Five characteristics of blockchain
You don’t need to be an IT expert or delve into too much technical detail to understand the fundamental principles of blockchain, but knowing the basics is the first step to understanding blockchain’s potential to change key HR activities.
Blockchain enables trusted interactions between unknown participants by combining five design elements to authenticate users, validate transactions and record that information to a digital ledger in a way that can’t be corrupted by a single participant or changed after the fact.
Even capabilities that exist today aren’t fully ready to support the performance and scale that will be needed in a blockchain world
Early-stage “blockchain-inspired” experiments don’t include all five elements, but strictly speaking, all five are required for true blockchain:
- Distribution. Blockchain participants are connected on a distributed network and operate “nodes” — computers that run a program to enforce the business rules of the blockchain. Nodes also keep a full copy of the ledger, which updates independently when new transactions occur.
- Encryption. Technology records data securely and semi-anonymously (participants have pseudonyms). Participants can control their personal identity and other information, and share only what is required for a given transaction.
- Immutability. Completed transactions are cryptographically signed, time-stamped and sequentially added to the ledger. Records can’t be changed unless all participants agree on the need to do so.
- Tokenization. Value is exchanged in the form of tokens, which can represent a wide variety of asset types, including “money,” units of data or a user’s identity. Tokenization (the creation of tokens) is the way a blockchain represents and enables a “native value” (“currency”) that can be traded.
- Decentralization. No single entity controls a majority of nodes or dictates the rules. A consensus mechanism verifies and approves transactions — eliminating the need for a central intermediary to govern the network.
Existing and emerging technologies enable blockchains
A range of current and new technologies enable these blockchain characteristics, including encryption and peer-to-peer connectivity, but even capabilities that exist today aren’t fully ready to support the performance and scale that will be needed in a blockchain world. Essential capabilities already include:
- Decentralized apps (DApps): Applications that cryptographically store their data, instructions and records of operation in a distributed-ledger technology
- Distributed business terms and conditions (T&C): Automated trust mechanisms for external interactions and transactions between organizations or individuals
- Smart contracts: Programs or protocols that facilitate, verify or execute business processes
- Smart assets: Digital representation of physical assets with programmatic behavior
But for blockchains to radically alter current operating models or business processes and create new commercial, social and other governance paradigms, organizations will need to combine existing technology capabilities in new ways and acquire new know-how.
What it all means for HR
If your eyes have already glazed over, consider what these components and capabilities could actually mean for the way businesses engage with talent in real life.
Imagine the next big, strategic initiative your organization launches — with a blockchain seamlessly connecting all businesses, vendors, people, activities and communications: the assigned in-house talent, the contractors and third-party suppliers, the cross-functional communications, authorizations, pilots, stage-gate reviews, budget approvals, etc.
Without phone calls, emails or stacks of paper, the right talent can be authorized and brought in at each relevant step in the process, given access to the information and resources they need only for as long as they need them, with activities moving automatically and transparently along the chain.
Early HR use cases nonetheless offer a glimpse into the blockchain future for HR
Most promising use cases in HR
As mentioned, blockchain experiments to date incorporate only some of the defining characteristics of blockchain — so capture only some of its potential value. These early HR use cases nonetheless offer a glimpse into the blockchain future for HR:
- Background and employment-history checks. In a distributed blockchain network, permissioned applicants can acquire virtual credentials (tokenizing their identity), which provide an immutable record of their work history. Prospective employers who tap into this blockchain eliminate the chances of fraudulent applications.
- Employee data security and access. Employers have access to vast amounts of private information on employees. On a blockchain, records can be encrypted and immutably recorded — especially important for private records related, for example, to medical conditions or performance history. But these records can also be shared when necessary in tokenized form with participants who’ve been given verified permission.
- Smart contracts for the contract or temporary workforce. A smart contract creates enforceable and immutable rights and obligations for all participants. Immutable contracts in HR can, for example, automatically release payments from escrow once workers complete assigned tasks, which smooths income for workers and cash flow for companies.
- Compliance and regulations. Employees can enforce their “right to be forgotten” entitlements afforded by statues such as the EU’s General Data Protection Regulation (GDPR) just by deleting the encryption key and making the personally identifiable information unrecoverable. As more stringent legislation comes along, HR will be able to use blockchain to ensure employees have control over their own data.
- Payment and benefits. Transactions encrypted and stored as immutable data on the blockchain are more reliable, enabling more streamlined auditing and compliance reporting. Payees will no longer depend on intermediaries such as banks to process payments. Likewise, banks will no longer control money flows to the extent that they can currently skew transaction values by trading — and therefore varying the value of — fiat (government-issued) currencies.
Payroll management is so far the most sound use case for blockchain in HR
Direct access to external talent
Blockchain solutions already exist to facilitate real-time payments to contingent workers, such as members of the gig economy workforce. No payroll aggregators, no banks, no fiat currencies required. But that isn’t the full extent of the benefits for HR or workers; these innovations potentially expand access to talent.
Payroll management is so far the most sound use case for blockchain in HR. Key transactions are encrypted and stored as immutable data on the blockchain. Payroll data is hash-protected and uses vendor key management, which stores the information required to generate a key rather than the key itself (so it’s not possible to retrieve a key using any single component.) But this new approach to payments also makes it possible to employ (and pay) workers in remote locations or countries where payment infrastructure is limited or fiat currencies are volatile.
Payments on a blockchain will occur in real time and, if desired, through an internationally standard cryptocurrency, which will appeal to talent pools that were previously inaccessible because they were too distant or their identity and experience couldn’t be verified.
Employers will also gain access to the two billion people in the unbanked workforce. Gig economy workers can bypass third parties (e.g., banks, freelance management services) and receive payments directly. Employers can keep an immutable token of the payment records for audit and compliance purposes.
Blockchain action plan for CHROs
There are short, mid- and longer-term actions that HR leaders can take to ensure the HR function is in a good position to track and leverage the evolution of blockchain. Incorporate the following considerations as you plot your strategy:
Meet with stakeholders from your function as well as IT to review blockchain’s potential for changing the way you work, assessing its relevance to the current and future functional and enterprise business models. Look for areas in which blockchain will uniquely strengthen or enhance your functional value proposition. Decide on a realistic blockchain adoption approach based on strategic or tactical relevance to core functional processes.
With enterprises starting to investigate and invest in blockchain, demand has been high for staff skilled and knowledgeable in the enabling technology components and capabilities. However, there is a shortage of skilled staff who understand both blockchain and its applicability to potential business opportunities. Lay foundations as early as possible and start working together with external talent or upskilling internal talent now.
Undertake measured R&D/innovation efforts with the primary objective of identifying realistic use cases and learning how to support blockchain. Participate in operational risk meetings with risk managers and CFOs to develop a blockchain SWOT analysis for your firm, industry or government agency. Learn from peers and pilot projects in finance and supply chain, where many early experiments are taking place. Explore the broader use of digital wallets, enabling employees to receive a part of their salary through digital assets — the precursor to leveraging blockchain capabilities.