Blockchain’s next frontier: Shaping the business model

The story of blockchain market adoption closely resembles the path taken by other disruptive technologies: an initial industry explores what is possible, others give form and substance to what is plausible, and the marketplace helps define what is practical. It's no longer a question of whether the technology will work-it does work. What's at play now is how each industry will tailor blockchain adoption to meet its needs.

Linda Pawczuk is the global consulting blockchain and digital assets leader and a principal at Deloitte Consulting LLP.

Collective sentiment about blockchain is on the rise, along with meaningful implementations in the public and private sectors. At the same time, a new era of maturity is setting in-one in which organizations proceed with greater intention and seriousness as they tackle the challenges that come with adopting disruptive technologies.

Some of these challenges are rooted in the development of blockchain and distributed ledger technology: processing speed and scale, interoperability, and tech stack maturity, among others. Because of their technical nature, these challenges are likely more recognizable and understood within a context like blockchain that is inherently technical. And while not entirely resolved yet, progress is being made.

As blockchain and digital asset adoption increase, new and different kinds of challenges are coming into focus-challenges that underscore the operational implications that follow from market adoption. We categorize these new market challenges as the following:

• Early tech-heavy focus: Overemphasis on technology development and deployment.
• Multi-party operating models: Legal and governance mechanisms that facilitate interactions, such as contracting, dispute resolution, and third-party assurance, have not caught up.
• Regulatory clarity: Policies need to be studied and constructed to align with new digital business models.
• Geographic variability: Different geographies are taking a range of positions within the context of blockchain and digital assets.
• Professional services guidance: Despite limited guidance on accounting and auditing, the profession needs to evolve with the technology.

Early tech-heavy focus. It's understandable that the early focus of an emerging technology like blockchain should be on development more than the pressing market challenges that impact longer-term adoption. But a tech-heavy early focus may make it harder to resolve other market challenges that impede lasting adoption and make them more pressing as the technology matures.

As blockchain and digital asset adoption increase, new challenges are coming into focus-challenges that underscore the operational implications that follow from market adoption.

Multi-party models. Any discussion of market challenges within the context of blockchain should also include multi-party business models. By its very nature, blockchain represents a multi-party solution transforming a process that was linear, siloed, and point-to-point into a distributed peer-to-peer form of governance. Blockchain democratizes information and access to it.

Despite their many potential benefits-including cost savings, sharing of risks, and removing friction from years of inefficient processes-peer-to-peer models often take longer to deliver return on investment. They require a new way to share information and create value and evoke an array of issues to overcome, from data ownership and privacy to governance to financing to civil/criminal liabilities and beyond. This is true even in a vertical supply chain ecosystem, where interests are more naturally aligned, similar to the industry-focused platforms developed by IBM.

A horizontal multi-party business model presents its own kind of market challenge-what some may consider an unnatural coming together of potential competitors for a common purpose. This isn't always easy, even when the larger network effects and other strategic benefits are understood by participants. For one thing, some organizations are more efficient and strategic than others. And few organizations want to risk the competitive advantage and brand equity they took years in building.

Collective sentiment about blockchain is on the rise, along with meaningful implementations in the public and private sectors.

The Blue Cross Blue Shield Association, along with a coalition of Blue Cross Blue Shield companies, are looking to use blockchain technology. Shahzad Shah, executive director and chief enterprise architect of Blue Cross Blue Shield Association, views the governance structure as the critical factor to resolving the coopetition paradox. Since it is unlikely that all coalition members will have complete alignment at all times, the ability to rally around a common way of working and decision-making is at the foundation of our coalition. We didn't begin by building the technology; we began by unifying our goals and how we will operate and make decisions. This collaborative approach to a multi-party operating model helps to build trust and facilitates the data sharing required to transform the provider data process."

Regulatory clarity. For blockchain-and other disruptive technologies-one challenge is finding the right balance between innovation in blockchain and the regulatory policies that will govern it. Regulation is necessary and can be a force for good. It provides a much-needed ordering effect on the marketplace as a new technology achieves mainstream adoption. But when it's not aligned with innovation as it is occurring, it could slow adoption.

Blockchain is being applied in highly regulated industries like financial services, life sciences, and pharma, among others, which could be adding to the tension. Establishing regulations on privacy, anti-money laundering (AML), know your customer (KYC), economic sanctions, material provenance, tax reporting, data security, and many others, to accommodate the tactical application of blockchain technology in an operational setting presents a substantial hurdle to overcome. This is also important since the long-term implications may not yet be fully understood by regulatory authorities, and the applications of blockchain are continually evolving.

We didn't begin by building the technology; we began by unifying our goals and how we will operate and make decisions."

