21
Blockchain: An Introduction for Boards of Directors
Dr. Elizabeth Valentine
Chief Information Officer of Massey University, New Zealand, and Adjunct Research Fellow and Teaching Fellow at Victoria University of Wellington, New Zealand
Dr. Greg Timbrell
Part-Time Director of Teaching and Learning in the Information Systems School at Queensland University of Technology (QUT) and Dean of Studies of the Education Cluster of Anvia Holdings Corporation
Lachlan Feeney
CEO of Labrys and Faculty, Information Systems at Queensland University of Technology (QUT)
Dr. John Puttick
Founder of GBST Holdings Ltd.
Introduction
Business contracts have evolved over hundreds of years and are still evolving today. Since the virtual currency Bitcoin arrived in 2009, blockchain has emerged as a new, Internet-based way of recording entitlements and enforcing rights within contractual relationships. In essence, blockchain is a self-contained, software-only, digital ledger system used to securely facilitate, process, and record transactions and facilitate contracts.
With any new technology, there are opportunities and there are risks. Many expectations and predictions involving blockchain are derived from the premise of disintermediation. In many ways this term sums up what is possible through blockchain and its potential impact on a wide range of industries.
Envisage currency without the need of a government—cryptocurrency; or the stock exchange minus the exchange authority—block exchange; personal, multi-service supplier healthcare records—a health exchange; or efficient government transactions with rules defined within the chain to speed the transaction and reduce bureaucracy.
Many organizations function as, or rely heavily on, intermediaries. Increasingly, organizations are looking to lessen dependence on intermediaries through blockchain and the distributed ledgers that blockchain supports. The opportunity and the risk from blockchain disintermediation is process simplification and efficiency gains, reduction in cost and time, and improved compliance.
Blockchain has begun to disrupt the way businesses, governments, and whole economies transact around the globe. Discussion of this “game-changing” technology has made its way to the boardroom for good reason. Blockchain promises to overhaul service and supply processes through open, distributed, encrypted, and programmable digital ledgers that facilitate secure and fully decentralized transactions, including contracts, of almost every type. This disruptive technology is often associated with a closely related phenomenon, the “smart contract” (Paech, 2017).
In this chapter, we outline what blockchain is and why it is important. We describe the basic elements of blockchain technology using a simple online ticket purchase to illustrate how a system might work and to introduce how security is created within the system.
Given its rapid expansion in some industries already, or those industries potentially affected, we consider the impacts and governance considerations for the following contexts: banking, start-up, healthcare, real estate, education, and government and political organizations. Finally, we provide a brief case study outlining a finance industry blockchain development at the Australian company PrimaryMarkets.
What Is Blockchain and Why Is It Important?
Blockchain is a rapidly emerging technology that can simplify and secure transactions among parties.
A blockchain is a secure, append-only digital ledger that is shared and replicated among participants in a transaction process. Blockchain systems use algorithms to provide the rules of the transaction, and advanced cryptography to secure and record collaborative consensus in transaction processing across a distributed network. Blockchain uses synchronized, smart contracts to enforce business logic without the need for central control or intermediary intervention. With no central point of control and no central point of failure, trust is generated, and process immutability and provenance are recorded in the chain of blocks created in the transaction log.
To understand blockchain and its impact on business, it is important to understand the general conditions necessary for such transactions—economic and commercial—to take place:
- Participants consent to the various parameters of transactions, including dispute resolution.
- Algorithms1are guided by commonly agreed rules which govern each specific transaction.
- Transactions are monitored.
Cryptographics2 ensure the integrity and security of the information. Further, blockchain offers additional computer-assisted business practices that help ensure processes are compliant. These processes automatically enforce the expected procedures and behaviors of a transaction or asset embedded in the blockchain. In blockchain-based systems, this controlling mechanism is known as a smart contract.
The decentralized network on which blockchain operates means transaction records are not stored in any single location. Distributed databases across the transaction chain (network participants) confirm the transactions, or blocks, with one another, replacing the need for a trusted third-party intermediary to authorize transactions.
Change is beginning to happen at an enterprise architecture level with enterprise software platforms beginning to integrate blockchain into their system portfolio. Companies can streamline processes, facilitate data sharing, and improve data integrity by using blockchain as part of their enterprise resource planning (ERP) systems.
Why Is Knowledge of Blockchain Important to Boards?
