparency and immutability can deliver real benefits and using a distributed ledger is an effective solution to the right problem. Blockchain is especially relevant where parties who do not know each other and have no intermediary need a mechanism to trust the recorded data. This need could arise because of a failure of systems of governance, or where consumers outside a supply chain want to confirm the source of a raw material, or where there is a need for trust between commercial organizations without any direct business relationship. It may also involve digital asset ownership, custodianship and exchange, reward mechanisms, and any automation that requires decentralization. Process efficiencies are being achieved using blockchain over traditional software, most notably in asset tracking, simple supply chains, and administrative tasks involving multiple parties. There are even some business models that have been proposed in the past but never realized and can now be achieved with the application of distributed ledger technology. There is a shift occurring from disillusionment to practical applications as blockchain claims its place in the technology landscape.
Blockchain Applications in the Real World
From processing, mining, harvesting, or manufacturing of products through to their consumption by the end consumer, blockchain applications are springing up in the most unexpected corners. While a seamless network of transparent ledgers spanning the globe is still the preserve of futurist fiction, there are commercial systems in place for authentication in the food supply chain, for provenance of luxury goods, and for elements of transportation, among others. Behind the scenes, administrative functions are being overhauled thanks to this technology, which enables transparency and collaboration between mutually suspicious groups. In particular, the financial services sector has been quick to identify those aspects of robotic process automation which would benefit from decentralization, and relationships with other industries such as the legal profession where trust is a factor in the smooth running of systems. Banking and auditing functions are working on a variety of blockchain applications, which range from small proofs of concept to deployed and scaling systems.
In the world of large capital projects, both public and private, blockchain models are improving the record keeping for complex supply chains and for decision approvals from design intent through construction and operation. The long-term nature of infrastructure projects, which may endure for decades, if not centuries, means that reliance on corporate knowledge and individual memory is unreliable, and assets may pass through several hands over their lifetime. Authentication of information is essential across the whole lifecycle of a capital asset.
Let’s look in more detail at some of the new business practices that have been enabled by blockchain technology across all these sectors and examine the requirements for a successful blockchain implementation.
Getting to the Truth
One of the greatest misunderstandings of the nature of blockchain is that it is a repository of absolute truth. Yes, the immutability of the records held within the blockchain ensures that transactions are protected by what Joseph Lubin, part of the original Ethereum team and founder of ConsenSys, describes as “military-grade tamper resistance.” You can be confident that a transaction or document authenticated by reference to a blockchain record is original and unchanged. But what is the subject of the transaction? In the case of cryptocurrency, coins are generated from within the construct and the transactions recorded relate to assets whose provenance is certain. As soon as you step outside the virtual world and start to represent the physical in digital form, how can you be sure that the asset making its immutable way through these decentralized ledgers is the right one?
Reliable Prime Entry: Garbage In, Garbage Out
You cannot trust everything that a computer tells you. For decades programmers have lived by the “GIGO” principle: if the inputs into any system are garbage, then what you get out, however good the processing in between, will also be garbage. Self-styled digital troublemaker Terence Eden applied the principle when attending an early talk by the team behind an art certification and verification platform. What if, he wondered, artwork being tracked by the blockchain was not the valuable original but a deliberately authenticated fake? His blog describes his spur-of-the-moment test of this concept during the company’s presentation, accessing an early demonstration version of the platform.2 “Long story short,” he explains, “I convinced them that I painted the Mona Lisa. For this ‘proof’ I provided ... An e-mail address [and] a photo of the Mona Lisa from Wikipedia.”
It is important to recognize that Verisart is working toward reliable physical and digital verification of provenance and that the platform is now being used commercially in the art and collectibles market, but Eden’s prank highlighted clearly and simply that without trustworthy prime entry, blockchain records are not worth the data bits they occupy. The blockchain guarantees the truth of transactions, not absolute truth. For businesses that operate in the physical world there is a need to minimize or eliminate the risk of human error and deliberate interference at the point of data entry, making it more inconvenient to defraud the system than to maintain its integrity. Much of the work to be done will rely on behavioral change and incentives to be more rigorous in ensuring the accuracy of transactions, and this is already being observed in some blockchain implementations (for an example, see the Kraken IM case study later in this chapter). To tighten up our blockchain records, we can turn for help to other emerging technologies.
Intersection with the Internet of Things and Artificial Intelligence
The Internet of Things (IoT) introduces connectivity into everyday physical items, from smart kettles to intelligent buildings. Ondrej Vlcek, CTO and president of cybersecurity provider Avast, estimates that there will be up to 50 billion consumer devices online by 2025, to say nothing of the billions of commercial sensors, tools, vehicles, and machines that are rolling out rapidly as data connectivity improves, particularly with the introduction of 5G networks in major economies.
These sensors offer two things. First, the wealth of data that they collect gives deep insights into the behavior of the world and people within it. This informs and trains artificial intelligence (AI) to identify anomalies; AI is already being used in fraud detection, reducing the risk of inaccurate data making its way into centralized or decentralized ledgers. Second, direct communication from sensors to the ledger removes the human interface entirely. This is a key element of the IOTA blockchain discussed in previous chapters and is essential to the reliable operation of many enterprise blockchains.
