Section 4: Investment and use-case by industry
Currently, start-ups are overall struggling in all areas, while consortia of companies are at work, making slow but continuous progress with dedicated resources. Each in their own sector, these consortia are thinking and developing “coopetition” frameworks as well as value and information exchange infrastructures. Their progress, successes, and difficulties should be closely monitored.
Some elements relevant to this discussion can be found in the section reviewing tokenized assets (e.g., real estate, refer to “O—Asset ownership”, page 23)
INVESTMENT IN DLT TECHNOLOGIES
According to IDC (International Data Corporation), spending on blockchain is projected to continue growing exponentially, increasing from 0.8 billion USD in 2017 to 1.5 billion in 2018, to reach 12 billion in 2022. The US and then Europe will account for the largest spending, followed by China and Japan. In the same study, spending will be led by the financial sector. Manufacturing and retail sectors are also reported to be increasing their investment by 82 percent annually.
What this says, at the very least, is that corporations have not been deterred from continuing to invest in the technology and the development of related applications.
Start-ups also continue to receive funding. However, regardless of the current dynamic of ICOs, there is an important phenomenon related to ICOs issued in 2017 and early 2018: funds were raised in cryptocurrencies (BTC, ETH, etc.), and if the teams have not converted or hedged these financial positions, they are now sitting on one fifth to one tenth of their initial capital. While this hedging and spending on development has no doubt placed downward pressure on crypto markets, the actual funding of these initiatives must now be problematic for their executives.
Banks were among the most active in trying PoC, with most of them starting early. As very few DLT-based systems are currently in production, it can be inferred that disillusion dominates blockchain teams within banks.
There are a number of ways in which the banking sector can be, and is, impacted by the inception of DLT. As we saw in another paragraph, there are many services needed for the custody of cryptocurrencies, including revenue management and payment itself, and most will probably be proposed by new kinds of banking actors. The impression we have right now is that large banks are turning to blockchain because they are obliged to. They found a couple of applications while optimizing their back-end functions, and their boards are probably relieved that it was all that needed to be done. Some go a step further by proposing a cryptocurrency brokerage service or tokenizing funds, in the most extreme cases. But there is no doubt that only start-ups that are native to the business will be able to propose disruptions comparable to the service that DLTs provide. Today’s banks are just too cumbersome, have too many employees to pay, and are dependent on too many legacy systems, which they will never manage to decommission. Even if their interbank settlement process is more efficient and faster, this will never improve their actual customer service.
Below is some relevant XRP news in banking:
New partners continue to join the XRP network. The Euro Exim Bank is now using Ripple to provide financial services for export and import companies, for cross-border settlements.
Ripple has invested 15 million USD in a Swiss producer of physical wallets (Tangem), as it has identified this as a key element in promoting the usage of cryptocurrencies; XRP in particular.
One argument that is often quoted is that even if Ripple closes as a company, the XRP network will continue— SWIFT cannot say the same. And indeed, it appears that XRP is taking over from the SWIFT system. Today, this is the most obvious application of blockchain.
The XRP community is also particularly active on social networks. This may indicate confidence, as this cryptocurrency has been resisting the downturn better than most in the past few months.
In other updates, Jerry Yang, cofounder of Yahoo, described blockchain as a “natural technology for banks and trading.” He predicted that “if you look at US institutions and banks, the kind of infrastructure that is being developed has long-term implications. For the technology to succeed, the question is, can trust be built? That can open a huge number of doors.”
At TenX, after Julian Hosp stepped down from his CEO position, payment cards were at last shipped to customers.
HSBC claims to have settled three million foreign exchange transactions and made payments worth 200,000 USD using DLT—a shared permissioned one. They claim that this use case is one that would not have been possible without DLT, and for them, it is a first of its kind. Regardless of whether this claim by the bank is correct, it appears that blockchain is finally being deployed full-scale in a company that is now benefiting from streamlining its processes. This is an example of a DLT-based solution performing better than available alternatives. Interestingly though, this is an accounting application, rather than a monetary application.
Tokenization of assets is promising field with a potentially considerable impact on the asset management sector. Refer to “O—Asset ownership”, page 26, for further details.
We typically hear people saying, “Blockchain will not, in the foreseeable future, be replacing current insurance technologies wholesale; it’s far more likely to be used as a transport layer to move existing portions of policy administration data into a more efficient, accurate, and selectively shareable format.” This means that, as in banking, the insurance industry is viewing blockchain as a means to improve the efficiency of their back office, as an additional layer in the architecture of their information systems, and in no way will they allow access to customers. While this approach of hiding the technology is correct, as the consumer does not necessarily care how the service is delivered, one does wonder if burying DLT so deep, as a framework, in a company’s existing processes is not a little too easy for them, with respect to the disruption potential. And so, we still believe that suitable startups may arrive and conquer the market with packaged and easy-to-use smart-contracted insurance policies, where customers will have much more direct interaction with the underlying smart contract.
