Technology

Building the Future of Finance with Blockchain

How CFOs can incorporate blockchain into their future finance function.

Is the future of finance new technology or new people? In preparing their finance functions for the future, Chief Financial Officers (CFOs) are focused on new skill development and technological transformation; and disruptive technologies will play a large role in reshaping finance as we know it today. Once only thought of in terms of Bitcoin, Blockchain is moving from applications in cryptocurrency to the wider potential of enabling an end-to-end digital economy. Blockchain is technology that enables shared databases and a chronological chain of activity of multiple users. It is a decentralized ledger that keeps a record of each transaction that occurs across a peer-to-peer network and provides “real-time” synchronicity, trust through its design and protocol, and a robust audit trail.

At a recent joint meeting of FEI’s Committee on Finance & IT (CFIT) and Committee on Governance, Risk and Compliance (CGRC) hosted by American Traditions Insurance Company in St. Petersburg, Florida, Deep Ghumman, Principal, Performance Improvement with EY noted that over the last few years, the distributed infrastructure ecosystem has evolved. “Since 2013, Blockchain technology has been in more focus and the technology is being evaluated for different use cases.” He went on to say that banks have introduced early adoption reviews of digital currencies and initiated large-scale use initiatives in the use of blockchain. Additionally, regulators are starting to issue directions and new blockchain distributed databases are continuing to emerge.

Blockchain is being touted as a revolutionary technology capable of solving multiple business challenges including:

  1. Increasing process speed and transparency – Maintaining a single ledger for all transactions confirms a complete, consistent, current view of every transaction at any given moment.
  2. Improving supply chain efficiency and effectiveness – Consolidated repository of customer and supplier information provides end-to-end documentation of where and how materials are sourced, purchased, allocated and used.
  3. Facilitating business networks/exchanges – Low cost peer-to-peer transactions eliminate the need for a third-party middleman to spend time and money on verification.
  4. Strengthening data security – Built-in security features, including high-grade encryption and decoupling of transactions from the identity of participants, provide a safeguard against cyber threats and identity frauds.
  5. Enhancing (and monetizing) privacy – Provides greater control to individuals and organizations over their personally identifying information, thereby allowing them to share only the amount of information needed to complete a transaction and nothing more.

Additionally, Blockchain technologies can improve operational efficiency across industry sectors such as financial services and insurance, real estate, healthcare, retail, manufacturing, technology, telecom, media and entertainment, and even the public sector. Companies have already begun implementing; smart contracts, real-time transactions and payments, registry verification, digital identity verification, instant policies and claim processing, land registry, and digital currencies. These applications are impacting international settlements, real-time auditing, loan syndications, fraud detection and prevention, document collection, compliance and new services around real-time payments and business operations. Blockchain has some companies thinking beyond disruption to the potential for disintermediation.

As a distributed database, a Blockchain is created when blocks are stored on each node that maintain a continuously growing list of encrypted data records and each refer to previous items on this list and is thus hardened against tampering and revision, i.e., creating an immutable database. Three different types of blockchains currently exist: public, private and consortium/ hybrid.

  1. A public blockchain is fully decentralized and anyone can read, write data to and from the ledger (send transactions), and participate in the consensus process. While advantages include users are more protected from developers and the network effect, the speed of transactions can be slower. The most well-known example of a public blockchain is Bitcoin, although others do exist such as Hyperledger, Bitfury, and Ethereum.
  2. A private blockchain is centralized and one central node can write data to and from the ledger (send transactions), and participate in the consensus process; read access is permissioned. Relationships are governed by informal arrangements, formal contracts or confidentiality agreements. Private blockchains are considered the fastest of the three and advantages include revert transactions, modify balances, validators are known — no collusion, cheaper transactions and more privacy. An example of a private blockchain is Monax Industries.
  3. A consortium or hybrid blockchain is partly decentralized and pre-selected nodes can write data to and from the ledger (send transactions), and participate in the consensus process; read access is permissioned. While not as fast as a private blockchain, advantages of the hybrid blockchain include quicker speed than public blockchains because not all pre-approved nodes must sign every block in order to validate the block. R3 is an example of a consortium blockchain.

So how might Blockchain impact the CFO? Given their oversight role in the finance function, a distributed ledger will allow for more efficient and transparent transactions that are settled simultaneously. Less manual attention will be needed for reconciliation and consolidation processes, thus allowing for a more efficient finance function. Blockchain’s data trail will also allow for more accurate monitoring of transactions, balances and project results. In addition, CFO’s execution role will benefit from Blockchain’s distributed nature because it decreases the opportunity for fraud or reporting inaccuracy. The immutable transaction history provides a single documentation trail that will streamline the audit process and allow for greater focus on systems and controls. The centralized data source will allow for greater reporting speed and validity for both internal and external stakeholders. Finally, and perhaps most important in the CFO’s expanding role as a strategic partner in the business, with improved efficiency and strategic analysis, the finance function will be able to devote more time and attention to organizational strategy. In some cases, with improved audit approaches and public transactions and, the CFO will be able to communicate to the marketplace more quickly and with more clarity and transparency.

For CFOs looking to incorporate blockchain into their future finance function, laying that foundation should include:

  1. Defining a vision – a clear vision for the future finance function, which is aligned with the organization’s overall purpose and business strategy, gives finance team members around the world a common ambition, and provides focus for efforts and investment decisions.
  2. Rethinking the technology – a bold technology strategy for the finance function will be critical. The function will need to build systems and tools that enable disparate teams to share information and make connected, data-driven decisions.
  3. Investing in people – CFOs need to find the new skills and capabilities required to exploit new technologies and increasing volumes of data. They also need to build their people’s softer skills, such as their communication and influencing skills.

It is estimated that there will be 50 billion internet-connected “things” by the year 2020; that includes sensors and RFID chips. Technology disruption has always existed. Consider this, it took 75 years for the telephone to reach 50 million users, and it took the television 13 years to reach that number. The internet took four years and Facebook took 3 ½ years. Pokemon Go took less than 3 weeks (19 days) to reach 50 million users; and that was just Android users. Blockchain is here and it is happening; what are you waiting for?