According to the NACD, “The use cases for blockchain are growing rapidly, including cryptocurrencies and the evolution of digital companies whose financial and operating model is enabled through a token. In fact, some might say we're now in a ‘token economy,’ with the representation of real or virtual assets on a blockchain spreading to raw materials, finished goods, income-producing securities, membership rights, and more” (Loop, 2018).
Blockchain is important to boards for two main reasons. First, while boards have heard of the technology, it appears they are undecided or divided when it comes to blockchain. A 2016 board of directors survey revealed that 91 percent of directors have at least heard of blockchain or distributed ledger technology. However, more detailed understanding of the implications appears limited, with respondents mostly undecided and the remainder divided: 36 percent viewed blockchain as an opportunity and 21 percent as a threat (Schweinitz, 2018).
Second, with most boards failing to demonstrate adequate enterprise technology governance and digital transformation capability, the opportunity for newcomers to eclipse the old guard is a risk of growing proportion (Valentine, 2016).
In the 2018 PwC Global Blockchain Survey (PWC, 2018), of 600 executives in 15 territories, 84 percent of participants say they have at least some involvement with blockchain technology; 25 percent are either piloting or fully implemented with a further 32 percent in the development stage with the remainder either researching (20%) or paused in the process (7%).
While financial services have emerged as the clear current leader in blockchain, the technology is expanding into industries such as energy and utilities, healthcare, manufacturing, government, retail, education, and auditing.
The Elements of the Blockchain Technology
The first known public blockchain was Bitcoin. The blockchain platform was initially built to facilitate mining,3 transferring, and rewarding Bitcoins.
As introduced, blockchain is a transaction and data storage technology. The most common current data store today is the database, a software technology first developed in the 1950s.
FIGURE 21.1 Centralized, Decentralized, and Distributed Systems
As illustrated in Figure 21.1, database design and functionality has evolved from centralized to decentralized and then to distributed web-based networks. Blockchain is both web-based and distributed.
Blockchain and Distributed Systems
Distributed networks and databases evolved rapidly as web-based communications became faster. A distributed database constantly shares data between its nodes—points of intersection/connection within a network. In blockchain, multiple devices are accessible through the network, with each device considered a node. The chain frequently has more connections between its nodes to enable this constant sharing. Blockchains are usually built on distributed databases. A distributed database may share all its data between nodes or some of it. When a distributed database acts as a blockchain system, it shares the data written on the blockchain across all the nodes of the distributed database until the process is complete, and a conclusion—a transaction record (perhaps driven by a smart contract) results.
What Is a Smart Contract?
Smart contracts, sometimes also called “chain code,” are programming scripts that can be incorporated on the blockchain to facilitate or provide logic for certain transactions to take place on the chain. The system is smart because it can be further programmed to be invoked automatically if something else takes place on the chain. The explosion of cryptocurrencies and the wide range of uses for blockchain are due mostly to the limitless programming possibilities of smart contracts.
How Blockchain Uses Smart Contracts
As blockchains evolved, platforms such as Ethereum, Hyperledger, and others specifically allowed for custom or user-defined programming scripts to be executed as a functionality. These customizable scripts, either user-defined or otherwise, opened up limitless functionalities for blockchains.
How Smart Contracts Will Revolutionize the Way We Do Business
The extraordinary diversity of possible use-cases of blockchain is due to the customizability of smart contracts.
If you can imagine writing the logic of a lawyer, a credit controller, or a government regulator, or pretty much any professional process into scripts or programmable codes, theoretically, those can be included in a blockchain smart contract. These can then be executed in a distributed way, through consensus of the participants, without the need of any intermediary. This blockchain would then record the resulting transactions on an immutable ledger and offer provenance in the form of a ledger-based smart contract.
An Example of How It Works—Purchasing Theater Tickets
A person wishes to conduct a transaction (e.g., the purchase of an online ticket to a concert). The ticket vendor manages sales for theaters, stadiums, concert halls, and other venues across the country. Each venue has its own seating system. The ticket vendor has distributed database nodes in every capital city that interact with the local venues, thereby ensuring a fast and efficient service. The customer lives in Chicago (and therefore the customer is transacting on the Chicago node) and wants to buy tickets for a show on Broadway in New York. The customer selects a show, date, and time and chooses two seats in the theater: Row G, Seats 14 and 15. The system asks for their Visa credit card details, which they enter. It then processes the request, first checking to see whether there is enough credit on their card to fulfill the transaction. Figure 21.2 shows how blockchain processes a straightforward transaction to buy theater tickets.