Plenty of blockchain-integrated IoT scenarios have been suggested by researchers. One notable example from Huckle, Bhattacharya, White, and Beloff 3 follows a commuter journey, with a connected vehicle autonomously arranging its routing to refuel (or recharge), while the blockchain application confirms the identity of the driver, triggers the car to set up the preferred driving position for that individual, and enables payment for fuel using a smart contract without human intervention.
Case Study: National Archive
One particularly interesting combination of artificial intelligence and blockchain has been piloted by the UK’s National Archives in association with the University of Surrey and the Open Data Institute. The work of the ARCHANGEL project on underscoring archival authenticity with blockchain,4 published in 2019, has not only demonstrated a solution to an archiving challenge but may have greater impact on authentication of other media. Mark Bell of the National Archives told me more about this two-year project. The team started out experimenting with blockchain use cases in archiving. One of the challenges laid down by the Archives was how to manage the rapid change in media used for the recording and storage of video footage. Even as consumers, in our lifetimes we have seen camcorder tapes of family events converted to VHS, then DVD, then MP4. How can we be sure that the childhood footage we view on MP4 is the same as the tape made in the heady days of a 1970s summer?
The authentication of a record by comparing hashes is well established and already in use for born-digital records. Any such files are hashed on sending and verified on receipt as they move through departments, as part of a centralized process. One of the blockchain challenges addressed by the team looked at applying the same technique for independent, decentralized verification of original university research data years after publication. Video records present a far more complex problem. How do you verify content when you move from format to format, or from high to low resolution? The hash of a VHS video will be different to the hash of an identical, uncompromised MP4 even when the content is the same, because the formatting data causes a variation in the record. This is where artificial intelligence comes in to enhance the solution.
The ARCHANGEL team introduced content-aware deep learning to strip away the format-specific data within a record and isolate the footage beneath. Every version of the video record has a hash related to the original, and the common content is the traceable hash which runs through the archive. Blockchain comes into play when the transparency of records requires an immutable public chain of evidence. This is an excellent example of two complementary technologies playing to their strengths. There are also nuances to this implementation of blockchain which are specific to the National Archives. Some of the records they hold are embargoed for decades under British law: Census data, for instance, is released a full century after collection. In this context, even file names can be sensitive. This requires a permissioned structure, and ARCHANGEL is currently using Ethereum, with open and closed records and a Proof of Authority consensus.
The team also ran a trial with international archives, including the National Archives and Records Administration (NARA) in the United States, agencies in Estonia, Norway, Australia, and the National Records of Scotland. This substantial element of the work captured standard hashes of archived documents and demonstrated the necessarily collaborative nature of blockchain.
Bell points out that when work started on the project in 2016 the aim was simply to develop reliable authentication for the Archives’ video records. Over the intervening years, the scandal of deep fake video has emerged, and the question of authenticity has been thrust into the public eye. This is an obvious next step for the research team,5 whose solutions for verifying footage under their control can be turned to the task of identifying fraudulent content. It is refreshing to find an emerging problem which invites an emerging technology solution.
Provenance and Authenticity
We have already seen the work being done in authentication and verification of art and collectibles. Goods that are scarce and highly valued are a magnet for counterfeiting, and blockchain is helping to fight the fraudsters. Achieving reliable proof of authenticity is the problem, and accurate prime entry combined with immutable digital verification delivers a solution.
London’s award-winning Everledger6 pioneered the tracking of legally mined diamonds using forensics and digital asset twinning on a hybrid public/private distributed ledger framework. The physical attributes of a diamond are already recorded by laboratories, defining up to 40 different data points to produce a unique digital fingerprint. This is hashed to Everledger’s Diamond Time-Lapse protocol, where more than a million individual, unique diamonds have already been recorded. Of course, representing a physical diamond digitally is something that could be replicated, but the complexity of the task is enormous. When the cost of being a bad actor is greater than the possible return, the system has inherent behavioral security. Of course, there is a strong commercial thread to this development. Everledger’s work has huge implications for the insurance industry because accurate identification of diamonds is a weapon in the war against fraudulent claims. According to financial markets commentator Chris Skinner,7 65 percent of fraudulent diamond claims go undetected. Validating the provenance of a diamond delivers confidence in its origins, strikes a blow against illegal mining and its terrible social repercussions, and provides a digital proof of ownership.
Top fashion brands Louis Vuitton and Parfums Christian Dior, under their parent umbrella of LVMH, have collaborated with ConsenSys and Microsoft to develop the Aura platform, launched in May 2019.8 Their goal is to give the consumer confidence and maintain the value of their premium brand. Aura “ensures the authenticity of the product, provides details on product origin and components (including ethical and environmental information), instructions for product care, and the after-sales and warranty services available.” Aura was a natural extension of the Louis Vuitton Track and Trace program, building trustless authentication into the model. Not only has the company embraced blockchain, but it has opened up Aura to other luxury brands, recognizing the need for collaboration to fight the endemic fraud and counterfeiting in this sector.
