The technology likely to have the greatest impact on the world of business has arrived. Not artificial intelligence, big data, cloud computing or self-driving cars, but rather blockchain, the technology behind digital currencies such as bitcoin. Blockchain technology represents nothing less than the second generation of the Internet and will spark a series of profound changes to virtually every corporation and institution in the world, from banks to insurers, manufacturers and retailers, even governments. Because the first generation of the Internet was built for moving and storing information, not value, it has done little to change how we do business or access financial services. When you send someone information, like an email, you’re really sending a copy, not the original. When it comes to most forms of information, that’s ok. In fact it’s one of the great advantages of the internet- that we have a publishing platform for information. However, when it comes to moving, storing and managing value, being able to copy an asset is a bad idea. After all, it’s okay to have a printing press for information – but not for money.
As a result, we rely on powerful intermediaries, such as banks, governments and big technology companies to establish trust, verify identity of parties to a transaction, and perform the critical business logic of commerce, from clearing and settling to record keeping. Now, overall financial intermediaries do an okay job, but with limitations. They use centralized servers, which can be hacked. They add cost, time and friction to transactions and business. Intermediaries also capture our data, preventing businesses and individuals from using that data to manage their affairs and compromising privacy, exposing sensitive information and undermining trust in corporations. These intermediaries also exclude two billion unbanked people who can’t prove identity or don’t have enough money to justify a bank account. In sum, intermediaries capture a lopsided share of the benefits of the digital economy, just as they did in the pre-digital economy.
Enter blockchain, a vast, global and distributed ledger running on millions of devices and open to anyone, where not just information but anything of value – money, equities, bonds and other financial assets, titles, deeds, music, art, scientific discoveries, intellectual property, even votes – can be moved and stored securely and privately, and where trust is established not by powerful intermediaries but through mass collaboration and clever code.
If the Internet was the first native digital format for information, then blockchain is the first native digital format for value – a new medium for money. It acts as ledger of accounts, database, notary, sentry and clearing house, all by consensus. Though the technology is still nascent it has sparked a Cambrian explosion of innovation in financial services. Consider smart contracts – a blockchain innovation- essentially code that mimics the logic of paper-based contracts with guaranteed execution, enforcement and payments, where trust can be established by consensus and not by banks, escrow agents, lawyers and courts. The impact on business will be transformational Consider financial services: every financial asset is, in a sense, a contract entitling the holder to some economic right, like a sliver of equity in a company or the series of cash flows from a bond. The same principle holds for many other kinds of assets and transactions, from insurance contracts to real estate purchases, IPOs, and everything in between.
However, with great opportunity comes great risk. Blockchain also catalyzes cooperative models for organizing capability—autonomous associations formed and controlled by people who collaborate to meet common needs. Groups of individuals, small businesses and corporations can translate their willingness to cooperate into reliable accounting for risk, assets, skills, and work product that displaces platforms like Uber, Airbnb, and TaskRabbit but could also challenge traditional models of insurance. Because blockchain technology makes platform building cheaper and manageable, it provides a standard common database and standard common contracts, which increase data transparency and portability, reducing the need for traditional companies. However, incumbents can learn to love mass collaboration and open source. Indeed, Just as IBM embraced Linux, insurers too can tap into self-organizing networks to co-create or peer-produce value.
Blockchain is not an existential threat to the companies who embrace this new technology paradigm and disrupt from within. Still, throughout history, leaders of old paradigms have shown difficulty embracing the new. Why didn’t AT&T launch Skype, or Visa create Paypal? CNN could have built Twitter, as it is all about the sound bite, no? GM or Hertz could have launched Uber, and Marriott, Airbnb. As with major paradigm shifts which preceded it, blockchain will create winners and losers. Though opportunities abound, the risks of disruption and dislocation must not be ignored. Still, we are hopeful today’s leaders will not become tomorrow’s losers, after all too much is at stake.