The CIO’s Guide to Blockchain

CIOs should begin to embrace blockchain to explore strategic business initiatives, but avoid falling for the hype.

More than $4 trillion in goods are shipped globally each year. The 80% carried via ocean shipping creates a lot of paperwork. The required trade documentation to process and administer all the goods is estimated to reach one-fifth of the actual physical transportation costs.

In early 2018, a logistics business and a large technology company decided to develop a joint global trade digitization platform built using blockchain technology. It will enable them to establish a shared, immutable record of all transactions and provide all disparate partners access to that information at any time. 

As blockchain evolves beyond bitcoin and the financial sector, large companies are looking to the technology for potential solutions to business challenges and to explore new disruptive business opportunities.

Why blockchain matters to CIOs

CIOs are under pressure to help guide decisions on if and how blockchain can be implemented in their enterprises. Often the solution won’t require blockchain — existing technology will suffice. In fact, Gartner anticipates that through 2018, 85% of projects with “blockchain” in their titles will deliver business value without actually using a blockchain. However, the very action of discussing blockchain opens up the opportunity for collaborative discussions, especially with peer entities that have the same noncompetitive business challenges. For CIOs, it’s necessary to understand what blockchain is and how it works, and more importantly, how the technology can be utilized to further mission-critical business priorities — or even disrupt the business completely.  

Blockchain has been the No. 1 search term on gartner.com since January 2017

“Blockchain technologies offer a set of capabilities that provide for new business and computing paradigms. Exploiting blockchain will demand that enterprises be willing to embrace decentralization in their business models and processes. It is not straightforward,” says David FurlongerDistinguished Vice President Analyst, Gartner.

Blockchain introduces challenges ranging from strategic issues around how to compete and collaborate at the same time (e.g., in an industry consortium), to the lack of technical interoperability, security issues and more hidden data management challenges, including the EU’s Global Data Protection Regulation (GDPR). However, Gartner predicts that blockchain’s business value-add will grow to slightly over $360 billion by 2026, then surge to more than $3.1 trillion by 2030. This means businesses need to start planning, to capture future value as well as mitigating competitive threats, from, for example, new decentralized operating and distributed business models.

Blockchain 101

Blockchain might one day redefine economies and industries via the programmable economy and use of smart contracts, but for now, the technology is immature. Essentially, blockchain is made up of sequentially grouped, consensually verified blocks of transactions. Those blocks are chained together, creating a shared record of all exchanges. This establishes trust among unfamiliar or unknown partners. The information is stored over many different or decentralized locations with no central intermediary (such as a bank or company.) The ledger where this information is stored forms an immutable (or unchangeable) record of transactions dating back to the first, or genesis, transaction.

Security is handled by cryptographic protocols and techniques that ensure the permanence, resilience and immutability of the data.

How bitcoin works

Bitcoin, probably the most well-known example of blockchain, records cryptocurrency transactions in a “chain-of-blocks” data structure, where a block is a group of transaction records added every few minutes in a never-ending series. The ledger records the sequence of each transaction and every “coin” (virtual currency stored as information bits).

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In order to achieve this goal of a “trusted record within an untrusted environment,” the bitcoin ledger relies on significant computational power and interested parties or “miners” to validate and confirm transactions, using a structured process for adding transaction records to the blockchain in return for monetary reward.

Get in early

CIOs can (and should) now to begin considering blockchain without the risk of being left behind. Only 1% of CIOs responding to the Gartner 2018 CIO Survey indicate any kind of blockchain adoption, and only 8% are in short-term planning and pilot execution. However, 77% of responding CIOs say their enterprise has no interest in the technology and/or no action planned to investigate or develop it. Gartner believes this is a more dangerous attitude. Gartner hype cycles are not indicating obsolescence. Re-engineering businesses to the extent that blockchain envisages will take time, but that doesn’t mean it won’t happen and the extent of that change on businesses, industries and society will be enormous. CIOs therefore ignore the trend at their peril.