Creation to Consumption
Tuna, Mangos and More
The supply chain is frequently cited as a perfect use-case for distributed ledger technology. Increased scrutiny of the origins of manufactured items, concerns for the environmental impact of the things that we use, and differing standards of health and safety, quality, or employment practices across the world, can be resolved by improved transparency and traceability. Potentially, every step of the way from raw material to finished product could be recorded and authenticated through blockchain. By tracking the provenance of components, ingredients, and materials, the purchaser can be confident that goods meet every relevant quality standard and that they are the genuine article. The potential to reduce counterfeiting and raise standards is significant. Combining a straightforward provenance chain with smart contracts smooths the cashflow of the participants, even across borders. This application of blockchain technology is possibly the furthest advanced, with multiple systems in active development and some at a stage of client readiness.
The tuna supply chain scenario envisages the involvement of multiple mutually suspicious parties from fishing to regulators to transport to processors to wholesale and finally to the consumer. The current state of supply chains involves trust relationships and regular verification of data. Businesses are always looking for a competitive edge, and this could be achieved in several ways. They might expand the supply chain beyond trusted parties, reduce the costs and the administrative burden of verification and regulation, or appeal to the consumer with greater transparency around sustainability, source, and authenticity. Blockchain is one tool that can facilitate these business model changes.
The first step in establishing a reliable digital record is to trace the physical asset and capture its movements in a way that can be relied upon. Supply chains already have the workflow in place to trace goods, and regulators rely upon the records kept and their own inspections to ensure that our clothes are not being made in factories that breach health and safety laws, or that tuna is being fished from the right waters by registered fleets. The difference that blockchain makes is locking the records into a distributed ledger and enabling them to be quickly authenticated by actors in the chain who do not have a direct relationship with either the organization or the individual who posted the data.
Distributed ledger supply chains are being developed and tested around the globe, and in October 2018 the IBM Food Trust9 blockchain went live as a commercial product. During the proof of concept phase, IBM worked with Walmart who challenged them to trace two mangos from farm to store. Using existing systems this process took almost a week to run, while the blockchain-based system completed the task in 2.2 seconds.10 Since then, IBM Food Trust systems have been adopted by other North American store chains, notably Albertson’s,11 and organizations including the National Fisheries Institute.12 In Thailand, exporters of the legendary durian fruit are working with DiMuto, a Singapore-based startup, to transform fresh durians into traceable digital assets, tracking each individual fruit along the supply chain.13
It’s early days in such a complex area and there are many issues to overcome, not least that, as we already know, a blockchain is only as good at the data that is fed into it. This is already being addressed by organizations in the sector, from the largest players to businesses like London-based startup AgriLedger, whose holistic approach to the value chain begins with Haitian farmers. When reliable inputs are overlaid with transparency and trust, this has implications for proof of ethical sourcing, distribution of wealth through the mechanism of smart contracts, and a reduction of opportunities for fraud and corruption.
Fighting Fake Pharmaceuticals
The provenance of commodities in the health supply chain is particularly sensitive as counterfeiting and human error in producing pharmaceuticals can have a direct impact on patient safety. The industry was quick to recognize the potential of blockchain to tackle the problem of compromised and fake medicines. According to Clauson et al. in a 2018 paper published in Blockchain in Healthcare Today,.14 not only the supply chain but the security of medical devices had the potential to be improved with blockchain applications, but at the time most initiatives were still in a proof of concept or pilot phase. This is still largely the case, but with increasingly substantial commercial and regulatory backing. Legislation has made drug traceability a strategic priority for pharmaceutical companies, including the 2013 enactment of the U.S. Drug Supply Chain Security Act (DSCSA). The 2023 deadline for compliance has pushed forward the development of new processes, and blockchain is at the heart of pilot projects with IBM, KPMG, Merck, and Walmart, according to Rachel Wolfson writing in Forbes in June 2019..15 Walmart, whose Health and Wellness sales accounted for $35 billion of their U.S. revenues in 2018, is a staunch supporter of blockchain technology and has also stepped in to join the MediLedger consortium, another group focused on pharmaceutical tracking.
Why is blockchain a suitable solution to this problem? The fragmented nature of the U.S. medical industry, reported Wolfson, makes a decentralized system the most appropriate structure, ensuring transparency and trust for multiple parties from manufacturers to consumers. Blockchain satisfies the needs of mutually suspicious parties who want trusted information presented on a transparent (albeit permissioned) platform.
