Part 1 of a 2-part series, “Blockchain and the CFO”
Finance is certainly no stranger to create new ways to establish trust. I believe that Luca Pacioli, a Franciscan friar and collaborator with Leonardo da Vinci, may have inspired a chain of innovations when he first codified the double-entry bookkeeping system in his mathematics textbook in 1494. For over 500 years, this widely adopted practice enabled trust between trading partners by providing greater insight into each party’s economic viability. Even in times of in-memory computing, which allowed financial books to be closed at any time and within minutes, these principles are still valid.
Innovations transformed how things were done, but each of them had a drawback that did not deliver the ideal state of a high-performing finance organization. Double-entry bookkeeping created more work in an already laborious and tedious process. Meanwhile, accelerated financial closings had limited value if the correctness of information still had to be confirmed using manual, traditional methods.
The real value of these breakthroughs can be realized through an underlying digital layer that automatically certifies all numbers going into the closing process. The finance team would have not only the full transparency it needs to ensure accuracy, but also a platform for securely shared information.
Take, for example, the hype and excitement around blockchain’s potential outside of Bitcoin – potentially impacting a variety of industries and lines of business, especially the finance function. The World Economic Forum foresees an opportunity for CFOs to provide a trusted platform for financial, contract, and voting activities, as blockchain reaches a tipping point in maturity when it stores 10% of the world’s gross domestic product (GDP) within the next 10 years. Many even believe that land titles, loans, intellectual property, corporate brands, currencies, and other digital assets could be better managed, secured, tracked, and monetized ecosystem as process efficiency increases and new market opportunities emerge.
If any of these predictions pan out, the gains achieved by CFOs will be nothing short of revolutionary. However, the skeptic in me always wonders why finance has yet to bring any of these innovations to life. The technology itself is not necessarily new, but I still find that we are in the infancy of demonstrating proof points of blockchain’s relevance that separates this distributed digital ledger from its initial role as a cryptocurrency enabler.
Reaching beyond technology myths to find real bottom-line value
When I hear any of our CFO clients’ thoughts about blockchain, the conversation always begins with Bitcoin and the drawbacks people have seen over the years; namely, security, data and performance concerns, and resistance of existing players. And now that banks are beginning to abandon the Bitcoin technology, finance leaders are having a tough time finding a valid reason to invest in it.
This line of thinking is faulty at best. Blockchain is much more than technology; it’s a framework that allows the creation of a trusted, publicly available registry to securely log information. It’s all about trust between business partners – and it requires innovative applications and new processes to make use of it.
Reconsider my observation about the banking industry, for example. The distributed digital ledger uses specialized algorithms that validate and authenticate transactions within a decentralized architecture and protected by digital encryption. This level of security will replace the role of third parties, such as banks, in guaranteeing information integrity and coordinating agreement among parties. So as you can see, the fear among banks is not that blockchain doesn’t deliver its promises. Rather, it works so well that financial services executives fear that adoption could be a suicide mission for the overall business.
Perhaps banks will not profit from blockchain, or perhaps they will. But this certainly shouldn’t skew a CFO’s perceptions of how the finance area can potentially benefit from a technology of distributed ledgers and registries. As Roy Amara, past president of The Institute for the Future, once noted, “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” And many CFOs are guilty of the latter.
Driving a revolution that makes a CFO’s dreams come true
Blockchain may be that opportunity CFOs need to finally tap into the full potential of their investments in digitization. With trusted public registries, they might go from securing and handling digital rights to transferring them smoothly and immediately without anyone in the middle and with full traceability. The ramifications of this advantage are significant, ranging from real estate processes, stock market performance validations, entitlements, and recycle registries to smart contract protocols that digitally facilitate negotiations, verify the agreement, and enforce compliance with terms.
But at the same time, CFOs must be aware that the use cases and processes around blockchain are still immature. They would do their business a grave disservice by not fully expanding their own understanding of blockchain and flexing their creative muscle to make the finance organization a true center of excellence.
Listen to Joel Bernstein, SAP CFO, Global Operations and Jack Shaw from Blockchain Executive talking about technology, innovation, blockchain, and the CFO at SAPPHIRE NOW to learn more about the potential of blockchain.
The next installment to my blog series Blockchain and the CFO will examine how blockchain can be the engine of finance’s smart contracts capabilities.