Built for bit­coin, blockchain tech­nol­ogy is find­ing many other uses

▶▶Busi­nesses are ex­ploit­ing a tech­nol­ogy cre­ated for bit­coin ▶▶“It’s in­sane. The de­mand is off the charts”

Bloomberg Businessweek (Asia) - - CONTENTS - Olga Kharif, with Matthew Leis­ing Sheenagh Matthews, with Ste­fan Ni­cola, Aaron Ri­cadela, and Alex Webb

Start­ing next Septem­ber, some lo­gis­tics com­pa­nies in Fin­land, Swe­den, Es­to­nia, and Latvia will be­gin out­fit­ting ship­ping con­tain­ers with a soda-can-size de­vice that will beam out the cargo’s lo­ca­tion, how much it’s vi­brat­ing as it trav­els, and its am­bi­ent tem­per­a­ture. The data will flow into a repos­i­tory in the cloud so the en­tire sup­ply chain can be in­formed if a ship­ment’s been de­layed. That will pre­vent re­dun­dant e-mails and phone calls. “There are mas­sive prob­lems com­mu­ni­cat­ing be­tween com­pa­nies,” says Mika Lammi, who’s over­see­ing the pro­ject from his perch at Kou­vola In­no­va­tion, a busi­ness devel­op­ment agency in south­ern Fin­land. “In­stead of hav­ing sep­a­rate data­bases, why not have a sin­gle blockchain where every­one can pool in­for­ma­tion?”

Blockchain is the tech­nol­ogy cre­ated to sup­port bit­coin, but it may soon sur­pass the crypto-cur­rency in im­por­tance. In the first quar­ter of 2016, ven­ture cap­i­tal in­vest­ment in startups com­mer­cial­iz­ing blockchain eclipsed that in pure-play bit­coin com­pa­nies for the first time, ac­cord­ing to in­dus­try re­searcher Coin­Desk, which has tal­lied $1.1 bil­lion in deals to date.

The sim­plest way to un­der­stand blockchain is to see it as the evo­lu­tion of the ledger, a record-keep­ing tool that’s been cen­tral to com­merce since an­cient times. Ledgers track the move­ment of as­sets, whether they’re parcels of land or shares in a com­pany, but they have a big lim­i­ta­tion: Ac­cess to the trove of data is re­stricted, os­ten­si­bly for se­cu­rity rea­sons, but of­ten be­cause that’s how its cus­to­di­ans make money.

In the age of the cloud, it’s pos­si­ble for a net­work of banks or com­pa­nies in a sup­ply chain to main­tain what’s called a dis­trib­uted ledger that all au­tho­rized par­tic­i­pants can tap into with­out need­ing to go through

an in­ter­me­di­ary. An­other ben­e­fit of a blockchain-based sys­tem is that it’s more se­cure. Crim­i­nals can­not com­man­deer in­di­vid­ual ma­chines to gain ac­cess to a net­work, as they did with re­cent at­tacks on Asian banks, by way of fake mes­sages on Swift, a plat­form banks use to com­mu­ni­cate with one an­other. In Fe­bru­ary, that method was used to siphon about $80 mil­lion out of an ac­count of the cen­tral bank of Bangladesh. “Hack­ing a blockchain is gen­er­ally con­sid­ered a low risk,” says Richard John­son, a mar­ket struc­ture an­a­lyst at Green­wich As­so­ciates. “Bit­coin has never been hacked.”

The tech­nol­ogy is draw­ing in­ter­est from fi­nance, ship­ping, man­u­fac­tur­ing, and en­ter­tain­ment. Gilles Gravier, an ad­viser at

Wipro, the In­dian out­sourc­ing gi­ant, says blockchain to­day is where the In­ter­net was in 1995. Com­pa­nies will need “courage,” he says, to use the tech­nol­ogy to “al­low them to do what they haven’t done be­fore.”

Blockchain’s boost­ers say it will drive big im­prove­ments in ef­fi­ciency by stream­lin­ing lo­gis­tics and cut­ting out in­ter­me­di­aries. Gil Luria, an an­a­lyst at Wed­bush

Se­cu­ri­ties, a Los An­ge­les-based in­vest­ment bank, es­ti­mates that sav­ings in trad­ing se­cu­ri­ties and other as­sets could reach tens of bil­lions a year.

R3, a pri­vate con­sor­tium of more than 45 in­sti­tu­tions, in­clud­ing JPMor­gan Chase, Bar­clays, and Wells Fargo, is work­ing to de­velop and com­mer­cial­ize blockchain ap­pli­ca­tions. In Fe­bru­ary the New York-based group re­vealed it had suc­cess­fully sim­u­lated trades of dig­i­tal as­sets on a pri­vate net­work span­ning four con­ti­nents. Tim Grant, man­ag­ing di­rec­tor of R3, says blockchain could speed the of­ten lengthy process of shift­ing as­sets from one party to an­other. That in­cludes over­seas wire trans­fer, which he says can take days to com­plete be­cause of an­ti­quated sys­tems and pro­ce­dures. “It’s man­ual pro­cesses that can be au­to­mated in a very se­cure and trans­par­ent way via dis­trib­uted ledger,” he says. “We’re just try­ing to col­lapse these in­ef­fi­cien­cies.”

John Han­cock Fi­nan­cial, a Bos­ton com­pany that sells life in­sur­ance and mu­tual funds, is also ex­per­i­ment­ing with blockchain. Four staffers in its in­no­va­tion lab have cre­ated a vir­tual cur­rency for the pur­pose of re­ward­ing em­ploy­ees, who could use it to buy gift cards, for ex­am­ple, says Ace Moghimi, John Han­cock’s head of in­no­va­tion in North Amer­ica. “The whole point here is, let’s build the ca­pa­bil­ity and fig­ure out where you can ap­ply it,” he says. “It could po­ten­tially have re­ally big im­pli­ca­tions for the busi­ness.”