An illustration of the first phenomenon is RiskBlock Alliance (a consortium of more than thirty insurance companies), which is expanding its activities in Canada. In November, RiskBlock announced it would also chair blockchain standards for ACORD, the global standardssetting body for the insurance industry. The goal of RiskBlock’s participants is to boost efficiency and reduce fraud. They are working on two insurancebased blockchain applications: (1) a “proof of insurance” application which shows whether customers have paid their premiums and are eligible for benefits, and (2), a subrogation tool that helps collect member payments and improve claims processing and accounting. The subrogation tool could help those filing claims to get paid faster through the use of smart contracts that automatically disburse funds after the insurance company has the proof of loss needed to process a claim. The whole framework is called “Canopy.” B3I is also engaged in a partnership with RiskBlock.
An example of the other aspect is Etherisc, which has developed smart contract tools to create insurance policies on Ethereum. One of their applications, FlightDelay, enables users to obtain insurance against the risk that their flight will be delayed or canceled. Individuals purchase the insurance policy using a credit card, and, in the event, their flight is delayed by forty-five minutes or more, they receive an automatic payment without the need to submit a claim. Another application allows Puerto Ricans to insure their homes for up to $5,000 against the risk of hurricane damage. Under the policy, owners receive an automatic payout if their homes are damaged by a hurricane, as confirmed by an agreed-upon weather source. The developers of this policy are currently seeking investors to underwrite the risk—and this could very well be a huge roadblock that big players in the insurance sector will use to dominate the market.
The difficult path toward functioning traceability and a supply-chain ecosystem implemented on DLT-based platforms slowly continues. IBM’s Hyperledger is focusing especially on this use case.
In particular, the shipping industry’s development of solutions continues. The Israeli firm, Zim, has reportedly opened such a platform to all clients (in selected trades). The city of Veracruz in Mexico is also claiming to have switched operation to a DLT-based platform.
Ford has announced that it is tracking the origin of cobalt—a metal used in the production of batteries and is in high demand because of the ramping-up of electric car production—thanks to blockchain. As 60 percent of the world’s cobalt is mined in the Congo (DRC), often from inhumane child labor practices, an immutable audit trail of the supply chain from mine to smelting to shipping to Ford’s factories has been implemented. Data providing evidence of the cobalt consistency throughout the process are to be recorded on the blockchain, thanks to smart contracts. However, maintaining a safe and reliable proof of the consistency of the metal during its entire journey is not easy. In the end, what will matter to the industry is being able to certify that materials used in production were from an ethical source, regardless of the actual cobalt (or commodity). Eventually, processing certificates of other key actors will be on the way.
Overall, big corporations are very interested in using blockchain in logistics and supply chain. Philip Morris wants to use blockchain to fight the counterfeiting of cigarettes. Nestlé is searching for ways to guarantee the origin of the cocoa used in its chocolate business.
Many start-ups are into the development of the solutions, platforms and IT of DLT infrastructure. It appears that fresh food product traceability may be a field where successful applications are the first to emerge. The availability of complete information about the origin and processing of food is today a “nice-tohave” feature that most people do not thoroughly check, but maybe with wide-scale availability, enhanced accuracy, and unquestionable reliability, it could become a point of difference.
It is crucial to highlight here that blockchain will in no way create miracles in traceability. Of course, the availability of a high-level tracking system is essential, but this only moves the weak point to other elements of the value chain. Humans, or robots controlled by humans, are still going to be responsible for entering data into the system. Regarding smart contracts, immutability can apply to errors or fraudulent information uploaded. Employees who are authorized to input the data can still be corrupted, or the goods can be physically substituted, or sensors can fail on the journey from production to consumption.
INFORMATION AND TELECOMMUNICATIONS
The Carrier Blockchain Study Group (CBSG), which includes worldwide telecom companies (from the UAE, the US, Taiwan, Japan, etc.) is aiming at developing an innovative blockchain platform specifically designed for telecommunications providers. The goal of the group is to provide telecom members and their users with different services, such as secure global digital payments, personal authentication, internet of things (IoT) applications, clearing and settlement, and other services, using blockchain technology.
The question of whether Facebook will issue its own cryptocurrency is still open. Apple Pay and others that are taking steps into banking (such as GAFA) have been identified by large banks throughout the world as their greatest threat; as Facebook has not yet entered this field, a built-in crypto for WhatsApp, Facebook Messenger and Facebook itself is quite possible. Reports indicate they are working on a stablecoin and to do so they are recruiting all the DLT engineers they can find—reportedly a team of forty people led by an ex PayPal executive. India might be the target market to do exactly what WeChat did in China. However, some believe that to succeed Facebook would need what it lacks today; consumers’ trust.
The U.S. Department of Energy has announced federal funding of up to 4.8 million dollars for universities working on R&D projects, including those related to blockchain. In July 2018, the department also awarded a grant of nearly $1 million to Coloradobased blockchain start-up, Grid7, in a move aimed at advancing the development of a decentralized energy grid.
Iberdrola, from Spain, is among the latest actors claiming to track so-called renewable energy from production to consumption. The company is assessing the feasibility of delivering 100 percent renewablesourced energy to its customers. The beneficiary of the experiment has been Kutxabank, with offices in Pais Vasco and Andalucia under the Caja Sur brand.
