Demystifying Blockchain: how organizations and governments are applying the model

As Bitcoin has gained popularity, Blockchain has received a lot of interest, too. In particular, the potential for Blockchain in finance and energy industries has garnered much attention. The technology’s promise of providing transparency and security for data sharing and transactions that occur between a network of peers — without going through a third party — is highly applicable to these sectors.

It is important to make the distinction, however, between Blockchain as a cryptocurrency platform and Blockchain as a secure public database. The former denotes currencies that are distributed on a Blockchain and validated by the peer-to-peer network. A consensus is achieved by complex computer mining to verify the transaction with a “proof of work” statement that is costly, time-consuming and limited in supply. The latter, while based on the same principles and technology, is not transacting cryptocurrencies. It does not rely on mining for verification; rather, it shares data that is validated by “selective endorsement” and “proof of stake,” which is far less energy intensive.

First uses of Blockchain

Since its first iteration as the technology behind bitcoin, blockchain has evolved considerably, with several platforms developed to improve functionality and make the technology more accessible to others.

Nxt, for example, is an advanced open source Blockchain platform that is built on the functionality of the first wave of pioneering cryptocurrencies like Bitcoin. It is often credited with helping the technology mature. Since 2013, Nxt has been using Blockchain to facilitate the transfer of tokenized assets. Notably, it was used to raise funds for cryptocurrency-based projects NEM, SIA and Ardo.

Similarly, Ethereum was launched in mid-2015 to enable so-called “smart contracts,” a computer protocol that digitally facilitates, verifies or enforces the performance of a contract. Ethereum is not just for cryptocurrencies, but for loans and larger assets, as well. Its infrastructure is now used by many companies to offer blockchain-based services.

As the technology has continued to evolve, major firms, particularly in finance and trading, have started to evaluate and invest in it. One example of Blockchain in finance is a project by Nasdaq and Citi Treasury and Trade Solutions. In 2017, they integrated a solution to enable straight-through payment processing and automated reconciliation by using a distributed ledger to record and transmit payment instructions, according to Nasdaq.

According to the companies, the trial resulted in greater operational transparency and increased efficiency, along with ease of reconciliation through a seamless end-to-end transactional process.

The following year, Louis Dreyfus Company (LDC) and its partners, Shandong Bohi Industry and banks ING, Societe Generale and ABN Amro, “successfully completed the first full agricultural commodity transaction using a blockchain platform.” The trade was for a soybean shipment that traveled from the United States to China and “included a full set of digitalised documents (sales contract, letter of credit, certificates) and automatic data-matching, thus avoiding task duplication and manual checks,” per LDC

According to LDC, the Blockchain “demonstrated significant efficiency improvements” for all participants, with time spent on processing documents and data being reduced fivefold.

Governmental support

As startups and larger firms have forged ahead with experimenting and developing Blockchain, governments have been slow to regulate the technology, though most are now actively supporting and engaging with it.

The U.S. has yet to create formal regulations for the technology. However, several states, including Delaware and Illinois, have created special initiatives to encourage and support its use.

The European Union, particularly, is keen to support the development of Blockchain. The European Parliament’s Industry Committee has said that “applying the “Blockchain” model to areas like energy use, supply chains and governance would cut costs for firms and empower citizens.” Additionally, according to the EU Parliament, “it has already invested more than €80 million in projects supporting the use of blockchain,” and “around €300 million more will be allocated by 2020.”

The U.K. government has also been keen to support Blockchain technology, funding several projects and trialing technology at its Ministry of Defence and Food Standards Agency. In 2014, it approved the first company working with blockchain, called Credits, as a supplier of services to the government, meaning a public body could, in theory, start using the technology.

However, the U.K., U.S. and EU still have no official regulation for the technology — something that could boost blockchain’s uptake and development by reducing future regulatory risk.

The island of Malta, however, has been keen to take advantage of the Blockchain boom and has become the first country to create legislation on the technology, which it passed in July 2018, per Forbes.

Blockchain for key industries

It is now well established that Blockchain technology has implications for several key industries, particularly energy, finance and supply chain logistics, and cannot be ignored by any business operating in these sectors.

According to Juniper Research, banks using Blockchain can experience cost reductions for payment processing and reconciliation, treasury operations and compliance. In particular, it notes that the technology would “realise savings on cross-border settlement transactions of more than $27 billion by the end of 2030, reducing costs by more than 11% per on-chain transaction.”

Blockchain is already growing quickly in finance with the desire to process cash transfers cheaper, faster and more efficiently. Deloitte’s 2018 Global Blockchain survey found that 34 percent of the 1,000 blockchain-savvy executives it interviewed had initiated some form of blockchain deployment.

Similarly, for the energy sector, Blockchain can be used for not only trading but for energy dispatch transactions and data reconciliation, peer-to-peer energy trading and new project financing. It is already being invested in by industry-leading firms. A consortium of companies, including BP and Royal Dutch Shell, are developing a Blockchain-based platform for trading that is expected to start by the end of 2018. EDF Energy, Shell and NorthernGrid are participating in a distributed ledger energy trading platform backed by National Grid and Siemens.

It is clear Blockchain has big implications, some positive and some disruptive, for financial and energy industries. However, it is important to note that most projects currently underway are yet to be fully scaled and realized, and are not yet ready to entirely replace incumbent systems.