However, in a more complex example, at the same time, another customer in Boston (transacting on the Boston node) requests Row G, Seats 12 to 14. They are using an American Express credit card. A similar credit check takes place with a different clearinghouse. In this situation, there is potential for a double booking or perhaps the person in Chicago who completed their transaction first may miss out because their credit clearance takes a few milliseconds longer due to high traffic at their clearinghouse.
In a blockchain system both transactions would be recorded and submitted to a staging area called a memory pool. A decision process that operates across the whole blockchain distributed database, called a consensus algorithm, determines which transaction takes precedence over the other during a particular time period during which the block is created. Alternatively, this process could be handled at a smart contract level.
FIGURE 21.2 How Blockchain Works for a Simple Theater Ticket Purchase
If the person in Chicago completed the transaction first, pushing the Enter button before the Bostonian, fairness might dictate that they have first choice of Row G, Seat 14 irrespective of how long it takes to clear the credit card payment. But this is a business transaction and the consensus algorithm is driven by process rules established by the vendor.
Blockchain consensus algorithms generally determine preference order based on transaction fees. When either buyer submits a transaction to the memory pool, they will submit it with a fee attached. The “miners”4 of the blockchain system will sift through the memory pool to process the transactions with the highest fees first, as it is the miners who collect the transaction fees.
The miner will check that the buyer actually has the funds/credit to spend before processing the transaction and then will immediately deduct those funds from their account. Say the Bostonian is married to the Chicagoan and they are using the same credit card (i.e., both are using the same Visa card). In other words, the couple are using the same line of credit to simultaneously purchase a total of five tickets. The transaction that paid the higher fee will be processed, and the other transaction will be declined. This is a strength of most blockchain systems: disallowing a person to spend the same dollar twice!
Once a transaction has been processed by the miners it waits until the block is complete before being confirmed to the ledger. A block is completed when it hits either a time limit or size limit. For example, on the Bitcoin blockchain a block is completed on average every 10 minutes or when it hits 1MB worth of transaction data. In these circumstances, if a transaction is sent to the memory pool with a very low fee attached, it can take a significant amount of time before a miner chooses to process it and usually will require a slowdown in the number of transactions being sent to the memory pool.
As Figure 21.2 illustrates, when a block is closed, a new block is started. In closing the block and opening the next, several processes assure the security of the block and the chain generally. A block is made up of a header containing metadata or summary information about the block and its contents and the set of transactions. The details in the header vary with each blockchain type.
Other pieces of information in a header could include a time stamp of when the block was terminated, a block number, a nonce—this is a randomly generated number used only once for additional security—number of transactions, size of the block, and so on.
Some systems may want to include more complicated business logic when determining preference orders for transactions, and while this technically could be incorporated at the consensus algorithm level, this business logic is generally incorporated at the smart contract level. Smart contract rules may determine who gets the seat based on other commercial factors embedded in the transaction rules. The Bostonian wants three seats resulting in a higher sale, so they might get preference. The Chicagoan is using a credit card with a lower fee for the ticket vendor, so their transaction might get preference.
How Is Security Created and What About Hackers?
A “hash” of the transactions is created by a cryptographic algorithm. It takes all the transaction data and reduces it to a single 32-digit alphanumeric code. What this means is that each set of transactions generates a unique code (called a Merkle root) and any change to that set of transactions will alter the alphanumeric code generated by the algorithm.
Using the same process, the block header also contains a hash of the information in the previous block's header. This creates the chain in a blockchain. The security of the blockchain arises from this structure.
If a hacker wanted to change a transaction in a block, they would also have to change the hash code generated by the transactions in the block. Because this code is linked to the next block in a chain structure, the hacker would also have to change all the hash codes for each subsequent block. And they would need to make these changes to all the nodes on the network before the next block is created, without detection. With the added security of encryption, this is very difficult to do. The distributed network is constantly sharing the transactions between nodes to verify them. If a false transaction is detected during the creation of the current block, it will be deemed invalid and not added to the block.
It is the efficiency, transparency, and security of blockchain that has made the technology attractive and very useful to a wide and growing number of industries.
Industry Disruption, Impacts, and Considerations for Boards
The diversity of industries and the nature of blockchain impacts is growing rapidly. This section provides a brief summary across a sample of these. We highlight nine public and private sectors and offer initial considerations for boards.
