Blockchain reaction: Tech plans for critical mass
Why another tech-enabled global business and societal revolution may be in the making.
Blockchain technology has the potential to streamline and accelerate business processes, increase cybersecurity and reduce or eliminate the roles of trusted intermediaries (or centralized authorities) in industry after industry.
Banks, traders, exchanges and regulators are involved in many pilot projects and have launched multiple industry consortia to study blockchain’s use.
In a New York City neighborhood, a private experimental blockchain helps homeowners share solar-electric power generated on their rooftops without the local power utility’s involvement.
The blockchain reaction will pull in different industries at different times with differing levels of disruption, bringing both opportunity and risk.
Understanding the nature of that pivot, and the tax, legal and policy questions it will raise, will take time and preparation.
We anticipate critical mass in financial services technology in a 3- to 5-year time horizon, with other industries following quickly.
What if blockchains remake work, life and play the way the compass changed seafaring, internal combustion engines changed transportation or penicillin changed medicine?
One reason the blockchain reaction is racing toward critical mass faster than previous disruptive technologies is that it is arriving in the midst of the digital transformation already sweeping through most sectors of the global economy.
Consequently, despite the obstacles still to be overcome, businesspeople and governments are preconditioned to recognize blockchain’s potential. Tech companies have already established much of the digital infrastructure required to realize blockchain business visions.
The “embedded finance” scenario
In financial services, the first round of blockchain pilots is exploring more efficient ways to provide today’s services, such as transferring equities or other financial instruments in blockchain environments with potentially faster settlement and far lower transaction costs.
But the long-term blockchain vision is of markets that run by themselves, with finance embedded directly into the natural activities occurring within those markets. In such an environment, the finance industry will look very different than it does today.
Automotive ecosystem with embedded finance
One possible near-future “embedded finance” scenario involves a blockchain hosting all-inclusive records of an automotive ecosystem. Ownership, financing, registration, insurance and service transactions could all be tracked together.
Such a blockchain would make it possible for a manufacturer of driverless cars, for example, to place its cars in a ride-hailing company’s fleet. Every time the car is paid for a ride, a blockchain smart contract with embedded financing delivers a revenue share to the manufacturer.
The manufacturer may never need to “sell” a car to a consumer; it may not need bank financing, depending on the long-term cash flow resulting from its share of every transaction entered into by its products.
Other blockchain scenarios
- Embedded health
- Eliminating digital rights theft
- New credit markets for low-cost assets
- Government tax enforcement
- Industrial mash-ups
- Industrial IoT
Why is it important for companies to start considering their place in a blockchain world?
Ask yourself: how will my company make money in a market where all transactions are transparent, secure and validated, industrial assets are shared among market participants, customers have even more information than they do today and regulatory compliance and tax collection occur in real time, at the moment transactions take place?
Prep sooner, not later
“Achieve readiness early” is perhaps the most important lesson from the high price so many tech companies paid for being slow to join the cloud and mobile disruptions.
Engage tax team early
Companies trying to operate at the speed of innovation will find that ignoring the tax implications of their investment and operational decisions until late in the game could force them into a last-minute rethink.
- Blockchain defined
While the internet is a world-changing medium for information exchange, blockchain is “the first native digital medium for peer-to-peer value exchange. Its protocol establishes the rules — in the form of globally distributed computations and heavy duty encryption — that ensure the integrity of the data traded among billions of devices without going through a trusted third party. Trust is hard-coded into the platform. … [Blockchain] acts as a ledger of accounts, a database, a notary, a sentry and clearing house, all by consensus.”1
1 This definition is from “How the Tech Behind Bitcoin Will Change Your Life,” Time, 6 May 2016, © 2016 Time Inc., by business technology guru Don Tapscott and his son Alex, a blockchain expert. They also coauthored the book, Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World
- Industrial IoT defined
These are alliances that bring together a given sector’s industrial assets, instrumented with IoT technology, into sharing-economy-style digital marketplaces. Once instrumented and organized this way, industrial asset utilization should rise significantly, driving down cost for all market participants.
- Industrial mash-ups defined
These are alliances in which one or more parties make use of assets or capabilities of another party to create new business value, without affecting the other party’s ongoing use of the assets or capabilities for their original business purpose.
Industrial mash-ups are fluid partnerships that replace the “physical” vertical integration of an M&A or JV with an ecosystem of collaborating partners to bring the new business idea to market. They make possible the pursuit of new ideas that would not be viable under traditional M&A or JV approaches.
- How blockchain distributes, secures and automates trust
Blockchains are essentially public or private distributed databases containing records of every transaction ever made among participants in a given network, encrypted into time-stamped blocks via a cryptographic hash function.
Each block’s hash result is a unique identifier and is incorporated into the next block for integrity verification. Blockchains further protect data integrity by distributing a full copy of the database to each participant; revisions must be agreed to by a majority of participants.
Blockchain’s hash function plus its majority consensus approach add up to a powerful new approach to information security. “Blockchain shifts cybersecurity from depending on one to depending on many, and a large volume of people are much more trustworthy than any one individual,” says Paul Brody, Americas Strategy Leader Technology Sector. The approach makes blockchains virtually tamperproof.
Finally, blockchain includes a technology called “smart contracts.” These are bits of executable code that act only if specific conditions within the blockchain are met. Combined with the blockchain elements already described, smart contracts can automate trusted activity among participants, such as payment transfers upon completion of a specific task, or partial payment for reaching an agreed-to milestone.
- The bitcoin-blockchain connection
Blockchain came into the world as the technology that underpins the bitcoin virtual cryptocurrency. Blockchain was first described in a 2008 paper published by Satoshi Nakamoto, the pseudonym used by the anonymous person or people who designed bitcoin. It was first implemented in bitcoin’s original source code. Since then, perspectives on bitcoin have waxed and waned, the latter partly because of the way criminals and terrorists have used bitcoin. But blockchain has seen continuously growing interest in its widespread applicability.
“Blockchain shifts cybersecurity from depending on one to depending on many, and a large volume of people are much more trustworthy than any one individual.”
EY Americas Strategy Leader
“Blockchain is developing much faster than anyone expected. To think the impact to your industry is many years away is very risky.”
Angus Champion de Crespigny
Financial Services Blockchain and
Distributed Infrastructure Strategy Leader
Ernst & Young LLP (US)
“To date, blockchain has transformed only people’s thinking. We don’t yet even know all the questions blockchain technology will raise, much less the answers. But waiting for the technology to take hold is too late. Now is the time to start defining the questions and influencing policy that will lead to answers.”
EY Global Technology Sector Leader
“With blockchain, the theory is you can much better document transactions and therefore avoid any
crime connected with the possibility of hidden transactions.”
EY Global Technology Law Leader
“In a B2B environment, there might be a disconnect between the transparent openness of blockchain and a company’s desire to keep sensitive commercial information private.”
Indirect Tax Services
Ernst & Young LLP (US)