Blockchain beyond financial services

CIOs can begin their exploration by studying blockchain use cases across industries. For supply chain, the potential applications range from the ability to track a mango from farm to store (traceability) or tracking a genuine object from factory to store (counterfeits) to managing paperwork (efficiency). Governments have also been exploring potential applications and although many are still nascent, they offer interesting use cases. For example, Ukraine has explored blockchain for regional elections, and Brazil is planning to use blockchain-enabled voting to conduct national referenda.

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For other government users, such as the U.S. Department of Homeland Security, blockchain technology offers an opportunity to create a digital identity network, effectively creating a single sign-on experience. For humanitarian aid, the U.K. Department for Work and Pensions and New York City’s Department of Homeless Services use cryptocurrency to securely and reliably administer help via credits for social or humanitarian services. In the financial services industry, blockchain opens up a world of opportunity for cross-border payments, trade finance, securities settlement efficiency and more secure identity systems.

Avoid the hype

Though blockchain holds great promise, often the technology is offered as a solution in search of a problem. To ensure a successful blockchain project, make sure you actually need to use blockchain technology. Additionally, much of what is on the market as an enterprise “blockchain” solution lacks at least two of the five core components: Encryption, immutability, distribution, decentralization and tokenization.

Read More: 7 Strategies to Gain Value From a Doomed Blockchain Project

Security, technology and legal limitations

As with all new technologies, blockchain is not without its challenges. For example, established laws still need to be revised and amended to accommodate blockchain use cases, and financial reporting is still unclear. The technology also lacks legal, tax and accounting frameworks; native interoperability; scalability; and limited or inadequate governance models and standards. Many versions of blockchain are being built within existing operating models, when the original intention was to disrupt and disintermediate centralized entities, operations, processes and business models using open source and democratized engagement.

Read More: Why Blockchain’s Smart Contracts Aren’t Ready for the Business World

Further, security for blockchain is a challenge given the lack of best practices and standards. Within cryptocurrency, for example, tens of millions of dollars have been stranded or stolen due to misunderstandings, basic code errors, fraud and security errors. Security vulnerabilities also exist in the technology that surrounds the blockchain ledger, meaning all blockchain projects must be evaluated for technology, governance and compliance, human misunderstanding and value at risk.

The collection of technologies that make up the entire blockchain still carries significant risks

“Although the blockchain ledger uses sound cryptography, the collection of technologies that make up the entire blockchain still carries significant risks,” says Mark Horvath, research director at Gartner. “This causes many to underestimate and underappreciate both the risks of blockchain-based systems and the value of applying some basic security protocols.” Although these challenges might seem insurmountable now, enterprises should not avoid exploring how blockchain might disrupt their industry.

Blockchain as a disruptor

On one hand, the timing and launch of bitcoin seems intentionally designed to disrupt the financial and banking industries. However, due to established and effective solutions and limiting technology, it seems unlikely to succeed. In other industries where blockchain could be disruptive, risk-averse companies are keeping a tight hold on the risk factors, resulting in incremental improvements instead of game-changing disruption. These industries include healthcare, supply chain and government. Even traditional disruptors such as Uber and Airbnb could be disrupted by the eventual successful implementation of blockchain. These companies, part of the “peer-to-peer” economy, still rely largely on a middle man to conduct business. Companies looking to utilize blockchain technology will be able to remove the central authority figure altogether. Achieving transformative change in this sector will take time due to adoption challenges — assuming the technology platform will be able to handle the scale and complexity of these business interactions.

This article has been updated from the original, published on June 29, 2016, to reflect new events, conditions or research.

Clients can reach more in the full report Blockchain-Based Transformation: A Gartner Trend Insight Report with Rajesh Kandaswamy and David Furlonger. Clients can read more about blockchain security in the full report Evaluating the Security Risks to Blockchain Ecocsystems by Mark Horvath, et al.

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