Banking and Payments
Currently, banks store money for their customers and handle transactions such as the transfer of that money. Blockchain is predicted to disrupt banking and financial services as much as the Internet has disrupted the media and entertainment industries.
Impacts for Banking and Payments Blockchain provides permanent, secure records of the millions of transactions that take place in the banking industry each day. This secure, distributed ledger system could significantly lower bank transaction risk.
Blockchain is also predicted to become a more secure way to store banking records, and a faster, cheaper way of transferring money through the decentralization provided by blockchain.
The technology can provide access to universal financial services around the world, including countries where traditional banking is impossible. This means that money transfers can be done globally in just a few minutes for very low cost. This will likely change the entire banking and payment system and will have significant impact on the payments industry.
Blockchain's strong identity verification and decentralization could also reduce financial fraud among stock exchanges and banks.
Considerations for Boards Security of banking systems: Most banking systems operate on a centralized database, creating a single point of vulnerability; once hackers breach the one system, they can gain wider, even full access.
Customer information security: Financial institutions spend millions every year to understand their customers and in meeting customer due diligence regulations. Blockchain would allow the independent verification of customer information systems to be accessed by auditors and regulators at lower cost.
Transaction processing speeds: The distributed ledger makes it possible to connect all the parties in a financial trade in real time. As more financial institutions adopt blockchain technology, transaction processing will become faster, cheaper, and safer.
Audit trails: Distributed ledger technology can be leveraged by banks for all of their compliance efforts. The transparency of information and permanence of records makes it nearly impossible to alter or manipulate the data. Longer term this will mean banks may no longer have to keep redundant audit trails of transactions. The transaction ledger “chain” is the audit trail of transaction flows and controls which are transparent and more easily verified.
The Start-Up Industry
With thousands of start-ups looking for investors, there are few ways for them to get in front of the right investors without jeopardizing the security of their ideas. Likewise, there is no easy way for investors to find the companies they are interested in backing.
Meanwhile, initial coin offerings (ICOs) sold in the form of tokens are already changing how venture capital is raised. This trend sees start-ups increasingly turning to crowdfunding, and angel investors are starting to buy ICOs instead of stocks.
Impacts While crowdfunding platforms create trust between creators and supporters, they generally charge hefty fees. Blockchain technology can change all of that. In fact, it has already started. Companies such as Pitch Ventures are creating a way for start-ups to pitch to investors live, in a secure manner.
Entrepreneurs create summaries of their product or service and investors can quickly sort and find potential opportunities. Ethereum's Smart Contract allows a secure medium for the pitches, so privacy is maintained.
Considerations for Boards
Crowdfunding: By using blockchain in crowdfunding, greater trust is created and underpinned by smart contracts, online reputation management, and transparency.
Start-up capital: New projects can release their own tokens that can later be exchanged for shares, products, services, or cash. Many blockchain start-ups have now raised significant capital through token sales, although there remains some risk associated with the start-up delivering on the tokens purchased, and tokens retaining their purchase value.
(See the PrimaryMarkets case study later in this chapter to illustrate the potential of this market.)
Real Estate Industry
Transacting the sale and purchase of commercial and domestic property is a complex, time-consuming, laborious, and costly business. It is possible to miss important information as well as to tamper with it. In addition, all of the intermediaries in a real estate transaction—agents, lawyers, banks, and land registrars charge hefty fees.
Impacts for Real Estate Blockchain is predicted to disrupt the need for multiple intermediaries in the sale and purchase of property. It can help speed up the transaction process with smart data searching, tracking, verifying ownership, ensuring document accuracy, transferring property payments, and registering title. Using blockchain technology will speed up the transactions by reducing the need for paper-based recordkeeping.
Considerations for Boards
Risk reduction and increased auditability: Blockchain offers transparent transaction processing, fraud reduction, and identification of mistakes in public records.
Cost effectiveness: Transactions can be conducted with measurably less work and less cost because of reduced bureaucracy.
Legal
Blockchain technology is poised to disrupt some areas of the legal industry by being able to store and verify documents and data faster, more securely, and more accessibly.
Impacts for the Legal Profession Smart contracts and process automation afforded by blockchain have the potential to significantly disrupt the legal profession. Smart contracts can automate most organizational structures, agreements, systems, and processes. Smart contracts are predicted to reduce or remove trust issues from transactions.