Crossing Oceans, Crossing Borders
Any implementation of new technology in an enterprise must confer a benefit, and the introduction of Insurwave, a blockchain-based system for shipping insurance, is a case in point. Freight giants A.P. Moller–Maersk faced a challenge in managing the complex ecosystem of the purchasing and administration of their highly transactional insurance process. Vessels can change hands frequently, thereby changing the insurance premiums as vessels are added and removed from the insurance coverage and requiring the annual reconciliation of their asset register for overall insurance risk exposure purposes. The first step was to digitize the vessel data, understanding both the current data and new data points that would be enabled by blockchain. In May 2018 a consortium including Ernst and Young, Microsoft, network security experts Guardtime, and insurers XL Catlin (now AXA XL, a division of AXA), MS Amlin, and Willis Towers Watson launched this blockchain solution based on the R3 Corda framework,16 merging the existing digital data capture and transactions through smart contracts. At the time I spoke to XL Catlin’s Digital Leader Hélène Stanway, and Ghanshyam Patil, Digital Lead for Blockchain, who explained more about the Insurwave project.
Patil told me that Corda was technically suitable because of the maturity of its smart contracts and validation processes and its capacity to scale the volume of stakeholders as the systems roll out to other insurers and fleets. The Corda framework is popular in financial services as a semitrusted network, and this suited the purposes of the consortium. Although insurers and brokers needed full transparency to keep their underwriting accurate, other parties had to be controlled by permissions. In a commercial market, it would be impractical to make insurance deals and premiums transparent, as each insurance decision takes account of multiple risk factors which would not be clear to third parties, and may result in disputes. The notary function, handled by Ernst and Young, provides the glue to keep the system churning. Stanway explained that the global asset register is held by the notary and smart contracts manage the insurance transactions when vessels are bought and sold. The system makes use of the IoT for prime entry to the ledger, and the sensors are delivering additional benefit by collecting more data points than could be captured or processed by the original system.
The proof of concept ran successfully during 2017 and Insurwave rolled out in May 2018. It has since widened its scope to include not just the hulls but each vessel’s machinery and added a further piece to the jigsaw thanks to a partnership in May 2019 with China’s Zhuhai port. There are also developments around interoperability with other blockchains: the vision of a global, joined up supply chain system cannot be achieved with siloed systems.
Another consideration is that if sensors are tracking the location of the hulls, then you could track the containers within them, and ultimately goods throughout their transit. Kuehne & Nagel’s17 existing Verified Gross Mass (VGM) portal already tracked the weight of loaded cargo to fulfill regulatory requirements, and in 2018, they incorporated a blockchain element for data verification and to provide transparency of shipment information. As data sets and records are combined over time, the picture of the cargos that cross our oceans will become clearer.
The Way We Work
Automation of back office services is not a new phenomenon. The humble spreadsheet was, until the arrival of VisiCalc18 in 1978, a time-consuming job with paper, pencil, and eraser. This “first killer app” of the computer era changed finance roles forever, replacing a repetitive task with code and moving the focus of the accounting function from calculation to analysis and forecasting. There remains very little that is not in some way automated, with the possible exception of the manual sampling and checking processes of a traditional audit.
Finance and related functions may shun the limelight, but they are trailblazers in the use of emerging technology, pushing to make processes more secure, less prone to human error, and more reliable. We are seeing the use of artificial intelligence in fraud detection, data gathering from the connected devices and sensors of the IoT, forecasting based on smart data, and authentication of transactions through blockchain technology. The concepts of distributed ledgers and triple-entry bookkeeping come naturally to accountants, and finance and administration professionals have been quick to exploit this natural advantage in decentralizing processes. Significant advances have been made in the world of financial technology (fintech) around banking, escrow, securities administration, and audit transparency.
Decentralizing Finance
The traditional centralized banking system seems at first sight to be working perfectly well without a blockchain. Public perception of bank payments, particularly in a world where a tap of your smartphone to a sensor is becoming commonplace as a payment method, is one of simplicity and speed. Behind the scenes, however, it is a story of complex reconciliation of multiple accounts, administratively burdensome and entirely ledger based. If a payment is moving from one bank to another, there are immediately multiple parties involved in the transaction, and the cumbersome structure is a prime candidate for reworking in a distributed ledger. There is no reason why fiat currency could not be managed using a permissioned blockchain approach. There is no requirement to create cash, therefore no mining to be done, but the transfer of money and all related transactions can still be immutably recorded and confirmed by the distributed parties, that is the banks and the account holders.
A blockchain-based system powered by smart contracts can deliver greater transparency, confidence in the integrity of the records, and long-term cost savings into the bargain. Financial services and banking consultant Kapil Dhar told me that there is a huge amount of collaborative distributed ledger development going on under the radar across banking and financial services. Applications are being trialed at proof of concept scale in several areas as banks assess the decentralization use cases within their back-office functions. The expected benefits include potentially significant economies of scale and scope. The most mature projects have addressed cross-border payment applications, and adoption of the Ripple distributed ledger across banking in several countries worldwide is accelerating development. Ripple (using its XRP coin to effect transfers) and more recent competitor Stellar (using XLM), are fintech-specific technologies designed to manage cross-border payments. Some systems are live, including Santander’s One Pay FX19 app, which was the first blockchain-powered foreign exchange system to launch to consumers, released in the UK and several other countries in April 2018. In the securities market, ownership transfers are already being made using distributed ledgers. The first such transfer took place in March 2018 between Credit Suisse and ING,20 and in April 2019 the Moroccan and Kuwaiti central securities depositories successfully piloted a cross-border securities settlement. The other priority for banking is work on digital identities to improve the Know Your Customer (KYC) process and combat money laundering operations.