Shahzad Shah, Executive Director and chief enterprise architect, Blue Cross Blue Shield Association

Terri Cobb, IBM alliance lead at Deloitte Consulting LLP, pointed out that companies may one day need to prove they're taking the necessary measures to secure data in their possession. IBM's LinuxONE servers have a way to do that using pervasive encryption. Pervasive encryption protects blockchain data whether it's in flight or at rest. This is a highly secure way to control data on the mainframe and when it goes to another system. It's also yet another example of how blockchain is influencing how business gets done."

Geographic variability. With blockchain premised on a multi-party and often cross-border architecture, different geographies are taking distinct positions on the status of blockchain and digital assets. This can mean challenges in cross-border blockchain adoption, even without regard to regulatory issues, and render the kinds of global initiatives blockchain promises tougher to realize.

To help mitigate the perception of risks, some jurisdictions took an early and, at times, strong regulatory stand with respect to cryptocurrencies and digital assets. Others implemented regulations that encourage development of this technology, rather than focusing on problem management.

Beyond cryptocurrencies and digital assets, different jurisdictions have varying regulations with direct impact on cross-border blockchain models even if blockchain isn't the focus. For example, the General Data Protection Regulation that governs data protection and privacy within the European Union states a right to be forgotten" that enables EU citizens to request their personal data be erased from network storage repositories-a provision that may be incompatible with the immutable character of digital ledger technology.

Regulatory views on cloud adoption, national open standards on application programming interfaces, cybersecurity requirements, and health information, among others, all vary from country to country, too. A homogeneous cross-border blockchain platform may struggle to comply with these regulations under different regimes.

Even within a given country, especially if the country is sufficiently large and government is stratified, we may see variability in regulatory positions. Take the US-some states have introduced blockchain-related legislation and some have not, with the effects of legislation being highly uneven. At the federal level, there appears to be no greater measure of cohesiveness. For example, there is no single voice about the treatment of cryptocurrencies: The Internal Revenue Service treats cryptocurrencies as property, while other federal agencies such as the Commodity Futures Trading Commission and the Securities and Exchange Commission apply an evaluative approach in determining the status of a particular cryptocurrency and which of the two agencies has proper jurisdiction.

It is said that regulation follows innovation and sometimes labors to keep up. Blockchain is no exception. The quest for regulatory clarity may yield a more realistic and practical set of global guiding principles and industry standards that individual jurisdictions may choose to adopt.

There's some evidence that this is already happening. For example, the Financial Action Task Force, an intergovernmental organization established to combat money laundering, recently issued a set of recommendations that detail regulatory guidelines on virtual currencies, including cryptocurrencies and cryptocurrency exchanges intended for adoption by its member jurisdictions.

Third-party guidance. Lack of regulatory harmony may lead to confused and possibly incorrect interpretations of requirements and inadvertent noncompliance. As more information is recorded on blockchains, professional services guidance is critical in rendering correct judgments about operative regulations. And, of course, the challenge becomes even more pressing when the blockchain model crosses borders.

How can an auditor, for example, use regulatory requirements to test and certify that a procedure is compliant if the requirements are unclear?

We see blockchain as one technology that might solve some of our business challenges and the challenges our customers face, but the question is Why blockchain?'"

Sumeet Bhatia, Head of Innovation, Zurich Insurance NA

The challenge that confronts professional services guidance in a blockchain-driven world goes beyond just regulatory clarity. It extends to a complete understanding of how the underlying transaction operationally works within the context of the blockchain technology. Did the technology change the transaction in any way simply because it took place on a blockchain? How do you test for AML/KYC compliance within the construct of this new digital world? These and other questions will likely drive auditors to develop a deeper understanding of blockchain technology and represent a substantial market challenge.

Blockchain is more than a technology project

These are just a few of the market challenges that confront the wider adoption of blockchain today-and they're now receiving the kind of focused energy that purely technical challenges enjoyed in years past. This evolution is a mark of maturity that often signals the wider adoption of disruptive technologies and the kind of adoption we're seeing today within the context of blockchain.

As Sumeet Bhatia, head of innovation at Zurich Insurance NA, explains, We see blockchain as one technology that might solve some of our business challenges and the challenges our customers face, but the question is Why blockchain?' Blockchain adoption should not be a solution looking for a problem, but the other way around. At Zurich, as we turn to an innovation mindset to find solutions, we start with the problem statements, then develop appropriate use cases. Recently, we started in multi-party data sharing and reconciliation in the group captive renewal process, which today is very manual and paper-based. While this is a very basic use case, early results point to wider adoption of blockchain solutions within Zurich Insurance, driving meaningful ROI."

As blockchain finds its way into organizations' strategic plans, new challenges will emerge requiring multidisciplinary perspectives. But just as the applications of blockchain become more nuanced and familiar, so, too, should the market challenges. This is what happens as a technology moves from early stage experimentation to production and, finally, to production at scale.

Deloitte Consulting LLP would like to thank Jonathan Holdowsky, Tim Davis, and Alexi Von Keszycki for their contributions to this piece.

For more information, visit www.deloitte.com/us/blockchain.