Blockchain is coming. How should CFOs prepare?

Rage Review : Although it is still in the early stages of blockchain technology development, the driving force behind blockchain can make it quickly become a mainstream technology, which means that chief financial officers (CFOs) need to start paying attention to this emerging technology immediately. CFOs are interested in blockchain because it can reduce costs, provide new services, reduce settlement times, and improve liquidity. They should learn about blockchain application areas that are popular with financial institutions, such as supply chain and trade finance. These applications are not only applicable to transactions between companies, but also to internal transactions, including transfer pricing and corporate budgeting.

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Blockchain’s distributed ledger could one day become an effective tool for financial transactions and risk management, and experts say now is the time for chief financial officers (CFOs) to learn about the technology.

It’s still early days for blockchain technology, but the momentum behind it could make it a mainstream technology quickly. That means CFOs need to start paying attention to this emerging technology now. “We’re in the early stages of blockchain, but there’s a chance that some executive team will come to the CFO and ask what their blockchain ledger strategy is,” said William Fearnley, director of compliance research and fraud and risk analyst at IDC Financial Insights in Framingham, Mass. “That’s going to be a 2017 story, so CFOs should put blockchain strategy on their agenda.”

Blockchain is not just the underlying protocol of the digital currency Bitcoin. A blockchain - or a distributed ledger - is an electronic ledger in a distributed computer network to which transaction records can be added, and the transaction information in the distributed ledger cannot be tampered with.

“This is critical for CFOs because it’s a system that records the real data,” Fearnley said. “Then a CFO can say, ‘Let’s look at all the transactions between counterparties,’ and see that transaction unfold in the string.”

Jerry Cuomo, vice president of blockchain technology at IBM in Armonk, New York, said blockchain technology can make collaboration between companies more efficient while improving trust and security.

He said the audit trail provided by blockchain would allow parties involved to go back to the ledger and quickly review transactions and settlement disputes.

Learn more about blockchain technology

But how should CFOs prepare for the coming blockchain revolution?

“Our advice is that CFOs should start looking into blockchain now and join blockchain-related consortiums, of which there are two in the financial services space: R3 and the Linux Foundation Hyperledger Project,” Fearnley said.

David Schatsky, senior manager at Deloitte in New York, said that while the blockchain technology family has shown a lot of promise, there have been no major commercial implementations yet, but Schatsky agreed that CFOs should learn more about blockchain technology.

David Schatsky

“First they have to realize that Bitcoin is not a blockchain,” he said. “That’s one of the reasons people are put off by blockchain, because they don’t think it’s relevant to them. But Bitcoin and blockchain are different, and people should recognize that.”

Schatsky said that the core concept of blockchain is the distributed ledger, and CFOs understand ledgers. So they will warm to the concept of distributed ledgers and start to think about the impact of it, such as the fact that the ledger can be shared between all parties involved in a transaction, so everyone sees a single source of truth, which is critical.”

He said: "CFOs must quickly understand the details of the blockchain concept. Some white papers, vendors and consulting firms such as Deloitte are studying blockchain technology and can provide CFOs with advice and guidance."

However, Schatsky found that understanding the concept of blockchain is different from having a deep understanding of blockchain technology. At the current stage, a deep understanding of blockchain technology is not necessary.

"It's too early to tell," he said.

Next, he said, CFOs should learn about blockchain applications that are popular with financial institutions, such as supply chain and trade finance. These applications apply not only to inter-company transactions, but also to intra-company transactions, including transfer pricing and corporate budgeting.

“There are many use cases for blockchain, but we want to focus on the ones that will directly change the lives of financial executives,” Schatsky said.

Fearnley said CFOs should test blockchain applications by building and running proofs of concept.

“CFOs are interested in blockchain because it can reduce costs, provide new services, reduce settlement times and increase liquidity,” Fearnley said. “‘Blockchain people’ say, ‘Remember the first web page you looked at?’ That’s what blockchain can do.”

Cuomo said that successful CFOs are beginning to pay attention to blockchain technology, have high hopes for it, and are drawing up roadmaps for using blockchain.

“It’s important to have a clear position on using blockchain,” he said. “Disputes, compliance, audits and reporting are all issues that plague CFOs because they are time-consuming and error-prone. So using blockchain technology as a first attempt to solve these issues is very sensible.”

Schatsky said once they have an understanding of the concept of blockchain and its use cases relevant to financial institutions, it is the best time for CFOs to evaluate the internal processes they are responsible for managing.

“Implementing blockchain-based solutions in the most expensive, error-prone, and inefficient transaction processes can deliver the greatest returns,” he said. “Assessing blockchain’s potential can fix or restructure these processes.”

Blockchain technology can enhance the security of financial data

Jamie Steiner, general manager of financial services at Guardtime, an Estonian cybersecurity provider that uses blockchain technology in its data security products, said that while blockchain is still in its infancy in the enterprise, it will become more useful in the future, perhaps in ways that observers may not expect.

Jamie Steiner

He said it is important for CFOs to understand the different financial impacts that emerging blockchain technologies will have on their businesses, risks and corporate valuations as they are used.

“Right now, most of the interest in blockchain is in the removal of intermediaries in financial services,” Steiner said. “That’s limited to financial transactions that are done on a shared ledger, but that’s not the only application of blockchain, it’s just that I think it’s the most well-studied process at the moment.”

Steiner said CFOs need to first verify information within their companies, which can sometimes be a huge financial risk for their companies.

“The next step is for CFOs to make a concerted effort to use blockchain technology to protect data security, so they can prove to external third parties, stakeholders or investors that they have taken the necessary steps to protect the data of their top services,” he said.