Records (including wills) stored on the blockchain can be quickly and securely verified. Any changes to the documents are authenticated and stored. blockchain technology will also significantly reduce legal issues dealing with inheritance, including cryptocurrency assets because of process transparency.
Considerations for Boards
Reduced legal costs: This technology has the potential to reduce legal fees because of the efficiency and speed of machine learning within blockchain search.
Cost reduction includes the potential to reduce or eliminate lengthy court battles over things such as title or digital inheritance. For example, litigation dealing with resolving concerns over wills of the deceased or any other documentation can be reduced or eliminated.
Healthcare
Medical institutions and healthcare professionals need a secure platform to store, access, and share sensitive patient information and records. The potential for error, fraud, privacy breaches, and lost records has created distrust between consumers and healthcare providers.
Similarly, patients often use the services of multiple healthcare facilities, and general and specialist services over time. Their overall healthcare data is not held in one place. Furthermore, they have no control over who their personal healthcare data is shared with. Patients increasingly feel the need to have greater control over their own data, where that data is shared, and who has access to it.
Impacts for the Healthcare Sector Blockchain technology has the potential to benefit medical practitioners, institutions, and their multiple stakeholders. From a patient perspective the technology has the potential to provide a transportable, secure, accessible, multi-healthcare provider, permissions-based personal health record. This personalized record could be accessed by the doctors and other healthcare professionals who are authorized. A permission-based record would also allow patients to determine whether their personal records can be shared with third parties such as insurance companies and researchers.
Considerations for Boards
Digital transformation: Many of the troubles experienced by hospitals and healthcare professionals, as well as patients themselves, are because of outdated infrastructure and legacy systems. There is often a lack of secure platforms to store and share medical data. Overcoming these issues requires significant integrated transformation with a focus on a complex range of stakeholder needs and system requirements. Furthermore, because individuals both move around as well as travel internationally, there are interfacility, interdisciplinary, and international implications.
Data security and privacy: Imagine a universal, common health record securely stored in the healthcare blockchain. By decentralizing records, there's no need to transfer them between doctors. Authorized people could access medical records from anywhere in the world.
Government and Politics
A government is the system or group of people governing an organized community, usually a province, state, or country. Government is a means by which laws and policies are enforced, as well as a mechanism for determining these laws and policies. Broadly, government normally consists of three branches: legislature, executive, and judiciary.
Each government has a kind of constitution, a statement of its governing principles and philosophy.
Government systems are often slow, bureaucratic, and disconnected, lacking transparency and prone to corruption. Right up to current times, governments around the world have been accused of rigging core processes such as citizen consultation and election results.
Impacts for Governments and Politics Decentralized government systems can increase transparency by distributing core citizen data—birth, marriage, death, and criminal records—throughout the blockchain, breaking them out of local and departmental silos.
Smart contracts could automate formerly bureaucracy-laden processes in across-government systems.
Blockchain security is predicted to make online voting fast and secure. Blockchain would take care of voter registration and verification of identity, and it would ensure only legitimate votes were counted. Blockchain cannot be deleted.
Considerations for Politicians and Government Agencies
Audit: Blockchain technology can be used for board polling and voting. This could be a great step ahead in making governance processes more robust and auditable.
Compliance costs: In turn there is the potential to reduce the cost of compliance by removing unnecessary bureaucracy from government transactions and citizen engagement processes.
Education
The education sector is a vital part of any economy. Education is the process of acquiring knowledge, skills, values, beliefs, and habits. Education can be formal or informal. The methodology of teaching is called pedagogy.
Formal education is commonly divided into such stages as early childhood or preschool, primary school, secondary school, and then college or high school, university, or an apprenticeship. In most countries, formal education is compulsory up to a certain age.
Informal learning can happen at almost any time, but most commonly happens at work or through involvement in a professional association, club, church, or vocational interest group.
Impacts for the Education Sector The education sector has long talked about providing every learner with personalized, transportable education and training records and online ePortfolios that authorized people or organizations can access to determine qualification authenticity or provide evidence of competency.
The education industry is poised to see some significant breakthroughs utilizing an emerging version of the Internet that combines blockchain, cryptocurrency, and virtual reality. This new Internet will be known as “3DInternet,” with the power to create a global classroom like never before.
Considerations for Boards Recruitment risk management: Verification of the qualifications and experience of board members and senior executives during recruitment will become easier, faster, and cheaper.
Energy
The energy sector covers a wide range of industries. The sector includes all types of fuel extraction, manufacturing, refining, and distribution and sale of energy.