At Deloitte, the tech­nol­ogy un­der­pins an ex­per­i­men­tal air­line loy­alty pro­gram in which terms and dis­counts can be ad­justed at will so that, for ex­am­ple, a cus­tomer whose flight was grounded would be able to use air­line points to pay for a meal at a restau­rant dur­ing a lay­over. “Sud­denly what you en­able is a very dif­fer­ent cus­tomer ex­pe­ri­ence and be­hav­ior, and you can in­crease your rev­enue,” says Eric Piscini, a prin­ci­pal at Deloitte.

If they pan out, these ap­pli­ca­tions may boost the mar­ket for cloud ser­vices, al­ready a $175 bil­lion-a-year busi­ness glob­ally. Mi­crosoft, which last fall be­gan of­fer­ing tools for de­vel­op­ers to build such sys­tems quickly, has 5,000 blockchain­s on its servers, up from 50 in De­cem­ber, ac­cord­ing to Mar­ley Gray, di­rec­tor for busi­ness devel­op­ment for blockchain at the com­pany. “It’s in­sane. The de­mand is off the charts,” says Jerry Cuomo, vice pres­i­dent for blockchain tech­nolo­gies at IBM, which has de­vel­oped open source blockchain code that has about 1,000 ac­tive users.

De­spite the ex­cite­ment, blockchain faces ob­sta­cles. Speed is one— the tech­nol­ogy may be too slow to ac­com­mo­date a large vol­ume of trans­ac­tions. In­te­grat­ing new tech­nol­ogy into ex­ist­ing sys­tems may also be a chal­lenge. And reg­u­la­tory hur­dles could de­ter or slow the adop­tion of blockchain.

Deloitte’s Piscini says the hype is caus­ing some con­fu­sion about what the tech­nol­ogy is good for—and what it isn’t. “Every­body comes to us say­ing, ‘We have a prob­lem, and we need the blockchain to fix it,’” he says. “Half the time, they need some­thing else to fix it.”

the Mit­tel­stand—the small and mid­size en­ter­prises that form the back­bone of the Ger­man econ­omy—are rapidly em­brac­ing the idea of the net­worked fac­tory. Yet they re­main wary of en­trust­ing in­tel­lec­tual prop­erty to a cloud con­trolled by global tech­nol­ogy be­he­moths and pos­si­bly sub­ject to gov­ern­ment snoop­ing. “Small and medium en­ter­prises are afraid that those mon­sters we some­times call In­ter­net com­pa­nies will suck out the brain of in­no­va­tion,” says Joe Kaeser, chief ex­ec­u­tive of­fi­cer of Siemens, which in March be­gan of­fer­ing cloud ser­vices us­ing a net­work man­aged by Ger­man soft­ware pow­er­house SAP.

In a case be­ing closely watched in Ger­many, the U.S. Depart­ment of Jus­tice has de­manded that Mi­crosoft hand over e-mails stored on a data server in Ire­land. The soft­ware maker ar­gues that the U.S. has no ju­ris­dic­tion there; the U.S. gov­ern­ment says it does, be­cause Mi­crosoft is an Amer­i­can com­pany. Con­cern that the same thing could hap­pen in Ger­many means lo­cal cloud providers will be able to charge a pre­mium “un­til Mi­crosoft and other Amer­i­cans can con­vince peo­ple they’re safe in these coun­tries,” says Bloomberg In­tel­li­gence an­a­lyst Anurag Rana.

U.S. com­pa­nies aren’t ced­ing the mar­ket. Mi­crosoft will of­fer its Azure pub­lic cloud in­fra­struc­ture in Ger­man data cen­ters, with T-Sys­tems act­ing as a trustee of cus­tomer data. The com­pa­nies say the ar­range­ment will keep in­for­ma­tion away from non-Ger­man au­thor­i­ties. And IBM in De­cem­ber opened a re­search and sales hub for Wat­son, its cloud-based cog­ni­tive com­put­ing plat­form, in Mu­nich—a move in­tended to re­as­sure Mit­tel­stand buy­ers about the se­cu­rity of their data. “If a cus­tomer wants data never to leave Bavaria, then it won’t,” says Harriet Green, IBM’s gen­eral man­ager for Wat­son. “I’m be­ing in­vited in by many, many cus­tomers in Ger­many, be­cause fear about se­cu­rity is very, very real.”

Build­ing a na­tional-fortress cloud may de­feat the pur­pose of the ex­er­cise. A key fea­ture of a cloud is that it gives a com­pany the abil­ity to quickly re­con­fig­ure net­works as de­mand shifts and con­di­tions change. And a global net­work is al­most al­ways more adapt­able and of­fers greater cost sav­ings than one con­fined to a spe­cific coun­try, says For­rester Re­search Se­nior An­a­lyst Paul Miller. Smaller do­mes­tic play­ers “must find com­pelling ways to dif­fer­en­ti­ate them­selves from the tech­ni­cal prow­ess, global reach, and brand recog­ni­tion of the big pub­lic clouds,” he says. “So they em­pha­size lo­cal sup­port.”

An­dreas Loff, man­ag­ing di­rec­tor of cloud-ser­vices con­sul­tant Au­tonu­bil

Sys­tem, says that mes­sage res­onated with two re­cent auto in­dus­try cus­tomers. They con­sid­ered of­fer­ings from var­i­ous U.S. and Euro­pean providers be­fore set­tling on Profit­Bricks. “The data doesn’t touch Amer­i­can soil if the cus­tomers don’t want,” Loff says. “That’s a big ad­van­tage.”

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