The use of blockchain-based solutions can potentially improve compliance and decrease risks associated with the digitization process and can improve efficiency.
Office shutdowns and social distancing in the face of COVID-19 has made many businesses reassess how they operate. They had to quickly adopt technology to ensure that their business can continue to operate. This is not confined to collaboration and conference tools but also extends to the digitization of documents, certificates and business processes.
Before the pandemic, enterprises have avoided digitization on processes that involve compliance requirements such as the need for wet ink signatures and to file/sight physical documents and certificates. Uncertainty over the validity of digital alternatives have held back enterprises, however COVID-19 has changed this.
The need to do business completely online has forced companies to look at how to digitize their processes. While examining digitization solutions, data privacy issues became evident. Many current solutions are centralized and store enterprise documents on their platforms. Some key concerns or challenges when it comes to digitization are:
1. Trust in the documentation when it is being shared or used outside of the organization. A third party software platform may not be trusted to ensure the validity of important documents. In many situations, a physically signed wet ink, signed and stamped document is required as the counterparty is uncertain about its authenticity.
2. Having to store the company’s documents with third party platforms. This is a concern not just for important legal documents that contain sensitive corporate information like sales contracts or title documents. Documents that contain personal information such as customer profile forms can also be an issue in event of a data breach.
The use of blockchain-based solutions can potentially improve compliance and decrease risks associated with the digitization process and can improve efficiency in use cases that cut across organizations. Enterprises have been exploring the use of blockchain to improve efficiency since the advent of technology. And this has resulted in proof-of-concepts that eventually became production systems that utilize blockchain as the fundamental technology.
Now what is blockchain? The concept comes from the cryptocurrency Bitcoin which was conceptualized in 2008. Bitcoin was designed as a digital currency with no central authority and governed by its participants. The aim is to create a peer to peer currency (with no intermediaries and owned by users) that can be used for all sorts of digital transactions and does not require a physical asset as collateral. All participants take part in operating the Bitcoin network by checking the transactions for validity and storing a copy of the ledger.
To achieve this, the creator of Bitcoin designed an incentive mechanism known as Proof-of-Work (or Bitcoin mining) which rewards participants who act in the interest of the network.
This motivates participants to only allow legitimate transactions and reject bad ones. Another important part of Bitcoin’s design is the database layer or the blockchain. To simplify, each transaction is linked (using cryptography) to the previous one in blockchain. This creates a chain which cannot be easily tampered with. It prevents bad actors from trying to fraudulently spend unowned bitcoins or to block others from transacting.
The technical design of the blockchain database makes it hard for any individual to change the historical data, creating a strong evidence base. It prevents the double use of digital assets like bitcoins but can be extended to digital documents. It is this feature that attracted financial institutions and enterprises to explore the use of blockchain for their business.
All data or transactions that enter the blockchain is validated by the network, creating trust in the information. Documents like certifications or guarantees issued by one entity (on blockchain) can be trusted by another. Counterparties can also attest to the information by signing the data digitally on the blockchain.
Blockchain use cases in enterprises include: trade, supply chain, manufacturing, food safety, trade finance, medical records and inter-bank settlements (to name a few). Many of these efforts are consortium led, for example, the blockchain-based trade finance platform we.trade is a joint-venture company owned by 12 European banks and IBM, with shareholders including CaixaBank, Deutsche Bank, Erste Group, HSBC, KBC, Nordea, Rabobank, Santander, Societe Generale, UBS and UniCredit.
We.trade was launched in January 2019 and the technology is currently licensed by 16 banks across 15 countries, helping SMEs enhance their cash flow, digitizing their processes and giving them access to bank guarantees, invoice financing and credit insurance.
IBM Food Trust is another interesting use case that is used to ensure food safety. Initiated in 2016 with Walmart, users now include Nestlé, Tyson Foods, grocers Carrefour and Albertsons, as well as the wholesalers Raw Seafoods. Food Trust gives access to supply chain data of food production processes, from farm to store to the consumer. This allows stakeholders such as manufacturers and supermarkets to action on possible food contamination in an efficient manner that doesn’t result in massive recalls.
Blockchain-based solutions are growing and it is a matter of time before SMEs need to join some of these consortium efforts. The SME needs to be ready in understanding of the technology and be able to integrate into the blockchain solutions.
However, choosing which consortium to join can be tricky. There is not just one consortium per industry, there are many efforts in different regions that serve the same use case; it can be hard for an SME to decide which networks to join. Some key considerations before jumping into a blockchain solution are:
1. Network Governance
Many consortiums are controlled by its founding members, late joiners may not have much say in the direction of the network. It is important to evaluate the neutrality of the governing board to ensure that decisions made are not biased towards any particular parties.
With many blockchain networks sprouting out, interoperability is also an important consideration. You do not want to have to replicate your processes over multiple systems just to be part of these blockchain networks. It’s not just about technical interoperability either, document standards need to be uniform as well.
The underlying technology used in the blockchain network is also a consideration. Most blockchain technology is open source but the consortium lead and members will build their own proprietary software on top of the technology to fit the use cases.
This may mean that there will be licensing fees involved for newer and smaller members joining the network. One should consider if there is any potential vendor lock-in in this case. Another consideration for the technology is also the size of the blockchain network, its scalability and interoperability.
Other than joining blockchain consortiums and integrating to their networks, SMEs can also start utilizing blockchain technology to improve their own business process and efficiency. One example is blockchain-based credentials. The OpenCerts project, which was developed by GovTech Singapore, allows for education certificates to be verifiable via blockchain technology.
This means that employers can verify education credentials that are provided digitally and there is no need to request for certified true hard copies. This also reduces the need for employers to verify credentials directly with education providers. OpenCerts is now adopted by major educational institutions in Singapore.
Another example is the use of blockchain for business documents and attestations. Dedoco is collaborating with Nexia TS to create a platform to register business documents on blockchain (making them tamper-proof), and to record attestations (like digital signatures) on these documents. This allows the documents to remain private to the counter parties, yet creating an evidence trail that can be verified by external parties.
Blockchain can potentially improve business processes and create trust between organizations. The technology has gone through an experimental phase in the past few years and is now moving into production. Such technologies are meant to be used industry wide and SMEs will eventually need to adopt these solutions.
Understanding of the technology now and starting with smaller use cases will help SMEs get ready for such changes. When used right, blockchain can enable true digitization for when physical and paper processes are eliminated, creating a new, faster and more efficient business model for the post COVID-19 organisation.
For more information, please contact:
Dr Ernie Teo
Co-Founder, Dedoco Pte. Ltd.