All economic activity requires energy resources, whether to manufacture goods, provide transportation, run computers, and other machines. Modern society consumes large amounts of fuel, and the energy industry is a crucial part of the infrastructure and maintenance of society in almost all countries.
Impacts for the Energy Sector The energy sector has been highly centralized and controlled for a long time. Energy producers and users have had to supply and purchase via intermediaries such as public grids or distribution networks. With increasing sources of alternative energy generation coming from consumers as well as bulk suppliers, blockchain allows energy sellers and buyers to buy from each other in a decentralized way. This is already happening widely in electricity distribution with the rise of third-party resellers as well as through early examples of community storage and transmission of electricity.
Considerations for Boards
Cost reduction and sustainability: Depending on the organization's strategy, factors such as cost reduction, ethical sourcing, and sustainable practices within the energy supply chain may become important for competitive as well as sustainability considerations that blockchain use could facilitate.
Supply-Chain and Logistics Management
Supply-chain management integrates supply and demand management within and across companies. It involves the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management. It also includes coordination and collaboration with partners, which may include suppliers, intermediaries, regulators, third-party service providers, or customers.
Logistics management is that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements.
Impacts for Supply-Chain and Logistics Management Every transaction made on the blockchain is documented permanently and is made secure and transparent by the nature of how the technology works. This saves time and reduces human intervention and consequent transaction error risk. Blockchain also assists in controlling inventory and the real impact of products on the environment. The distributed ledger allows the verification of the authenticity of trade products by tracking them from where they originate, as long as there is an identifier and relevant data associated with the product. An example is Everledger, a blockchain system for tracking diamonds.
Blockchain offers a variety of options for companies that ship goods. The technology is ideal for tracking goods and completing tasks when moving and transferring items in the supply chain. Entries on the blockchain can be used to regulate the delivery of goods in the supply chain, including facilitating areas such as customs and excise.
Blockchain-based logistics can solve problems like fraud, counterfeiting, product safety, and inventory management. For example, blockchain identity verification can ensure shipments aren't stolen by fake drivers.
Considerations for Boards
Consumer demand for product labeling and information: Blockchain supply chains may provide consumer purchase transparency, with increased insight into the factory where your goods were made, the person who made them, and even whether the materials were ethically sourced.
Summary
Ultimately boards will still need to consider any move to blockchain for whether the technology:
- Supports strategy and performance achievement;
- Creates measurable value to the organization, its customers, and shareholders; and
- Will assist the boards in meeting its duty-of-care obligations when it comes to risk and compliance.
In the next section, we provide a brief case study of how PrimaryMarkets' board and executive identified a market opportunity and implemented a blockchain solution with extraordinary results.
PrimaryMarkets: A Finance Industry Case Study
Business Profile
Located in Sydney, Australia, PrimaryMarkets was founded in 2015 and has rapidly become a leading global independent marketplace.
The company transacts secondary trading of existing securities and investments, manages secondary securities trading on behalf of companies/trusts, and assists unlisted companies/trusts in raising new capital/debt/hybrid. PrimaryMarkets has processed over A$77 million in security trades through its investor network of over 49,000 investors. Their investors expect fast transactions with zero tolerance for error. Its digital registry services provide blockchain-based registration of securities registries.5
Industry Background and Business Challenge
Until very recently, the over-the-counter securities industry has seen very little innovation. Many of the small to medium-sized firms still run most of their securities registries on excel spreadsheets. They commonly process and mail out physical paper forms/certificates and manually input the details of trades post-transfer. This makes trading securities extremely slow and labor intensive. The manual aspect of the bulk of transactions leaves enormous room for error and worse. It is not uncommon within the securities industry to see entries in a company registry where a number of securities are allocated to “unknown” or “lost.”
With a team of less than 20 servicing an investor network of almost 50,000, PrimaryMarkets quickly realized that manual processing by staff members of documents, trades, and registry updates through existing legacy software was infeasible. PrimaryMarkets required a solution that would scale with their business, require limited human capital, could process trades quickly, and most importantly leave no room for error.
The Solution
PrimaryMarkets looked to existing software solutions to automate much of their business with little success.
Existing software was not nearly flexible enough to adapt to its business processes and notably, none would guarantee immutability of registry data. PrimaryMarkets decided it would build its own Digital Registry Services system. After careful consideration of different technologies and approaches, PrimaryMarkets believed that the new and exciting Distributed Ledger Technology (DLT) would be an excellent fit to underpin their new system. It was the only solution that would ensure its customers immutability of their registries.
