CEMC September 2017 Newsletter on Blockchain
Planes, Trains, Automobiles… and Blockchain?
Over the last few years, I am sure that blockchain has been on the radar for most CEMC members. As early as 2014, blockchain has had a whirlwind effect on Wall Street with blockchain fintech companies sprouting from coast to coast—Manhattan’s FDR Drive to Silicon Valley— and abroad. Whether you are in retail or commercial finance, blockchain technology is here to stay and its adoption will undoubtedly have a lasting impact on the flow of financed assets.
The Alta Group estimates that equipment leasing represents almost $275B of the $1.7T equipment market. With billions at stake, it is easy to see why corporate practitioners of equipment financing are paying close attention to this technology. While certainly disruptive to many, for others, blockchain can be a catalyst.
Let me explain.
Blockchain: Disruptor and Catalyst
As a disruptor, blockchain technology has the promise to eliminate intermediaries—trusted middle men who help facilitate a transaction between two parties. The classic example here is the role that the Depository Trust and Clearing Corporate (DTCC) plays in the clearing and settlement of stock transactions. Stock traders and other parties trust the DTCC; however, buyers and sellers of stock do not need to know or trust each other in order to successfully complete a transaction. The mechanism of a “trusted middle man” has worked for decades on Wall Street and for centuries in the history of global commerce.
Enter from stage left: Blockchain.
Blockchain technologies—the secure and decentralized nature of transaction recording—has the potential to eliminate the middleman. When a transaction is executed between two or more parties on a blockchain network, a copy of that transaction is broadcast across the network for all parties to record. This is a huge disruption for the middleman; A network effect has replaced him.
Blockchain is also a catalyst. It’s an opportunity to correct sometimes decades old institutional behaviors that result in poor or inefficient business practices. Blockchain has the potential to re-write business processes. Case in point, it is reported that for syndicated lending the creation of institutional debt takes on average 21 days to complete. For example, if a corporate customer were to seek a $1B loan from its bank, the bank may not take on $1B worth of risk and instead spread the risk among a syndicate of institutional investors. Why does it take 21 days? The challenges around current and accurate data and document reconciliation cause inefficiencies. The process of capital formation for a debt instrument between a collection of investors can take a series of meetings and agreements using a slew of communications from emails, phone calls, and even antiquated devices such as fax machines. Many of the parties involved are working off their own disparate spreadsheets. With blockchain technology, data synchronization among all parties is guaranteed by the underlying technology, eliminating reconciliation challenges. All participants in a transaction are working on the exact same data set. End result: capital debt can be created in as little as 3 days. Net value offered by blockchain technology in this scenario is a 7x improvement in the velocity of money. It is clear that blockchain will impact financial business processes.
What about Planes, Trains, and Automobiles?
So now you may be asking, “What does this have to do with planes, trains, and automobiles?” Blockchain technology use cases extend to include any physical asset that can have digital representation, and therefore the Internet of Things (IoT). Let’s discuss blockchain’s underlying technology and its intersection with IoT.
First, what exactly is blockchain? Blockchain, which is best known as the enabler for cryptocurrency, is a distributed method of transferring and tracking value online via an ongoing list of transactions or records, called blocks. These blocks are cryptographically linked and validated in peer-to-peer networks, which makes it virtually impossible to alter data in any single block without altering data in all subsequent blocks—and these records are replicated in thousands of computers around the world.
Once a single transaction is validated and recorded, it is automatically updated everywhere on the network. In effect, blockchain enables any ecosystem of participants—enterprises, machines, or individuals—to securely exchange and distribute goods, services, data, and currency with assurances that it’s transparent to them, accurate and secure.
Blockchain’s cryptographic and transaction assurances address two of the biggest concerns about IoT—trust and security. The commercial equipment marketplace is one such industry where blockchain combined with IoT may have a lasting and positive impact.
Blockchain + IoT Unleashes the Internet of Value
The “sweet spot” of blockchain could very well be at its intersection with IoT. Together, they form an Internet of Value that provides secure value flow across a whole range of industry segments.
In the IoT space, we are seeing very broad applications—such as managing mining site data and reporting, manufacturing supply chain, transportation data security, oil and gas operations, energy production, and insurance risk management. All of these applications are connected, exchanging value, and disrupting sometimes decades-old business processes and technical workflows.
When it comes to commercial equipment, the intersection of blockchain with registered, connected, or smart appliances means that interested financiers, logistics providers, and even customers have full visibility into an asset’s history. Having a complete and unalterable history of mining equipment, aircraft, enterprise networking gear, and construction equipment means that all parties involved in these physical assets have access to the most current and accurate view of the assets.
For example, let’s discuss an off-road mining truck. Assume for a moment that this truck is instrumented. Sensor data from all over the truck is collected and reported. Maintenance data is collected and reported. Operational data is collected and reported. All of this data, in a traditional IoT context would be aggregated and either stored locally or transmitted to a central operations center. As this truck is sold, or comes off lease, the field data may be lost or simply never communicated to the next owner, financier, insurer, etc.
However, if the truck’s field data is posted to a blockchain network which creates a report similar to “CarFax,” then an entire ecosystem could have permissioned access to operational or maintenance data. The truck’s “CarFax” report would be comprised of high integrity data that is protected, secured, and immutable. In effect, no one would have the ability to manipulate the data which is securely acquired and posted to a blockchain network leading to previously unavailable opportunities. For example, from a big data perspective, fleet field data can be measured and evaluated against field data from other operators’ fleets and in doing so, create a net new market…. All based on blockchain technology.
While this immutable record of field data is valuable; the really compelling aspect of blockchain technology in the equipment leasing and financing (ELF) industry is the ability to create a completely new financial instrument class. Leveraging the cryptographically secure and immutable record properties of blockchain, a new form of Asset Backed Security (ABS) could be created, and be highly granular comprised of a single vehicle, or more likely an entire fleet.
Blockchain has a large market potential
The market potential in the blockchain space is significant. Goldman Sachs estimates the savings from blockchain adoption in just the capital markets space alone could be as much as $12 billion. Total available markets from other segments are still being evaluated.
Industries are moving swiftly to capitalize on these capabilities starting with the formation of consortia to ensure standards for enterprise blockchain efforts. Cisco is at the forefront of these efforts, along with Bosch, Bank of New York Mellon, Foxconn, Gemalto and several of the most innovative blockchain startups. Together we are leading the formation of the Trusted IoT Alliance, focused on ensuring blockchain interoperability in IoT applications. Interoperability will lead to broad scale adoption of the technology and for industries such as ELF, there is enough variation in the business ecosystem that multiple blockchain networks will thrive. At the Trusted IoT Alliance, we are seeing participation from virtually every industry. Oil/Gas, manufacturing, energy, mining, automotive, and aviation leaders are taking notice of our mission and are joining to take part.
What does this mean to you? Most likely, it means opportunity. There are still many benefits to blockchain that have not been realized or discovered, so now is the time to look for strategic opportunities to deploy blockchain in your organization. Join the Trusted IoT Alliance to be informed, involved and to become a catalyst in your industry. One thing is for sure: blockchain is here, and it will drive disruption. Take action now to capture the full potential of the Internet of Value and shape the future of blockchain and IoT.