Most of the blockchain ideas I hear about make no sense. In general, they are not blockchains (just a type of shared database) and when they are actually blockchains they are used to emulate shared databases and provide a slower and more expensive service. Then how is it that even a blockchain grouch like me thinks the technology has something to offer?
For now, let’s stop talking about blockchains and use the more general terms shared ledger to cover the spectrum of relevant technologies, and enterprise shared ledger to cover the specific use case of exchanging data between organizations (and regulators, etc.) in an approved manner .
I think that using Enterprise Shared Ledger (ESL) software will change business more than Enterprise Resource Planning (ERP) a generation ago.
Take a look at the current case study from Wirecard. The auditors reported that the company was solvent because they believed it had bank accounts worth billions of euros. It turns out there weren’t any. What an easy problem to solve! If only there was an immutable record of transactions that businesses could use to store account balances digitally signed by their banks that investors, customers, suppliers, and regulators could use in lieu of accountants to determine if businesses’ assets exceeded their liabilities! Transparency is a path to trust.
Helen Holmes (Instagram @TheOfficeMuse).
Some of the information in such a common ledger is confidential: it should only be obtained by regulators, the companies involved in the transactions, and possibly the market in which the transactions take place. We therefore need mechanisms to make use of the advantageous transparency of the common ledger in such a way that the necessary privacy is preserved. Let us use the term “translucent” to illustrate the case where observers could look through a list of (for example) bank deposits and loans to see if the bank is solvent but cannot see who is the depositor or the lender are.
Does the technology exist to implement such translucent transactions? Actually it does and it’s not new. Many years ago Eric Hughes, author of the famous Cypherpunk Manifesto of the early 1980s, wrote about “encrypted open books”. This is an idea that now seems fantastically forward-looking, a perfect example of what I previously referred to as counter-intuitive cryptography. It is based on the use of what is known as “homomorphic encryption” to store records in a form in which they can only be read by authorized parties but still undergo basic computation while they are still encoded. In other words, you can determine that (encrypted 2) + (encrypted 2) = (encrypted 4) = without ever being able to read the “2” or “4”.
This means that you can prove certain statements about data without ever revealing what the data actually is. An obvious use of this, and as far as I can remember, was central to Eric’s discussion of the subject of compiling a list of the company’s encrypted assets along with a list of the company’s encrypted liabilities and calculating that the company’s assets Company exceeds liabilities. In essence, this is a great way to see if the company is solvent without seeing the real assets and liabilities.
(When you combine the idea of open bookkeeping with Ian Griggs’ idea of triple bookkeeping, which came around the same time, you can see the foundation for a new and more efficient financial infrastructure that is the fate of accountants everywhere, a very comprehensive overview of the origins and taxonomy of the interface between open book, triple entry and shared books in an article by Juan Ignacio Ibañez, Chris Bayer, Paolo Tasca and Jiahua Xu.)
By employing translucent transactions, markets and regulators no longer have to wait until the end of the reporting period to conduct an audit and obtain the results with the help of qualified financial professionals. Instead, we are in an era of environmental stewardship, a term I borrowed from architecture to describe a transactional infrastructure that allows for constant review and validation. It perfectly describes how a common ledger can transform the business.
If you want to check that a bank is solvent before you deposit your savings there, you can do so with an app on your smartphone without looking at a year-long audit report that includes some numbers from the year before, filtered by management level.
Because regulators can see the status of the ledger at any time, they can spot any unusual or inappropriate activity. In addition, the information stored in the main ledgers in encrypted form was filed there by regulated institutes. For example, should certain transactions need to be investigated, for example on suspicion of criminal activity, the law enforcement authorities can request the appropriate information institutions to provide the keys that are required to decrypt certain transactions.
(If you’re interested in learning more about environmental stewardship and translucent transactions, I wrote an article for the Journal of Payments Strategy & Systems in the summer of 2016 with Salome Parulava and Richard Brown, who is now CTO of leading ESL software provider R3. R3 recently released its Conclave product, which takes an interesting step in that direction and allows companies to leverage Intel INTC SGX secure hardware to remotely review what other companies can and cannot do with shared data.)
I can see that the accountability in the environment and translucent transactions give companies the opportunity to create a kind of controlled transparency that is of interest to all parties involved: as an investor, as a customer, as a citizen, I would be much more to these organizations trust as “closed”. Why rely on management’s assurances for doing business when you can see what the purchase book looks like (without necessarily seeing what they’re buying or who they’re buying from)?
A market made up of what I like to refer to as “glass organizations” that trade ERPs that are interconnected through ESLs, serve stakeholders and work with regulators in entirely new ways is a very attractive prospect. In particular, this suggests that a new and better financial market infrastructure is in sight, and that the blockchain will have a lasting impact on creating new types of markets, and therefore new types of institutions, which I will come back to in the future article.
BERLIN, GERMANY – NOVEMBER 19: Markus Braun, former CEO of the German digital payments processor … [+]
In this world, regardless of whether it is Wirecard, Enron, Tether or anyone else, nobody has to rely on the word of the auditors, as they can simply calculate for themselves whether the company is solvent or not. Stop relying on tips and whispers to find out whether the money in a remote bank account is enough to cover liabilities in other countries: cryptographic evidence replaces testing and apps replace auditors.