IMAGINE A CRUDE OIL producer selling its production directly to a refiner without any intermediaries and never knowing who the buyer is. Imagine the most common method of executing commodity derivative agreements is without a bank, exchange, or broker. Imagine a power plant purchasing natural gas without engaging a wholesale gas marketing company. The power plant simply purchases directly from the natural gas producer, but they never know from whom or where it is coming. Imagine the non-existence of wholesale and retail commodity marketing companies.
All of these transactions would be recorded as soon as the product changes hands. All of these transactions would be governed by self-enforcing smart contracts providing certainty of funding with automatic payment upon the collection of the appropriate sequence of approvals. No need for intermediaries. No need for Letters of Credit. No delays while documentation is physically transferred and reviewed by multiple parties.
Such is the hope of the rapidly developing and much talked about blockchain technology – a technology which The Economist has referred to as “The Truth Machine.” Blockchain holds the promise to eliminate the need for intermediaries; eliminate both accidental and malicious discrepancies; eliminate or significantly reduce fraud; provide immediately audited settlements; and significantly reduce the complexity and costs in conducting many routine business transactions.
There are some very exciting early ventures into blockchain and cryptocurrency development. Experts consider its development to be at about the level of the internet in the mid-1990s, but its continued development is advancing exponentially faster. Sure Holdings is one of the most prominent public companies in the sector, and is at the frontier of providing transfer of shares of privately held companies using a blockchain-based digital ledger. Others include OpenBazaar, Ethereum, and Microsoft Azure, which have provided blockchain development and applications.
Due to the exponential development rate and underlying potential, this is not a technology that a company will want to ignore. The number of big banks and other institutions conducting extensive research and development provides evidence that the mainstream adoption of blockchain technology is only a matter of time. Having contingencies planned for different levels of development and adoption will be vital for the success of financial and other institutions.