Chain Of Tools: Lessons From The Front Lines

Eric Piscini , Gys Hyman and Wendy Henry

Do your customers trust you? And do you trust them? The emerging trust economy depends on each transacting party’s reputation and digital identity—and that’s where blockchain comes in. The technology behind digital contracts transforms reputation into a useful, manageable attribute.

Part 3 of a 5-part series. Read Part 1, Part 2, Part 4, and Part 5.

You can also read the full article or download a copy at Deloitte University Press.

In the greater context of the trust economy, blockchain is not a cure-all for the challenges of establishing and maintaining trust. As a technology, it is still maturing; standards and best practices do not yet exist. The very features that protect blockchain against theft and fraud could also drive overhead if not correctly implemented—a potential obstacle on the path toward individual deployment of the technology. Finally, legal recognition of contracts and digitally transferred assets is currently limited. The good news is that organizations can take steps now to mitigate, if not fully address, these challenges.

Some pundits are likening the emergence of blockchain technology to the early days of the World Wide Web, and for good reason. In 1991, the foundations for distributed, open communication were being laid—network infrastructure, protocols, and a variety of enabling technologies, from javascript to search engines to browsers. There were also new enterprise software suites that made it possible to take advantage of digital marketing, commerce, and linked supply networks, among countless other opportunities. Hyper-investment chased perceived opportunity, even as specific scenarios describing how the technology would change the world had not yet been defined.

Blockchain may lead to even greater disruption by becoming the new protocol for digital assets, exchanges, contracts, and perhaps most importantly, identity and trust. With efforts to create a new stack for all facets of blockchain attracting investment, the time is now for enterprises to explore the underlying technology, and to envision how blockchain may be used for more than just the easy use cases of cost savings and efficiency within their own boundaries. Take a hard look at your core business, surrounding ecosystems, and even the long-established mechanics of the way your industry operates, and then direct your experimentation toward a truly innovative path.

Smart play with smart contracts

Delaware, home to more than 60 percent of Fortune 500 firms, is teaming up with Symbiont, a distributed ledger and smart securities vendor, to launch a blockchain-based smart contracts system. Smart contracts are protocols that allow blockchain technology to record, manage, and update encrypted information in a distributed ledger automatically, without intermediaries.1 The system will enable participants to digitize incorporation procedures such as registering companies, tracking shares, and handling shareholder communications. For companies incorporated in Delaware, this could make registration and follow-up steps in the process faster, less expensive, and more transparent.

At the heart of Symbiont’s solution is an immutable, append-only database, which provides a single, global accounting ledger for system participants. Transaction history is appended and replicated across all network nodes, with access permissions restricted down to the specific organization or even user level. Each company registering with the state of Delaware signs in with a private key that verifies its identity to other participants. Autonomous recordkeeping will trigger notifications when actions are required, such as new filing requirements when thresholds are met or when documents approach expiration.

Project teams are taking a two-pronged approach to deployment. First, they will rebuild the public archives using a distributed ledger for storage and “smart records” to automate the control and encryption of public and private records. This critical step will make it possible for digital documents to be shared in multiple locations and, importantly, be recovered in the event of system failure.  Next, they will place incorporation and other legal documents on a smart contract-enabled blockchain and establish operational procedures for using and maintaining them.

This deployment is part of a larger effort called the Delaware Blockchain Initiative, which will lay the legal and technological groundwork needed to support blockchain-based systems going forward. The governor’s office is currently collaborating with the legislature to build the legal framework required to support blockchain-based incorporation processes and digitally originated securities.2 “We see companies allocate significant financial resources to correct and validate stock authorization and issuance errors that could have been correctly and seamlessly handled from the outset,” says Delaware Gov. Jack Markell. “Distributed ledger [transactions] hold the promise of immediate clearance, immediate settlement, and bring with them dramatic increases in efficiency and speed in sophisticated commercial transactions.”

