The Blockchain for Treasurers session at the Association of Corporate Treasurers (ACT) Conference 2018 that I recently attended in Liverpool, UK, explored the potential opportunities the technology might offer. But some in the packed room wanted a more basic explanation of what it is and how it might usefully be applied.
Use cases such as the Vodacoin tokenized crypto-currency that Vodafone experimented with to move money between 10 internal companies in a pilot to see if the technology could cut foreign exchange (FX) risk and provide other efficiency and speed benefits was mentioned as an example of how blockchain might help treasurers.
Other examples of intercompany netting; the we.trade application in the trade finance arena using the underlying distributed ledger technology (DLT); and ripple’s interest in supplanting SWIFT as the conduit for correspondent banking payment flows were also mentioned.
However, those of the 1100 treasurers, commercial banks and vendors at the show that decided to go to the blockchain session were more interested in the basics. This prompted an explanation from the expert panel of what exactly it is:
“I understand it to be a centralised ledger, secured by cryptography, between multiple parties recording a history of transactions, creating a block that is immutable,” said one of the speakers under the Chatham House rules in effect, to the general bafflement of many in the room.
What is it & how can it be used?
Corporates simply wanted to know what’s so wrong with a centralised database; if they should look to the technology as a possible future replacement for their treasury management systems (TMS); how it maps to virtual account ledgers, if at all – and if it was even worth bothering with yet as the technology moves from the experimental to the mainstream? It’s a complicated topic and the ACT Conference session was perhaps a little too techie for some.
An exasperated treasurer said during the question and answer section: “What’s the Betamax?”, alluding to the various consortiums and companies that offer different platforms and applications of the underlying distributed ledger technology (DLT), such as:
• R3 and its Corda platform
• Hyperledger’s Fabric for the supply chain.
• Ethereum and its ‘smart contract’ offering.
A steer to concentrate on the underlying DLT, rather than the buzzy blockchain or discussions about its original application Bitcoin, was provided by the panel, as they did their best to explain it to the audience. A reminder was also given that “it is still an immature technology” and there “aren’t clear winning applications yet”. Reassurance was also provided that “the front-end will look like any other solution” as it develops and goes mainstream.
Benefits & challenges
The potential benefits of DLT shouldn’t be forgotten in that it offers a cheap and easy way to improve know your customer (KYC) compliance and speedily move payments, trade finance and many other types of transactions across borders. DLT can assistant corporate treasuries internally and externally with their banks, as well as help to overcome legacy IT and other embedded problems in the financial and physical supply chain.
However, there are issues around resiliency, fraud and authenticity concerns. The heavy power usage of reconciling masses of data on what is often described as the ‘new web’ is also a worry.
The debate about if public or private chains are best was also discussed at the ACT Conference, with the purists liking for open source public chains accessible by all being dismissed as problematic “as they don’t scale and can sometimes only handle 20 transactions per second”. The instance where Ethereum crashed last year due to the CryptoKitties craze for trading virtual kittens in the Ether crypto-currency was rightly mentioned as an egregious example of the debate about the scale and resiliency problems with these new DLT platforms.
“Interoperable chains will arrive in the next couple of years which may be able to help,” said a member of the panel, alluding to the fact that these will allow the accessibility and network benefits of open source public chains to be retained, while interacting with private chains.
The latter private chains will be favoured by corporate treasuries and banks because their invited participants can be verified for security purposes and their technological capabilities to meet minimum service level capabilities assessed.
In the same way that the world wide web was slowly tamed and incorporated into the business world, so too will the blockchain world, perhaps to the chagrin of its innovators who viewed the original Bitcoin application as a way to bypass banks and financiers.
The evolution of DLT will be fascinating to watch over the next few years as it moves into the mainstream. The benefits of the technology cannot be ignored with all banks looking to co-opt it as a means to cut their internal costs and improve functionality and services – something which corporate treasurers can do too. But in my opinion corporates will be the last in line to adopt this technology as there was a marked reluctance in the room to risk an early adoption. Banks and corporates have to prioritize certainty in transactions, resiliency and trust. These are the foundations of their businesses, so they won’t be on the bleeding edge of this technological revolution. Equally, they cannot ignore it.
“As treasurers we’re guardians of risk,” concluded one of the ACT Conference attendees explaining the cautionary nature of the debate in the Liverpool ACC venue. The need to be mindful of risk and to fully understand new developments before introducing them was evident and understandable.
Nevertheless, the chain won’t remain blocked forever. DLT is coming to the corporate treasury world whether its participants like it or not.