In the corporation-to-corporation scenario, corporations will start working on blockchain projects for mission-critical (i.e., niche) applications, while waiting for the “big thing” to occur. Banks may not have any role to play.
It is a fact that corporations are late to take on the blockchain debate, and such lack of awareness may be the symptom of a simple lack of interest. After all, banks are all over blockchain because bitcoin shook them up and made them keep their wide eyes open.
It all began when, among Cyprus banks desperate for a bailout, a proposed rescue plan called for a one-time levy of 6.75% on all personal bank deposits under 100,000 euros. Although Cyprus' parliament rejected that bailout plan, Cypriots and non-Cypriot (e.g., Italian, British, Spanish, and Russian) foreign depositors feared their personal funds could be raided to pay off bank losses and raced to withdraw their money, only to find that banks had closed to prevent more panicked withdrawals. To circumvent the dramatic situation, some depositors turned their fiat currency into bitcoins to unlock and withdraw their deposits out of the country. From this chosen alternative, the value of the bitcoin rose 57% in one week alone, having an immediate shocking impact on banks. Sort of an asteroid hitting the earth and causing the extinction of dinosaurs.
Another possible explanation of such slow corporate uptake is that one of blockchain’s value propositions (if not the main one) is that buyers and suppliers can connect directly and form online networks, removing the need for middlemen. Smart contracts running on the blockchain should automatically detect trigger events along the trade value chain and instruct parties on actions to take to comply with contractual obligations. This sets the blockchain as the enemy of all intermediary operators in a business-to-business environment.
A B2B relationship is made of a sequence of buyer and supplier pairs, with a relatively high level of trust between the two. While the level of trust could be nil (or very low) between an exporter and an importer that are at the edges of the B2B value chain, this is certainly not the case between these parties. So if each pair on the B2B value chain intrinsically trusts each other, what additional contribution could a blockchain bring?
Furthermore, there is a clear shift to trade on open account terms, and open account business is increasing in market share. Open account occurs when a seller ships the goods and all the necessary shipping and commercial documents directly to a buyer, who agrees to pay the seller’s invoice at a future date. Open account is typically used between established and trusted traders. That has compelled the banking industry to seek to re-engage with buyers and suppliers by developing a blockchain-based value proposition aimed at meeting the needs of traders operating on these open account terms.
So, if open account transactions are founded on trust and keep banks out of the picture, why should corporate trade partners want to get them back with a blockchain? Since open account transactions are based on the principle of trust between parties, why the need for a trustless distributed ledger technology?
Innovation happens in bursts, as was the case with the Internet, which became popular when two “asteroids” hit the consumer world: email and the Web browser. Such a disruptive effect has not yet occurred in corporations’ world. While the bitcoin was the killer app (i.e., the asteroid) for banks, nothing is there yet for corporations.
If this is the case, little or no demand for blockchain-based applications can be expected by corporate users. Maybe the most aware of the technology are financial directors and corporate treasurers, for the simple reason that they are frequently exposed to banks and therefore absorb the inherent dynamics. These corporate representatives expect changes in payments, securities trade, and bank clearing. However, all have concerns that the blockchain discussion is moving too fast. The corporate side of the equation needs to see first a consolidation of the different players that populate the crowded space of blockchain applications (see The Global Landscape of Blockchain Companies in Financial Services). The need for standards and regulation is the next call.
This post is the third in a series of four on blockchain's business scenarios. Previous posts explored bank-to-bank and bank-to-corporation scenarios.
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