DLT was chosen for its key characteristics: immutability, transparency, validation, and incentivization. The technology uses standards such as ERC-20 (a technical standard used for smart contracts on the Ethereum blockchain, for implementing tokens). This helped PrimaryMarkets' system to robustly create and record ownership of securities, an absolute necessity in the financial sector.
Transitioning data from the existing spreadsheet-based systems was as simple as moving from a centralized ledger to a distributed ledger (as illustrated in Figure 21.1). The technology enables fast and cost-effective clearing and settlement of payments and combines this into an immutable record of ownership of securities. Ultimately, through automation and immutability, DLT unlocks the possibility of instantaneous peer-to-peer trading of unlisted securities/investments, bringing liquidity to a traditionally highly illiquid market.
Implementation
PrimaryMarkets partnered with Labrys, a DLT specialist, in June 2018 to work on their Digital Registry Service. PrimaryMarkets set out to build an Alpha version of the platform within six weeks. They made the decision to build their Alpha on the Ethereum blockchain due to its maturity and existing infrastructure/toolkits compared to other frameworks. The Alpha version was designed to demonstrate the core features of the platform including importing a company registry from a CSV (a simple file format used to store tabular data, such as a spreadsheet or database); creating units of securities on the blockchain; displaying investment portfolios; and basic transfer of security ownership.
Shortly after PrimaryMarkets' successful delivery of the Alpha version of its Blockchain-based Digital Registry Services in early July 2018, PrimaryMarkets saw its share price jump by 50 percent from A$0.10 to A$0.15, increasing its valuation from $A10 million to A$15 million.
Post Alpha, PrimaryMarkets turned its focus to the commercialization of its software. It strived to make its Alpha software robust and in August began trialing some of its existing clients on its new platform. The trial companies, including ex-ASX-listed company Haoma Mining NL, valued at almost A$50,000,000, and AIRR Holdings, valued at A$116,000,000, were onboarded into the system, registering over A$150,000,000 worth of securities on the blockchain.
Working closely with Labrys, by November, PrimaryMarkets produced the first commercially viable version of its platform. V1.0 was a robust, stable, and secure version of the platform. It also included additional management and administrative features to ensure that a company registry could be fully managed using the software.
Results
Ultimately, PrimaryMarkets' expansion into the blockchain sector proved to be an enormous success. Within six months they had built a custom blockchain-based digital registry service to transform the company into a leading registry service provider, at the cutting-edge of technology.
Running off the back of the V1.0 launch PrimaryMarkets received an all-script takeover offer from Linqto, a California-based global investor network and investment platform with Linqto citing PrimaryMarkets' blockchain-based platform as a key driver behind the deal, expected to be worth over A$33 million.
Conclusion
Blockchain is a disruptive technology for a whole raft of reasons, central to which is the disintermediation effect on process and transaction effectiveness, security, timeliness, and cost across a wide range of industries.
In the past many organizations and individuals relied on intermediaries to provide the rules, regulations, structures, and processes followed by all participants in a transaction. We relied on banks, lawyers, governments, transmission and distribution supply chains to facilitate the process and provide surety in case of risk. Unfortunately, over time, many intermediaries became large and exercised greater control over transaction processes. Many businesses and regulatory authorities alike became bureaucratic, inefficient, and costly to deal with.
A central promise of blockchain is that, for the first time, we are edging closer to a cost effective, replicable, secure, transparent, software-based solution that has the potential to reduce corruption and which facilitates trades and transactions, without the need for an intermediary. This is clearly demonstrated in the Australian success story of the transformation of PrimaryMarkets.
Perhaps, as Bandyopadhyay suggests, “The question probably remains whether the entities providing blockchain technology today themselves [will] assume a greater role within the value chain in the future, becoming large intermediaries themselves. It might or might not happen. And until then, we are safely assuming that we have a near-term future of explosive growth of disintermediated digital platforms, facilitating the exchange of goods, services, and currencies across industries and various walks of life” (Bandyopadhyay, 2018).
