Talking blockchain: Interview with David Butcher, partner in the Technology & Media team
Talking blockchain: Interview with David Butcher, partner in the Technology & Media team
Read time: 6 minutes
BDO partner David Butcher discusses how the pandemic has accelerated the emergence of blockchain across multiple sectors, and why now is a good time to invest.
When Bitcoin emerged as the first application of blockchain technology in 2008, the benefits it could bring were slow to be understood.
However, the true and varied potential for blockchain is now finally coming to fruition – and not only in the form of cryptocurrency, but across a wide and ever growing range of sectors from media and entertainment to government and healthcare.
Here David Butcher, BDO Partner specialising in Technology, offers his expert insights into the sudden rise of blockchain and explores some of the ways businesses and investors could take advantage of the opportunities blockchain could provide.
What impact has the pandemic had on blockchain and its adoption?
In the five years leading up to the pandemic there were a lot of businesses and organisations trialling proof of concept, but nothing like the all-encompassing solutions we’re seeing companies invest in today. The pandemic has helped blockchain develop its own marketplace, accelerating adoption in a way that none of us could have predicted. The greatest reason for this, is that people didn’t really realise they needed this type of technology until they could see its use and advantages.
"The pandemic exposed the inadequacy of traditional ways of doing things in some sectors, opening the door for new solutions to be sought."
For example, in 2018 HSBC issued a fully-digitised letter of credit using blockchain technology through R3’s Corda platform. It was the first live end-to-end trade finance transaction on a scalable application for the issuance of a fully digitised letter of credit, using blockchain. In December 2020 HSBC started using the Contour platform commercially, cutting processing times for letters of credit from five to ten days to as little as 24 hours.
There have also been a number of interbank trials using distributed ledger technology (DLT) such as the Italian Banking Association with 14 banks for reconciliation and in 2019 Irish banks started running similar trials. The Bank of America has around 50 blockchain patents, seemingly looking to be seen as pioneering in this arena. So much of the financial sector are now recognising the potential in these trials and have begun to follow suit, adopting blockchain technology into everyday use.
What factors have hindered the uptake of blockchain?
For many people, blockchain is completely associated with cryptocurrency in their minds, with all that entails. Cryptocurrencies are not widely regulated so it can seem like it has anti-establishment in its roots. But things are changing, some banks are even talking about or offering cryptocurrencies themselves, and people are beginning to wake up to some of the other possibilities that distributed ledger technologies offer aside from currency.
Some of the other challenges preventing the adoption of blockchain more widely included things like IP rights, governance, and everything that goes in tandem with that, holding people back. However, the pandemic opened up and exposed all the weaknesses of the global supply chain. For example, it might take six months for something to arrive from China, but before blockchain there was no true oversight visible to all stakeholders in the supply chain, meaning no way of understanding what the issues were or how they could be mitigated.
Many businesses came to see that blockchain technology could be the solution to issues such as these, and this focussed minds on addressing the IP and governance issues in order to enable blockchain solutions to be applied.
What emerging trends have you seen in blockchain over the last two years?
New uses for blockchain are emerging every day. Being able to prove provenance of something is key in a number of areas, from proving that diamonds aren’t from conflict zones, to being able to certify that medicines were produced in a particular setting and transported following all necessary protocols. Gartner predicts that, by 2025, 20% of the top 10 global grocers by revenue will be using blockchain for food safety and traceability to create visibility of production, quality and freshness.
Governments are beginning to use blockchain for digital identity purposes and potentially for voting because of the transparency it can offer. Systems for proof of ownership and smart contracts are also growing. There are also growing uses of proof of qualifications being used by educational establishments and employers.
One of the recent headline-grabbing uses has been for NFTs, particularly in the art market. NFTs or non-fungible tokens are proof of ownership of an original digital artefact. Art auctioneer Christies sold an NFT by digital artist Beeple for $69m. Musician and artist Grimes sold a collection of artworks for $6m. Other NFTs that have hit the headlines include some early internet memes, with people willing to pay hundreds of thousands for them.
During 2020 and 2021 growth went up another notch. The availability of blockchain-as-a-service platforms from players like R3 Corda, Hyperledger Fabric, Hedera Hashgraph, Quorum, Ripple and Icon Loop are enabling enterprises to use blockchain cost-effectively. As the market matures it could become even more affordable for smaller organisations.
What are some of the challenges blockchain has faced in recent years?
Like with all new technology, there has been an issue with people understanding blockchain and its capabilities. Likewise, there are issues about trust and security – if I am providing data or my identity to this blockchain, how secure is it? To ensure trust, some providers are working with regulators who are happy to actively engage with the blockchain community to make sure their solutions are fit for purpose. In the UK, the FCA has been working this way through its regulatory sandbox for several years now to support this.
An issue for some blockchains is the time it can take for transactions to be processed. And out of that comes another challenge. One big criticism with blockchain is the amount of energy and computer power that is required, particularly at a time when everyone needs to be reducing their carbon footprint. Some providers have resorted to using Iceland’s geothermal power, while others have concentrated on reducing the carbon footprint of the process.
On the other hand, blockchain could be one of the solutions for companies wishing to prove their ESG credentials and to show they have the right level of governance. It could be a system that provides proof to potential investors and to regulators. For example, it could allow the tracking, recovery, and recycling of products and tracking of the levels of primary and secondary raw materials used. The World Economic Forum (WEF) has launched a blockchain track and trace platform to prove the environmental sustainability of supply chains by tracking embedded greenhouse gas emissions from mines to final products.
So, what are the solutions to these challenges?
The evolution and variety of different blockchain platforms has solved some of these issues. Some platforms will be more suitable for different situations, for example faster processing for lots of transactions, versus a system that requires less computing power and therefore has a smaller carbon footprint.
Each of the solutions has different benefits and downsides such as different speeds of processing, being easier or harder to configure and create a user interface, or offering greater options for personalisation. So, it depends on your needs and what you’re trying to provide. You need to ensure you’ve got the right solution for the challenge you are trying to solve.
What advice would you give to businesses or investors interested in blockchain right now?
Blockchain is one of the most prominent emerging technologies. It’s still to achieve its full potential, making now a prime time to invest in companies providing blockchain solutions. If you do that you could find you are achieving better than the wider market returns as the technology continues to develop and attract uptake. However, you need to be sure that blockchain really is the right for you.
For investors, whether you’re a large investment fund, private equity or a high-net-worth individual considering investing, it’s essential that you fulfil the due diligence process and that you take the time to really understand the blockchain solution you are investing in. You need to understand what the USP of the technology is. You can’t invest just for the sake of investing in an emerging trend, you need to back the right technologies that answer a specific market need in order to guarantee a future return on investment. Like any investment, you also need to think about it as part of your portfolio and where it fits, how much risk it offers and your appetite to take that risk.
For companies that are considering investing resources in blockchain, you need to understand what the need is, where blockchain might fit within your tech stack, how it will solve issues and create efficiencies for you. You have to invest for the right reasons in the right solution. Understand that there is no one-size-fits all solution for corporates and enterprises. CEOs, CTOs and CFOs will need to weigh up its benefits compared with other options to see how it could improve the efficiency and effectiveness of your business. This will of course depend on the nature of your business and the problem you are trying to solve. Applying blockchain in a distinct area well, where it will add value, is where it’s worth investing resource.
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