Practical blockchain applications are emerging across several areas of financial services, and one institution, Northern Trust, has advanced blockchain technology with a series of U.S. patents.
Case Study: Northern Trust
In March 2018, Northern Trust deployed for its Guernsey-based private equity operation a set of new enhancements to its January 2017 release of its Private Equity Blockchain product, including a system whereby their auditors PwC, as well as KPMG, can directly access fund transactions, permitting real-time audit for private equity lifecycle events..21 Anthony Stevens, Global Head of Product Innovation at Northern Trust, explained that the work began with onboarding clients and streamlining private equity lifecycle events, for example a capital call event using functionality developed using more “traditional” technologies. The blockchain aspect of the product development became important when interacting with firms who needed access to raw data that was a true golden copy of the fund’s events, regulators and audit firms being good examples. The external parties can access nodes on the system and have developed technology that will provide alerts when specific data points are added to the node, enabling them to extract data as required. As a result of this simple innovation, the auditors reported a significant operational reduction for their work on the private equity accounts involved in the first rollout.
The underlying blockchain for private equity servicing took time to settle. The initial stack was built on Ethereum, moving to an IBM supported Hyperledger on the IBM cloud and eventually to Hyperledger’s open source Fabric framework on the Azure cloud. The first live capital call was processed on the blockchain in 2017 with the fund managers including Emerald Technology Ventures processing multiple calls via the application from mid-2018 onward. The system reached a significant landmark for scalability in June 2019 when Northern Trust announced its transfer to Broadridge Financial Solutions..22 The initial rollout expanded the platform’s reach to the state of Delaware, where Broadridge are continuing to develop the system’s functionality at scale. The aim of the transfer to Broadridge is to allow the full ecosystem to be developed at a much quicker pace, and for all parties involved in the Private Equity asset class to access the groundbreaking technology developed by Northern Trust.
The innovation at Northern Trust has continued. Stevens and his team turned their attention to some of the administrative headaches around their private equity business to see whether blockchain might provide a viable solution to some of their specific challenges. The first of these related to the new Economic Substance regulations23 governing businesses domiciled on Guernsey. Registration in this British Crown Dependency, located just off the coast of France, has a number of benefits for certain financial organizations. The substance regulations were introduced in January 2019 to ensure that firms running funds on the island could prove to the local regulators that they were managing the funds in line with the local rules, provide transparency into the processes, and ensure that profits registered by businesses on the island reflected “economic activities and a substantial economic presence.” This proof of economic substance included a requirement for directors to prove they were physically located on the island when voting on board and statutory matters, as evidence that a business was being properly directed and managed within the jurisdiction.
In a similar vein to Professor Mike Smith’s solution when faced with Scandinavian regulators querying his client’s data, Northern Trust developed a mobile voting app and collected GPS data from the directors’ devices, hashing and timestamping both the location and the vote to the satisfaction of the local regulatory rules. In the all too common event that a director was genuinely unable to reach the island to vote, due to vacation or, more likely, a fog-bound airport, then proof of intent such as flight reservation and cancellation records were used in place of GPS data, so providing the required proof in case of a fund review.
The team then turned their attention to the legal agreements governing the management of private equity funds. Requirements for different funds can be complex because options around ethical investing or personal beliefs must be taken into account. The legal agreements surrounding the funds must identify any exclusions to be applied in individual cases. For example, one set of investor documentation may specify that there is no investment to be made in alcohol, or armaments, or companies domiciled in particular countries. This must be translated to the appropriate legalese and enforced in the management of the fund.
Working in partnership with tech startup Avvoka, part of an accelerator program within law firm Allen and Overy, Northern Trust developed the capability to deploy legal clauses as smart contracts directly from a digital legal agreement..24 The Avvoka engine holds the template of a legal agreement, which can be parsed appropriately for the preferences of whichever law firm is acting for the client. The exclusion requirements are selected by a simple drag-and-drop from the smart contract library and incorporated in the legal agreement in the language required by the lawyers. This avoids forcing standard exclusion wording into complex documentation while retaining the underlying consistency of the smart contract. Once approved and signed, the agreement is recorded on-chain and the smart contract is generated direct from this document. This workflow avoids the challenge of encoding the detail of a legal agreement by turning the process around and starting from the needs of the developer.
The development of smart contracts for exclusionary purposes is ongoing: as clauses become more complex, automation must follow. For example, does the exclusion of investment into companies generating profits from alcohol apply purely to drinks companies, or to groups where just a small percentage of the revenue comes from this industry? There is also the question of making changes to smart contracts once they are incorporated in the blockchain, and here Northern Trust have been leading with field with a number of patents addressing this process. For example, the reappointment of auditors is an agenda point in a digital board meeting, and the result of the vote automatically triggers the extension or replacement of the appropriate smart contract and changes any permissions as required.