About the Authors
Dr. Elizabeth (Lizzie) Valentine is CIO of Massey University (New Zealand). She is also adjunct research fellow and teaching fellow at Victoria University of Wellington (New Zealand). Elizabeth completed a Doctor of Information Technology at Queensland University of Technology in 2016 and holds a first-class MBA from Henley (UK, 2002). A sought-after international speaker and executive coach, Elizabeth continues to engage widely in a number of national and international capacities. Her specialties are in the area of digital director professional development, and in the strategic and people aspects of digital transformation. Her doctoral thesis provided the first known multisector, international Enterprise Information & Technology Governance competency set to help boards and senior executives build this much-needed capability. Her work has been published in international peer-reviewed journals, books, and conference proceedings. More practical tips and guidance can be found at www.enterprisegovernance.co.
Dr. Greg Timbrell is an IT industry professional with over 38 years' experience. He is the part-time director of Teaching and Learning in the Information Systems School at Queensland University of Technology (QUT) and Dean of Studies of the Education Cluster of Anvia Holdings Corporation, a U.S.-listed global company. After a career in technology consulting and government executive positions, Greg completed a PhD in Information Systems at QUT. Dr. Timbrell is a member of the Tertiary Education Quality and Standards Agency Register of Experts and a higher education consultant specializing in technology and business curriculum. He is the author of Information Systems Consulting (Blurb Publishing) and co-authored dozens of international research papers across a wide range of technology topics.
Lachlan Feeney is a blockchain technology expert and has been working in the industry since not long after its inception. He is CEO of blockchain development agency Labrys and is an academic within the Information Systems faculty at Queensland University of Technology (QUT). Originally a software developer, Lachlan began his career in the blockchain industry writing smart contracts for various blockchain companies before starting his own blockchain development company, Labrys. At Labrys, Lachlan has overseen projects for various clients including PrimaryMarkets, the Solomon Islands Government, BlockTexx, Secure Health Chain, and many others.
Dr. John Puttick has enjoyed a multifaceted career in information technology, higher education, and community service. He is founder of GBST Holdings Ltd. and has guided this innovative leader in IT for the financial services sector from embryonic idea through to its listing on the ASX in 2005. GBST provides technology services to the financial services industry, addressing clients' needs for innovation, competitiveness, and responsive IT that truly enables their business. GBST has offices throughout Australia and in London, New York, Hong Kong, Singapore, and Ho Chi Min City. John is chair of listed Over the Wire Holdings Ltd. and of the private company TandA, a fast-growing SAAS company delivering workforce success.
Dr. Puttick serves as a member of Council of the Queensland University of Technology; the University of Queensland as adjunct professor, School of ITⅇ and previously as chair of the Business Council of the South Bank Institute of Technology. His support of the IT industry was recognized by his election as chairman of Software Queensland; he was awarded Doctor of the University for his distinguished service to QUT and the community and inducted into the Pearcey Hall of Fame for distinguished lifetime achievement and contribution to the development and growth of the information technology professions, research, and industry.
Notes
- 1. A process or set of rules to be followed in transaction operations by computers.
- 2. The way the blockchain technology constructs and processes transaction information and the protocols used to prevent third parties or the public from reading private messages.
- 3. Mining is the cryptocurrency term for the creation of its currency. The term derives from goldmining.
- 4. On a public blockchain such as Ethereum, the people who provide the distributed nodes are known as miners.
- 5. Australian Financial Review, 21-Dec-18.
References
- Bandyopadhyay, S. (2018). Blockchain is the future of business, and the future is here! [Reviewing the core concepts behind blockchain technology to understand why it is predicted to transform every industry and how we do business]. Retrieved from https://medium.com/techemerge/blockchain-is-the-future-of-business-and-the-future-is-here-f3ad0932d3e0.
- Loop, P. (2018). Blockchain: What boards need to know. Retrieved from https://blog.nacdonline.org/posts/blockchain-boards-need-to-know#_=_.
- Paech, P. (2017). The governance of blockchain financial networks. Modern Law Review, 80(6), 1073–1110.
- PWC. (2018). Blockchain is here: What's your next move? PWC Global: Today's Issues. Retrieved from PWC Global website: https://www.pwc.com/gx/en/issues/blockchain/blockchain-in-business.html.
- Schweinitz, H. (2018). How the board can make the most of blockchain [Leadership & Organisations Blog]. Retrieved from https://knowledge.insead.edu/node/10261/pdf.
- Valentine, E. (2016). Enterprise technology governance: New information and technology core competencies for boards of directors. (Doctor of Information Technology Monograph), Queensland University of Technology, Brisbane, Australia.