Take Away This Blockchain
I don’t think I will ever use a self-driving car. I’ve seen War Games too many times to believe that a computer can be trusted to understand the unintended consequences of some actions. Plus, I would never underestimate how even the slightest human interaction can impact what is essentially an automated process. Which is why I generally ignored all the buzz about bitcoin and other cryptocurrencies that operate on a blockchain infrastructure. But my unofficial motto for 2019 is to embrace the possibilities. To that end, I am willing to at least consider how blockchain technology can impact businesses and the financial sector, in particular.
First, what in the world is blockchain? Good luck trying to find a straightforward, “plain English” description. Here’s my attempt: Blockchain is a technology infrastructure that allows users to share and add to secure blocks of data, but not change them. Various contributors to an article on the topic for the Journal of Financial Planning describe it like a spreadsheet or database. Louise Matsakis describes blockchain as “essentially a distributed chain of data entries that everyone can view and that can’t be easily altered” (Wired, 5/18).
Bitcoin and other cryptocurrencies were built using blockchain technology. Devised as a more secure and efficient method of sharing payments in the gaming industry, more and more investors are asking about, and putting money into, bitcoin as an investment vehicle. While the contributors to the Journal of Financial Planning article suggest that bitcoin blockchain has never been hacked, they may be arguing semantics. Blockchain technology may be relatively secure, but people have lost money related to hacking of bitcoin exchanges and fraudulent trading related to bitcoin. The most famous example is Mt. Gox, a bitcoin exchange based in Japan. The exchange lost an estimated $3 billion in bitcoin value and collapsed in October 2017. This came about due to the business’ mismanagement and security issues that resulted in theft from the exchange’s online wallet. Subsequent fraudulent trading succeeded in driving up bitcoin prices in an effort to hide the losses, similar to a Ponzi scheme. Currently, investors are still waiting for some restitution, as some of the missing bitcoin was located, but the case is still under investigation, and an additional lawsuit with a business partner remains unsettled.
Outside of bitcoin, the long-range benefits of blockchain technology have yet to be fully realized. However, there is some promise in using it for supply chains, to allow tracking materials around the world. In this use-case, the blockchain is a digitized, more secure process that replaces physical paperwork and helps reduce transportation costs, while adding a layer of validation. The technology may also allow for automated agreements that go into effect as soon as certain conditions are met and that can track the status of a shipment (Wired, 5/18). Companies like Walmart may be able to track produce back to specific farms, thus eliminating the waste that comes with having to throw out everything if you can’t identify the source of contamination (Journal of Financial Planning, 1/19). While this increased security and efficiency is promising, implementing a new system will require everyone on the supply chain to make the shift. In addition, industries will need to address how to view, share and analyze the data, as well as allow for some measure of government regulation.
So, while I am not ready to invest in bitcoin at the moment, the possibilities related to blockchain technology in certain industries make a lot of sense. A savvy investor may look at investing in companies (Walmart, UPS and FedEx have all started exploring various uses of blockchain technology) that see this as part of their future operations and are able to start devising ways to implement it for improved efficiency.
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Information contained herein was derived from third party sources including Bloomberg, Standard & Poor’s, Dow Jones & Company, the Federal Reserve Bank of New York, and Morningstar, Inc. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. We have not and will not independently verify this information.
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