By focusing on the needs of a specific niche, this work has succeeded in demonstrating that blockchain can be applied successfully in audit processes. We will look more closely at challenges in the wider world of accounting and audit in Chapter 7. Northern Trust’s work has also delivered tools that will be valuable in supply chain administration.
Collaboration in a Trustless Economy
Blockchain is gaining traction in business communities where there are links between key parties and a need to improve efficiency, transparency, and authenticity. It is also making an impact in fields where there is no trust relationship between parties at the same level of a hierarchy, but all of them have relevant inputs into a central point. They may be reluctant to share their information with competitors at the same level but must make it transparent to the party above. Blockchain technology has a role to play in overlaying confidential data repositories with a layer of encryption and enabling access for only those parties with the right key.
Medical records immediately come to mind as an area where this problem persists. Electronic health records are traditionally stored at provider level, which results in fragmentation and discontinuity across different databases. This is as true in a private health system such as the United States, where data is held separately by a range of providers, as in a public system such as the UK’s National Health Service, where data is siloed within geographical NHS trusts. One of the earliest pilots addressing the complexity of patient records was launched at Beth Israel Deaconess Medical Centre in 2016 by MIT’s MedRec project team..25 The white paper proposed “a distributed access and validation system using the blockchain to replace centralized intermediaries.” The MedRec system featured several mechanisms to link individual registry IDs to the system (the Registrar Contract), to link patients to each provider they had used (the Patient Provider Contract), and to form a breadcrumb trail for patients (the Summary Contract) linking back to their providers and serving as a backup allowing them to access or download their history at any time. The 2016 proof of concept for MedRec 1.0 was a success, and in order to scale the system beyond the original pilot and increase the security around medical records a new architecture was proposed for MedRec 2.0, which is under construction.
Case Study: Gospel Tech
The personal sensitivity of the data involved in health care means that the MedRec project is moving more slowly than some commercial applications of similar principles. London-based Gospel Tech has taken a comparable approach to solving a sensitive data sharing and collaboration problem for clients in the aviation industry. They explain the data paradox that led them to a blockchain-based solution:
Traditional infrastructure means key data becomes centralized in silos, protected under more and more complex layers of security, which eventually degrade as employees circumvent protocols in order to collaborate. Ironically, this focus on preventing data from moving leaves enterprises more vulnerable to breach or loss of control of their data, whilst also restricting the true value of the data to the business.
The Gospel Data Platform helps companies and their supply chains to share sensitive data securely and confidently without exposing too much or the wrong information. Under the hood is a private permissioned blockchain using a Byzantine Fault Tolerance consensus mechanism (pBFT), which manages granular, authorized access to the information that’s needed without compromising confidentiality. As Gospel explains, before their system was implemented one of their clients was managing parts traceability for aircraft across a wide supply chain by holding regular meetings to compare versions of spreadsheets. Now, all the relevant parties participate in a network of Gospel nodes with access to a single source of truth. The blockchain sits across a variety of supplier systems as an extension to each node’s existing infrastructure, allowing users to sign in seamlessly and securely using their local credentials. The delay in parts traceability has fallen to minutes, improving overall efficiency and reducing costs.
Gospel’s platform is also being used in the field of human resources and payroll processing to manage complex data flows between disparate systems. Speaking to Computer Weekly in April 2019,26 the Chief Technology Officer of NGA HR, Stuart Curley, highlighted not only the simplicity and security of using the Gospel blockchain layer but also the importance of keeping immutable records of any changes made to the data. This theme of authentication, verification, and transparency runs through every successful blockchain implementation.
Managing the World Around Us
Widening the focus from the supply chain and back office functions, management of the infrastructure which surrounds us can also benefit from using blockchain and distributed ledgers. There are two areas where development is moving forwards rapidly: one the management of energy distribution, and the other addressing the full lifecycle of large capital projects.
Decentralized Energy
The supply of utilities to homes and businesses is complex and almost without exception centralized. This reflects the historical structure of provision of the resources that we consume. Energy is a case in point: for more than a century we have relied upon huge centralized power plants using fossil fuels, nuclear energy, hydroelectric dams, waste, and renewable sources. However, technology is advancing rapidly, and the generation of power is no longer truly centralized. Solar panels are appearing on rooftops across the globe. Factories are powered by their own forests of wind turbines. Why should the provision of electricity not become as decentralized as its production?
There is a real incentive for change in the energy market. Dale Geach, technology and innovation manager for Siemens Digital Grid,27 told me that the market is under pressure to meet the energy needs of society in a sustainable, efficient, and resilient manner. This is the Energy Trilemma, and the solution lies in the transformational trends of digitalization of energy management and the move toward distributed systems.
