Like all emerging technologies, blockchain is going through the ups and downs of the hype cycle. Depending on the month, it’s either a hopeless fad or the next big thing (for which are you are already late!).

Much of the technology we use every day went through that cycle, from disappointing clumsiness to operations so routine that the technology itself only gets noticed when it fails.

While CFOs will always have a role in putting forward ROI tests around major investments, they should also take a larger role in the emergence of blockchain. The technology is likely to have a profound impact, over the long run, on companies’ most foundational business processes, including order to cash and procure to pay.

In fact, I believe that by 2030, more than half of all new business contracts will originate between companies on a blockchain.

To understand when blockchains are useful, however, it’s important to remember, first and foremost, what makes them different from other technology tools, and then to apply some reasonable and thoughtful tests to individual use cases.

What most differentiates blockchains is their ability to coordinate information, processes, and payments without a central intermediary.

While there are many services that can information, processes, and payments, most companies have avoided them. They require a costly central intermediary — and intermediaries often use the global visibility of all transactions in a network to not only connect buyers and sellers, but to also manage the market for their own benefit.

This can be seen with big digital services like car sharing and apartment sharing. Despite not owning any cars or apartments, the intermediaries are not only worth more than the participants, they also have access to proprietary business information. Consumers may not feel they are giving up much, but for strategic users, the threat of exposing proprietary business information to a would-be future competitor is too risky to contemplate.

When to Take the Plunge on Blockchain?

Over the years at EY, we have developed a set of tests that you can apply. If your program checks the box on at least three of them, it’s probably a good strategic use of the technology:

1. Are multiple parties involved in your transactions?

This is the most important test. Complex process coordination can be easily achieved point-to-point with two parties.

Once you get beyond that, however, it becomes more complex to have shared logic without appointing any one party as an all-powerful intermediary. The truth is, most larger transactions become multi-party transactions. Once you add shipping or insurance or transaction financing, even something that originated as a simple purchase gets complicated.

2. Is there shared business logic between the parties?

Prior to blockchains, it was very difficult to implement shared logic between parties. For example, if three or four contract manufacturers are buying off the same purchasing agreement, you need each one to get the maximum available discount without showing any other party how much they have spent.

On a blockchain, this can be done with full privacy for each participant using smart contracts.

3. Is it critical to have a tamper-proof record of transactions?

In their essence blockchains are transactional systems that record each transaction for all parties in a network. While it’s not a perfect guarantee of immutability, the large number of redundant copies of each transaction makes tampering very difficult.

A number of EY clients use this feature for traceability purposes and to help validate that assets — everything from fine wine to vaccines — have not been tampered with in transit.

4. Are you managing a finite resource?

Blockchains are particularly good at managing finite resources like inventory or assets. Represented as digital tokens, the assets can exist in only one digital location at a time. Blockchains can also provide extensive safeguards that prevent users from “copying and pasting” unique digital assets.

The enthusiasm for blockchain-based inventory systems is based on the fact that they require reconciliation between locations and track individual inventory items. Once tokenized, companies can not only track digital assets; they can also deliver financial services against them, such as loans and insurance policies.

5. Does your industry ecosystem benefit from increased transparency?

Blockchains work best when applied to industry ecosystems. The ability to digitize a full value chain means not only greater efficiency. It also creates the opportunity to understand industry trends and capacity issues, should the participants agree to share the data.

Posthaste Processing

The use of standardized smart contracts and digital tokens simplifies the aggregation of industry-level data across the ecosystem, while the resulting analytics are much more insightful.

In the work we do with EY clients, we have seen tremendous improvements in process cycle times and results. A good example is our work in contract management. The ability of smart contracts to handle a large number of different rules and agreements has helped us take cycle time for processing deals at one client from 45 days to less than a minute.

In the past, “net 30” actually meant something closer to 60 days because of the delays involved in completing the process. When processing can be done in under a minute, the potential impact on payables, receivables, and revenue recognition can be significant.

Blockchains are well past the “proof of concept” stage. We know the technology works, and we understand many of the good use cases.

The role of CFOs should be to take a strategic look at this technology beyond ROI. Blockchains enable speed, privacy, and integration with business partners without being forced to use all-seeing intermediaries, and they allow users to embrace more digital business with much less risk.

Paul Brody is the global blockchain leader for EY.

The views reflected in this article are those of the author and do not necessarily reflect those of the global EY organization or its member firms.

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One response to “5 Tests for Deciding Whether to Use Blockchain”

  1. I understand Blockchain requires a widely distributed digital ledger in order to verify the authenticity of transactions. In the case of Smart Contracts, who hosts these ledgers? I’ve also heard that due to the length of the chain, immense computing resources could be required – have you found that to be the case?

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