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Blockchain’s Power as a Trust-Building Vehicle

By March 1, 2018Article

Blockchain is coming of age. Much of the debate around blockchain thus far has been dominated by its use for cryptocurrencies like Bitcoin. Unfortunately, this has created an image of blockchain technologies as risky, overly complex and accessible only to large enterprises. However, the usage scenarios for blockchain extend far beyond cryptocurrencies and afford opportunities for small and mid-size firms to leapfrog over their competitors at a marginal cost by leveraging the platform.

One of the core attributes of blockchain is its ability to track of goods and transactions between firms. This can enable many firms to begin leveraging blockchain platform today as a vehicle to build trust across stakeholders, allowing greater collaboration and transparency. Furthermore, these benefits can often be realized in a more cost effective manner than other alternatives:

Consider the following blockchain usage scenarios for any mid-size firm that needs to build trust with its constituencies:

1.     Driving transparency and reducing costs for audit process

Audit is a necessary function across industries and audit costs can be significant contributor of a firm’s expense irrespective of the firm’s size. Financial Executives Research Foundation surveyed 6,490 unique filers reporting in 2015 and found firms paid an average of $1.8 million in audit costs. In 2013, Bank of America reported audit costs of $90.9M. Audit expenses are a function of numbers of hours auditors have to spend in verifying transactions. Creating transparency to transactions and data lineage can make the audit process more efficient, greatly reducing audit hours and costs. A Big 4 consulting firm reports that a typical high value transaction (up to 6 blocks) takes up to a month (160 hours) to be verified in a traditional approach and within one hour by leveraging blockchain technology.  

This reduction in cycle time can lead to many advantages beyond just cost savings. Once the current cycle time constraints are overcome, the blockchain technology can drive additional benefits. First, firms can increase audit of number of transaction from a sample population to the whole population. Second, they can increase the frequency of audits from yearly to continuous audit, reducing reputation risk by identifying errors and addressing root causes in a timely manner.  Third, blockchain with an additional analytics layer can enhance audit quality by highlighting data inconsistencies or any unusual patterns in the transactions.

2.     Regaining consumer trust

A product recall typically results into adverse impact on corporate earnings and reputation. Mattel had to recall over 900,000 toys over lead paint and food companies like Bolthouse Farms were affected by botulism contamination in their carrot juice. Both firms were eventually able to absorb the financial losses from the recall but had a long road in regaining consumer trust. The companies involved have claimed the sourcing problem is resolved, however, without a mechanism to verify such claims consumers have to rely on the firms’ claims of corrective actions. Consumers may still find it hard to come back to the recalled product or worse, the firm as a whole.

Imagine a blockchain-based solution that enables consumers to verify the source of every part that went into a purchased product. Examples like use of blockchain technology to identify source of diamonds by firms like Everledger indicate that such solutions go beyond the traditional limitation of relying on a firm’s word and help build consumer trust that they do not have a conflict diamond in hand. Blockchain technology can help regain consumer trust by providing a mechanism for consumers to adhere to the old adage “Trust but verify.”

3.     Enabling trust as a differentiator

Typically firms find their competitors advertising the same benefits. These benefits range from claims of ethical sourcing, organic ingredients and carbon footprint. How can a consumer know which of the claims is factually correct? 

Firms interested in differentiating themselves from competitors making similar claims could take lessons from Typically consumers take a look at the reviews of similar products and Amazon-authenticated reviews help a buyer to make an informed choice. On the other hand, firms rely on candidate-provided references to make an informed hiring decision.  

There are many examples of reliance on verified third-party feedback for building trust. These examples apply to both individuals as well as institutions in their decision making process.  Blockchain provides a capability that is tamperproof and can provide consumers an ability to review not just product sourcing details but also any embedded evidence like independent reviews, third party certifications and regulatory documentation. A firm that desires to stand out from its competition can benefit from leveraging blockchain technology to enable trust as a differentiator by enabling independent, verifiable and tamper proof references of its advertised claims.

As compared to existing technologies that provide distributed ledger, a blockchain platform is unique in its ability to provide a distributed ledger that cannot be accidentally or deliberately tampered with, and enables relevant documents to be tied to the transactions for easy access. Large corporations are likely to have existing investments in technology that can be upgraded to mimic some these benefits of blockchain platform. Blockchain platform is now available in many flavors and includes established resources like Ethereumto flexible and cost effective emerging solutions like RChain Blockchain. Firms interested in thinking beyond the blockchain debate may find that the platform has capabilities that can be leveraged to reduce costs, build consumer trust and hence improve long term earnings.

Ashwin Abhyankar is an Engagement Manager at KPMG US

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