As far back as 2016, a survey conducted by the German Energy Agency28 revealed that almost three quarters of the decision makers who responded were aware of the potential impact of blockchain, 39 percent were planning implementations and 13 percent were already trialing innovations in the areas of peer-to-peer trading, charging of electric vehicles, and using blockchain for payment processes. In a 2019 paper reviewing the challenges and opportunities around blockchain in the energy sector,29 researchers from Durham and Heriot-Watt universities working with Siemens Energy Management identified several areas where blockchain could improve current processes. These include consumer administration in billing, identity management, and even smart contract-driven provider switching mechanisms; smart grids, decentralized networks and data transfer; and disruption of wholesale energy markets. Within these, microgrids and consumer-centered marketplaces appear to be the closest to realization at scale.
Microgrids and the Rise of the Prosumer
As domestic renewable energy generation becomes commonplace, many households are simultaneously consumers and producers. These “prosumers” are distinct from commercial producers and passive consumers and are an essential node in the new breed of microgrid.
Microgrids have been in use for years: they do not by definition involve either renewable energy generation or decentralized administration. Engie30 describes a microgrid as “an energy supply network built around local power and heat generation facilities. It is designed to operate autonomously or in synchronization with a national grid within a clearly defined area.” The efficiency of a microgrid in remote locations has been established and tested over a long period of time, for example, the Hartley Bay microgrid in Canada was originally set up in 2008, predating both the Satoshi white paper and the mainstream adoption of renewables at a local or domestic scale.
The aim of the Hartley Bay project was to demonstrate advance metering and demand response,.31 one of the three significant developments in technology which are now enabling the evolution of microgrids around the world. As smart grids and smart metering roll out across existing the utility infrastructure, data collected on energy consumption becomes more granular and plentiful. This facilitates machine learning for prediction of consumption, aiding microgrid planning and design. Operationally, smart metering also enables accurate billing to be incorporated as an automatic function in the administration of a microgrid. The second key development is the increased efficiency of renewable energy technologies that put electricity generation within reach of homeowners, landlords, and businesses. Finally, the emergence of blockchain technology has provided the glue to connect the multiple independent participants in a microgrid network, and the transparency to discourage bad actors.
While established microgrids in remote communities rely on a centralized source of energy, a decentralized microgrid can draw energy from many unrelated sources for local distribution. A distributed ledger enables a microgrid to operate as a decentralized network, reducing costs and the administrative burden for both producers and consumers, and improving transparency and accountability. A fully functioning, decentralized microgrid will ultimately maintain the ledgers of individual generators, processing micropayments for kilowatts contributed to the overall grid.
As the 2050 deadline for a net zero carbon footprint is closer in capital project terms than we might think, the imperative for change is driving development. Energy innovators LO332 are behind a number of projects including the Brooklyn Microgrid (BMG) in New York, Enexa transactive energy in Australia, and the Allgau community energy project in Germany. Their original peer-to-peer energy trial in Brooklyn in 2016 involved five prosumers and five consumers and processed the first ever live energy transaction on a blockchain between a prosumer’s smart meter wallet and the end consumer. The second phase scaled to include more than 300 homes and small businesses, and in 2019 BMG reached out to the wider community to launch its local renewable energy marketplace. The project is working to educate potential users in order to ensure smooth and informed adoption of the microgrid structure as it rolls out.
Let’s now move from microgrids to macro scale and examine how major capital projects can benefit from the application of blockchain.
A Holistic Approach to the Capital Asset Lifecycle
Complex engineered assets such as offshore platforms, power stations, and process plants have a clearly defined lifecycle from design intent through construction, commissioning, and operation to decommissioning and recycling. The challenge of disposal is particularly critical because of the knowledge that is lost through the decades. How could this knowledge be preserved reliably throughout the asset lifecycle?
In 2003 four obsolete U.S. Reserve Fleet hulls, dubbed the “ghost ships,” arrived on the British coast33 to be dismantled by expert reclamation operators. After a five-year delay due to environmental protests, the Able UK Environmental Reclamation and Recycling Centre in Hartlepool finally started work to break up the vessels, dealing with pollutants and recycling what they could of the materials. The Able UK yard, which lies at the mouth of the river Tees, is still humming with activity. It was responsible for breaking up the legendary French aircraft carrier, the Clemenceau, and has regular business dismantling oil and gas drilling platforms just a few miles from the docks where new rigs are being built. Even though oil rigs return to the Tees like spawning salmon to the river of their birth, there is a knowledge gap. Local legend tells of a 36” pipe on one such platform whose purpose was lost in the mists of time and memory. What ran through that pipe? What pollutant should the breakers account for? Is it safe to recycle the metal, or is it scrap? Without a ledger of record valuable resources are being lost, as disposal becomes the least risky option in the absence of certainty.