Initiatives to develop and use a common infrastructure across the shipping industry are emerging, in what can be considered as a typical case of sectorial “coopetition.” This will no doubt be very interesting to monitor, as it is likely to be adopted by other industries (e.g., health care, distribution, and energy).
The Maersk-IBM initiative in the shipping industry (named “Tradelens”) is supported by some major actors, including harbor authorities. Twenty-plus ports have joined, one of the latest being Algeciras in Spain. The network has now taken the name, Global Shipping Business Network (GSBN). Still, it remains to be seen if Maersk’s competitors will join the movement on this infrastructure or if they will try to build their own. CMA-CGM, for example, is still considering how it can enter the domain.
The “Blockchain in Transportation Alliance” (BiTA), which was founded in August 2017, is gathering steam as members continue to join (500-plus members in twenty countries) from a variety of industry sectors, including freight, transportation, and logistics. The Alliance’s members “share a common mission to develop a standards framework, educate the market on blockchain applications and encourage the use of those applications.” This is another example of a consortium trying to organize itself, and one that will be interesting to monitor.
Initiatives for managing personal health data, with users controlling the access permissions, continue to be discussed. CoinHealth is considering rewarding healthy behavior, thanks to wearables, which enable patients to earn rewards based on their measured activities. Some start-ups, such as MedCredits, even envision that telemedicine can be delivered on such a platform, with information being sent by the patient and the medic being able to send back a diagnosis, depending on images and a description of the symptoms.
In the US, the Drug Supply Chain Security Act requires the pharma industry to be interoperable; this means that when a drug passes from one party to another, there needs to be a way to record it. Blockchain is a natural candidate to deliver that.
Collaboration Hub for Life Sciences, a consortium of pharma companies, has partnered with SAP to fight the counterfeiting of drugs. This is both a supply chain and health care sector application, and another initiative that documents all steps in the production and shipment of a product. However, it seems that the ultimate destruction of the token (representing the drug package) is missing in the process, as otherwise it can easily be reused by counterfeiters.
ADMINISTRATION AND POLITICS
Litigation: Legal actors are looking into smart contracts because they realize that they may have to deal with these in the near future when working on cases, as the legalities of contracts can and do change.
Paradoxically, the main concern of legal professionals in this regard is the potential shrinkage of their revenue streams caused by the inception of DLT-based information systems. That is because smart contracts may eventually resolve much of the problems that, until now, have required lawyers to battle in the courts.
Legal records: Washoe County in the US state of Nevada is offering digital marriage certificates stored on the Ethereum blockchain. A similar technique is used for birth certificates.
Voting: In South Korea, a system called K-Voting, built on blockchain, is being offered to small democratic communities (universities).
GAMING AND ENTERTAINMENT
In general, compared to centralized gaming “worlds,” decentralized gaming platforms allow users to own their virtual asset of the game, and trade them on the platform. This enhances safety and provides all other characteristics of DLT tokens.
A promising example of a decentralized collectible dueling game that has been recently launched is World of Ether—that exists inside the Ethereum Virtual Machine. The game focuses on the collection, breeding, and fighting of monsters. Each monster is stored inside a contract and referenced by the platform. This appears to be a more elaborate attempt than Cryptokitties to have a gaming ecosystem exist on the blockchain— Cryptokitties which is still alive; however, with only a couple of hundred active users per day.
DecentraLand (still on Ethereum, and which ICOed in the second half of 2017) is an interesting attempt. The team is building an ecosystem of games with the aim of capturing value from this ecosystem through the appreciation of the MANA token. The ecosystem is a “virtual reality platform where users can create, experience and monetize their content and applications.” The team builds the “metaverse” from Snow Crash; parcels of land are sold to users who can build a 3D universe of their own. The money within this world is the MANA, and the details of land ownership are also well maintained by a smart contract. This is, without doubt, a very interesting use case that is worth monitoring.
The most high-profile example of blockchain being used for social good comes from the United Nations World Food Program. It has switched the processing of spending accounts by food-aid recipients onto blockchain at its Za’atari refugee camp in Jordan. The camp’s 100,000 residents access their accounts using iris scanners at food store checkouts, which confirm their identity and then reconcile the bill against their family’s account using blockchain. The system has enabled the UN to exclude banks from these transactions, thereby reducing its processing costs by 98 percent, resulting in savings and the ability to deliver more humanitarian aid.
At the frontier between banking and charity is the effort by NGOs and blockchain start-ups in South Asia and Latin America to use blockchain to offer microloans to small businesses that don’t have access to the existing banking system or face punishing interest rates.
On a more optimist initiative, “Indigen” blockchain was launched with the objective of protecting indigenous culture. As an ERC20 of Ethereum, with proceeds from the ICO serving to fund charity projects in developing countries, holders of the predetermined number of tokens will be entitled to receive rewards as dividends from future projects. However, whether remote and illiterate communities will embrace a specific cryptocurrency remains to be seen, let alone the clarity of where the dividends originate from.