Swift: From middleman to enabler

Blockchain has the potential to rewire the financial industry and beyond, generating cost savings and new revenue opportunities. Payment rails have been the subject of various blockchain-driven initiatives. Payment transaction firm SWIFT has been testing use cases to demonstrate how its 11,000-plus member financial institutions can optimize the technology’s transparency while maintaining the industry’s privacy requirements in the emerging trust economy.

The organization’s new R&D arm, SWIFT Innovation Labs, was launched with an eye on eventually providing distributor ledger technology (DLT)-based services that leverage its standards expertise, strong governance, and security track record. DLT, it says, would provide trust in a disseminated system, efficiency in broadcasting information, complete traceability of transactions, simplified reconciliation, and high resiliency.

SWIFT’s team of 10 experts in standards, securities, architecture, and application development built a bond lifecycle application that tracks and manages bonds from issuance to coupon payments to maturity at an ecosystem level rather than by individual company. SWIFT applied its own ISO 20022 methodology to DLT to gauge interoperability with legacy systems in cases where all stakeholders were not on the distributed ledger.

The bond lifecycle proof-of-concept was built using an Eris/Tendermint consensus engine to enable smart contracts written in Solidity, a language for the Ethereum blockchain. Monax’s Eris platform was chosen because it is open-source; it enables a permissioned blockchain that can only be viewed and accessed by the parties involved in the transaction; it supports smart contracts; and its consensus algorithm has better performance than Bitcoin’s blockchain.

SWIFT’s lab team set up five blockchain nodes (in its California office, at an account servicer in Virginia, and at investment banks in Brazil, Germany, and Australia) on a simulated network that implemented the ISO 20022 standard, which covers transaction data for banks, securities depositories, and high-value payments. The standard’s layered architecture consists of coded business concepts independent of any automation, which according to SWIFT “seems a good place to look for content that can be shared and re-used” via a distributed ledger.

“SWIFT has been targeted in the press as a legacy incumbent that will be doomed by DLT,” says Damien Vanderveken, head of R&D at SWIFT Innovation Labs. “But we believe SWIFT can leverage its unique set of capabilities to deliver a distinctive DLT platform offer for the [financial] community.”3 This could translate into cheaper, faster, and more accessible remittance and corporate disbursement services around the globe.

For more insight on blockchain, see In Blockchain We Trust.

Copyright ©2017 Deloitte Development LLC. All rights reserved. Reprinted by permission.

Endnotes:

1 – Ream, Chu, and Schatsky, Upgrading blockchains.

2 – Deloitte Center for Financial Services

3 – Finextra, “SOFE Berlin: Swift unveils blockchain proof-of-concept.”


Eric Piscini

About Eric Piscini

Eric is a Deloitte Consulting LLP principal serving the technology and banking practices with 20 years of experience defining IT strategies including M&A, technology infrastructure, IT operations, post-merger integrations, echannel strategies, payment, and digital transformations. In addition to serving financial institutions and banking regulators in core aspects of their technology environment, he also leads the Deloitte global cryptocurrency center serving financial institutions and retailers.

Gys Hyman

About Gys Hyman

Gys is a principal in Deloitte Consulting LLP’s Deloitte Digital practice, the world’s first creative digital consultancy. He is currently focused on the banking industry and has helped a number of organizations with large scale digital transformation efforts, ranging from designing, building, and implementing green field’s digital banking capabilities to large scale core banking systems transformation efforts.

Wendy Henry

About Wendy Henry

Wendy is a specialist leader in Deloitte Consulting LLP’s Federal Technology practice and works with clients to distill emerging technologies into simple business value discussions. An ever-curious individual, she thrives on understanding how emerging technologies can drive her clients’ business towards newly created value. She is a hands-on technologist with 30 years of large-scale, complex system integration experience across a wide variety of technologies, including blockchain, cloud, digital innovation, and location-based technologies.