Teesside-based Kraken IM (Information Management) took on the challenge of this complex supply chain, and now work with global oil and gas giants to turn the existing system of record to a true ledger of record. Their initial focus is on ensuring that all relevant information from individual manufacturers and contractors is available during construction and is sufficient for commissioning and operation of a vessel, platform, power station, or other major capital asset. This is a complex task: records must cover everything from the supply of 10,000 fire extinguishers to the construction of process plant and must be of comparable quality across the diverse range of pieces which make up the whole. As CEO Ian Cornwell explained, a multibillion-dollar project may involve over a million individual items of equipment, and the data on each piece must include the design intent, its function, materials, and operational information such as maintenance manuals. There are a lot of competing systems of record and teams that run them who hold this wealth of data, and as a result there is often a need for a systems integrator to make sense of the patchwork. This builds additional layers of cost and complexity and into already highly complicated projects. Furthermore, data can be transferred across different systems during the decades of operation of a capital asset, with all the additional costs and field matching challenges and failures that such transfers always involve. It’s a recipe for confusion and waste.
Kraken’s vision is to move the industry from systems of record to a ledger of record, changing a document-centric industry to a data-centric culture. Cornwell gives the example of an aspect of a project where the design intent is “I need a pump just here.” There will be engineering requirements, standards, and local regulatory constraints that impact on the specification against which suppliers will be asked to tender. A supplier may propose a slightly different material which in their experience will be more effective in the setting. Even before the pump is fitted, changes may have been made against the design intent. Recording the individual stages of approval ensures that at commissioning it is quite clear to the operator what has been supplied. This is a step toward greater clarity at the end of the lifecycle, where the asset can be dismantled based on the reality of what has been supplied, not the initial design documents. A full ledger of record for Architecture, Engineering, Construction, and Operation (AECO) would give a transparent asset history sufficient to maximize the recycling effort, creating a genuine circular economy for engineering equipment.
The Halcyon information management platform developed by Kraken initially focuses on approval milestones in the project lifecycle between supply and commissioning. The audit trail shows when an item was supplied, who supplied it, what it is, how it compares to the original design intent, and decisions affecting it through construction. This growing data corpus not only supports the asset lifecycle but gives greater scope for analysis and decision making than standalone documentary systems. There was one barrier to adoption that Kraken had to surmount: persuading engineers to let go of their documents, and to trust in the data instead. As Cornwell explained, “The only thing we cared about was the provenance. We already had an approval workflow but proving when something was signed off and what exactly it was opens doors to other functions.”
Blockchain’s transparent and immutable characteristics provided the solution. By anchoring the date, time, and approval details to a transaction on the Tierion Chainpoint network, they now had provenance for signoffs. They also achieved transparency for information that is not as static as a system of record might suggest. Decisions and planning throughout the project rely upon easily available data. For example, being able to define the weight of a unit made from many components is essential when planning the logistics of construction, such as hiring the right crane for the job.
One of the things that interested me was Kraken’s experience of reliable prime entry to the ledger. Blockchain gives us trust in transactions but is not a repository of absolute truth. How could users be sure that the milestone was recorded accurately? According to Cornwell, the action of making the transaction visible to all parties has resulted in people being more conscientious about the entry itself. This is pleasingly reflective of the original concept of public announcement of a digital asset transaction, as outlined by Wei Dai in 1998 and adopted by Satoshi in the 2008 Bitcoin white paper: Visibility is an arbiter of trust. In addition, Kraken’s clients have observed that the actual approval process has become more rigorous because of the immutable record that is generated. The engineering world is naturally risk-averse, especially when dealing with hazards such as oil, gas, and nuclear power. As accountability becomes more onerous, for example following the Hackitt Report34 on London’s 2017 Grenfell Tower disaster, parties who know they may have to stand by their decisions in an enquiry are very careful to do things right.
The Hackitt Report called for digital by default product specification and persistent identity for components, which is the ultimate goal for the AECO supply chain, and proposals went to public consultation in June 2019, which, if passed, will see persistent identity and traceability become law in the UK. Full equipment traceability has wide implications not only for safety but also to enable a decision-making shift from lowest initial capital expenditure to lowest total expenditure over an asset’s lifecycle. This holistic approach to the capital asset lifecycle may lie some way in the future, but the building blocks are in place.
Enterprise Blockchain at Scale
The adoption of distributed ledgers in the private sector has moved reasonably quickly thanks to a combination of realistic problem-solving, talent coming into the sector in search of the next big thing, and development of underlying frameworks including the Hyperledger suite, IBM Blockchain, Ripple’s early innovations in the fintech space, and spinouts from Ethereum.
The commercial imperatives surrounding the private sector have driven development predominantly toward permissioned blockchains. This fragmentation has been compared to stages in the adoption of the internet and World Wide Web by business: private intranets and bulletin boards were adopted before more open systems, and locally hosted servers are now gradually being superseded by cloud storage as infrastructure security improves and confidence increases. There are concerns around the long-term scalability of private blockchains, of which the most obvious is that in a blockchain without a native cryptocurrency, what are the appropriate mechanisms for trust once the network scales beyond known parties? This and other questions are already being addressed by developers at the coal face of distributed ledger evolution, and the next decade will be particularly interesting.
What could be achieved with blockchain technology in a world unconstrained by commercial sensitivities? Let’s turn to developments which are emerging from a different source: the world of gaming.