Blockchain Outlook For Finance Executives: Proceed With Caution

Finance executives are getting mixed messages on blockchain technology. An open, trusted, distributed ledger, blockchain technology first emerged in the cryptocurrency space, but its potential utility extends far beyond Bitcoin. Blockchain is an efficient way to settle payments without third parties. It allows users to verify transactions and validate origins for many purposes. And along the way, it generates incredibly valuable data that can be shared enterprise-wide. But what does it mean for CFOs?

It’s hard to overstate the potential for industry disruption. An MIT Sloan Management Review article compares blockchain to an “internet of value” and speculates on the way that intriguing concept can transform organizations. On a practical level, blockchain can significantly reduce the cost of transactions by lowering fees and improving efficiency. Since blockchain doesn’t require third parties or a clearinghouse to validate transactions, companies that use it can virtually eliminate those costs.

When companies receive payments via blockchain, transactions are accelerated, meaning the company gets paid more quickly. That’s a boost for suppliers, who typically bear costs up front and get paid last. Finance, real estate and banking transactions that used to take weeks or months can be closed in hours or minutes. Blockchain is especially useful for cross-border fund transfers and currency conversions, which are more affordable and faster with a trusted distributed ledger system, lowering operating costs.

Blockchain is highly secure, with a digital signature formed by each hash in a block and multiple blocks linked to create the chain. This process generates unique and verifiable digital signatures that can’t be deleted or modified since the ledger is distributed across multiple computers. Falsifying an entry would require access to every computer that stores a copy of the ledger, which reduces the risk of fraud and embezzlement to near zero.

Blockchain is expected to have an enormous impact on supply chain operations, making compliance more affordable and reducing risks by providing a way to prove suppliers meet goals, such as sustainability or fair-trade objectives. By using blockchain ledgers, buyers and sellers can access all documents relevant to a transaction to ensure they are accurate and authentic. This simplifies the process of providing proof of compliance or demonstrating adherence to regulations.

From an enterprise planning standpoint, the use of blockchain also has a massive upside. It can free data from proprietary systems, adding to the information available for analysis. Companies that use legacy planning systems will find it difficult to adapt these systems and connect with a distributed ledger system like blockchain. But those who use a modern, cloud-based system that easily adapts to new data sources will be able to incorporate distributed ledger data, perform forward-looking scenario modeling, analysis and forecasting, and share stronger insights throughout the enterprise.      

So, given the immense potential upside, when will blockchain go mainstream? CFOs, who tend to be a cautious group, will likely wait until they see the technology prove its value before embracing it. Transaction vendors are working on blockchain applications, and a Cowen report cited by CNBC projects that spending on blockchain solutions will more than double to top $2 billion in 2018. But the same report surveyed executives in the sector, who estimated that it will take an average of nearly six years for the first blockchain applications to go mainstream. Other experts quoted in the article say blockchain applications are decades away from widespread adoption.  

IT research firm Gartner has a helpful way to separate hype from reality for emerging technologies: the Gartner Hype Cycle. The firm charts expectations over time, defining a “peak of expectations” that plunges into a “trough of disillusionment” and gradually rises on a “slope of enlightenment” to the “plateau of productivity.” According to Gartner’s 2017 hype cycle report for emerging technologies, blockchain has passed the peak and is progressing toward the trough, with plateau status expected in the next five to 10 years.

Blockchain buzz is inescapable, but the emerging technology’s potential to improve business operations — including finance, supply chain and planning — is genuine. Look for large enterprises to conduct pilot programs while smaller companies wait for further development. As usual, finance executives will require a strong business case to make a move, and that’s as it should be. CFOs should balance a healthy skepticism with an openminded approach. The bottom line? Proceed — but proceed with caution.

Tony Levy is Global Head of Finance Solutions at Anaplan.