Blockchain—Not Bitcoin—Represents the Next Step in Financial Evolution and Beyond
In a direct response to the 2008 global financial crisis, someone using the pseudonym Satoshi Nakamoto published a white paper discussing Bitcoin, a novel method for transmitting value without an intermediary. Nakamoto proposed an electronic version of cash that could replace government-issued money. Bitcoin promised to be bigger than the internet and even the Renaissance, and forever transform numerous industries. It threatened to render antiquated financial intermediaries obsolete. A Bitcoin Revolution would topple governments, leading to a state of Crypto Anarcho-Capitalism. Virtually every transaction, even ones as small as buying coffee, would be completed using cryptocurrencies.
Of course, that’s not what happened. Although Starbucks now accepts Bitcoin, credit cards remain dominant in legitimate point of sale transactions. And, despite promising to be unhackable, Bitcoin showed serious weakness after the Silk Road, Mt. Gox, and Confido debacles unfolded. Meanwhile, the world did not stop using government-issued ‘fiat currency.’
Even though Bitcoin never lived up to the hype, the underlying blockchain technology might. Nakamoto developed blockchain technology, which solves the double-spend problem by implementing a universal ledger with a confirmation mechanism. This changes how we record, verify, monitor, and distribute information. By solving information privacy and accessibility problems at once, blockchain may disrupt many industries including law, finance, real estate, health care, transportation, logistics, and entertainment. This post explains why blockchain technology has already impacted payment processing and supply chain management, and how the next generation of blockchain technology might transform any transaction that requires complex yet discrete tasks.
International Payment Processing
Historically, cross-border payments have been innately complex and inefficient because there is not a uniform global payment system. Some banks use the CHIPS system, while others use SWIFT, CHAPS, or others. This means transactions can only be completed through correspondent banking relationships that connect institutions’ mismatched payment systems to move funds. As complexity increases, more intermediaries are added, each tacking on their own fees and extending the time required to complete the transfer, creating an efficiency nightmare.
Bitcoin itself is unlikely to resolve this nightmare, but it pushed the industry to innovate, as banks feared they could be replaced by cryptocurrencies. JP Morgan responded by taking the blockchain backbone and developing the JPM Coin to facilitate the instant transfer of digital payments. Using the Quorum blockchain platform, JP Morgan created a ‘stablecoin’ unshackled by the burdens traditional payments face. Although presently reserved for institutional clients, it might generate international cooperation because Quorum is open source. Additionally, JP Morgan launched their Interbank Information Network to enhance communications between over 400 banks in the network, and has worked with Singapore to establish a multi-currency payment network titled ‘Project Ubin,’ in the hopes of bringing this technology to the world.
Supply Chain Management
Improving financial products is the most obvious use for the blockchain. After all, that is what Bitcoin set out to do using the same technology. But blockchain applications go beyond finance. Supply chains have inefficiencies that blockchain technology can address as well.
Supply chain record-keeping is outdated. Supply chain management produces mountains of physical paperwork that generally multiply with each step in the supply chain. Records are often in paper form, making information harder to access. These inefficiencies can obscure the source of products, and the results can be deadly. Consider the E. Coli and Salmonella outbreaks in 2018. Food-borne illnesses made hundreds sick and left some dead. The outbreak led to sales of tainted food and wastage of safe food because food supply chains are difficult to trace. It was impossible to adequately warn customers if they were at risk.
Blockchain technology can improve record-keeping and increase accessibility by digitizing physical documentation and recording it on a blockchain. Blockchain’s decentralized ledger allows system updates to be distributed instantly across all users, or ‘nodes.’ Companies can use blockchains to improve quality assurance while maintaining privacy.
Walmart is already using IBM’s Food Trust platform to bring transparency to the food industry for consumers and distributors alike, informing people what they need to know about their food. In an outbreak, these systems identify which step in the supply chain carried the contagion so retailers can alert consumers and mitigate risks faster and with less waste.
Using the blockchain in open-source payment processing systems and supply chain management are just the tip of the iceberg. The next stage in the proliferation of blockchain technology is already underway and builds on top of the backbone that preceded it.
The next generation of blockchain technology uses ‘oracles’ to feed data from external systems into the blockchain. Blockchain technology can now react to the happenings of the world. ‘Smart contracts’ are blockchain-based code that automatically executes functions upon the happening of pre-specified events. They can streamline entire processes, automate business decisions, and cut time spent on mundane tasks.
Smart contracts could transform the real estate industry. There are multiple steps in a real estate transaction, many of which require an attorney. Some attorneys believe their jobs are safe, but recording titles and deeds on the blockchain could modernize the title search and deed transfer process, obviating the need to attorneys. Blockchain produces an immutable record free of human error. Encumbrances and liens would be readily apparent and accessible without the use of costly attorneys. Payment and ownership transfer could happen simultaneously. Title would transfer automatically from seller to buyer. Propy hopes to use blockchain to reduce fraud and streamline the closing process.
Smart contracts might profoundly impact the healthcare industry. Getting pre-authorization of health benefits wastes countless hours of physicians’ time. By reducing a health insurance agreement to code, smart contracts allow insurance providers to automatically accept or reject claims based on predetermined criteria. This level of automation reduces costs by reducing human labor and creating a highly secure yet accessible system for health record-keeping. This is especially important to resolving the opioid crisis because inadequate record-keeping can inhibit drug traceability, putting lives at risk. BurstIQ stores and transfers health care information on blockchains. They partnered with the American Heart Association and Hitachi Vantara to increase informational accessibility to scientific data for doctors and researchers on the frontlines of the global COVID-19 pandemic.
This epoch will be remembered by blockchain technology, not Bitcoin. In trying to create the perfect cryptocurrency, Nakamoto combined multiple component technologies to bring the world the blockchain—a revolutionary technology that has the potential to change how the world does business.
Seth C. Oranburg is an Assistant Professor at Duquesne University School of Law.
Joseph R. Stead received his JD from Duquesne University School of Law.
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