Boards will have to make strategic bets on blockchain in a climate of uncertainty.
Many boards of directors will call upon CIOs to brief them on blockchain due to current market hype. While most have heard about blockchain, few understand the technology and its implications for business. The difficult task as a CIO is to explain the strategic implications of blockchain without getting bogged down in its technical aspects.
Board directors won't want a lot of detail, just the high-level issues, implications and suggested actions. Three areas you should focus on include a description of blockchain, frictionless markets and the cross-industry business impacts of a programmable economy.
The reason for this is that blockchain has the potential to create cross-industry, transparent and frictionless markets, where transactions have almost no costs and restraints. However, be aware that the future business climate, risks and legal status of blockchain remain unclear.
To help educate your board directors, the following factors should direct your conversation:
1. Directors need to imagine competing in frictionless markets
Start your discussions by asking the board to envision what would happen if it were possible for markets to become frictionless. Then advise them to take a hard look at the company's value chain and its sustainability, by analysing the parts that would need to change as blockchain propels a transition to a frictionless market.
It’s important, however, to present frictionless markets as an aspiration, rather than a near reality, Gartner believes that there will always be some friction until at least 2035. A key barrier to adoption of cryptocurrency, for example, is the generally horrible user experience and cumbersome security measures needed to manage private keys, so that wallets aren't compromised and funds stolen.
Blockchain has the potential to create cross-industry, transparent and frictionless markets, where transactions have almost no costs and restraints. However, be aware that the future business climate, risks and legal status of blockchain remain unclear.
2. Explain why the board should further investigate blockchain
The technology to make frictionless markets possible already exists, albeit in limited form: distributed ledgers such as the Bitcoin blockchain. Blockchain's potential benefits include:
• Civilians and computerised agents govern the economic and transaction infrastructure, which is global in scale, peer-to-peer, self-regulating, secure and reliable.
• A decentralised, shared history of activity, obligations, rights and records ensures transparency and certainty.
• Fine-grained and diverse value (not just monetary) creation and exchange occurs directly between participants to a network, at lower cost and higher speed compared to legacy systems.
• The system is open to everyone, both public and private, but control and openness can be customised.
• Ownership and rights are recognised broadly. The system guarantees proof of existence, process and asset provenance.
• Distributed autonomous organisations acting as full-fledged legal entities can execute transactions with no human intervention.
3. Warn the board not to underestimate the impact of blockchain
Enterprises run the risk of having their business disrupted if they do nothing about blockchain; however, undertaking a blockchain initiative carries risks too. It’s important to discuss the following three areas where blockchain will affect the board's risk calculations:
• Business climate: Blockchain will offer opportunities to lower costs dramatically, especially where transactions occur in a wholly digital space. Enterprises will find it easier to expand their markets, either by entering blue-ocean spaces or enlarging their existing ecosystems of suppliers and partners. However, financial regulators, banks and other institutions that oversee today's financial architecture won’t know what to do about blockchain, so they will hesitate and act in conflicting ways for the next five to 10 years. This will mean boards will have to make strategic bets on blockchain in a climate of uncertainty.
• Risk management: Blockchain will increase risk in some areas, such as blurring the boundaries of previously well-defined entities; a greater dependency on a new technology that no one controls and whose full implications are not yet clear; and changing risk models to accommodate it. It also decreases risks as well by offering transparent auditability and compliance; having no single point of failure; and supporting portable, secure and globalised identity.
• Legal issues: Blockchain poses a number of big legal challenges, such as unclear jurisdictions and enforcement; undefined legal basis for identity, trust, smart contracts, market standards, taxation and other components; and unclear financial reporting requirements for companies using it. In addition, frameworks and regulations such as know-your-customer laws that are the requirements to use specific market infrastructure and privacy laws, will have to be revised or substantially amended for blockchain.
Read more: CIOs disrupt IT operating models to align with digital business
David Furlonger is a vice president and Gartner Fellow. He works primarily with CEOs, senior business leaders and CIOs in the banking and investment services sector. His research includes Gartner's annual CEO and CIO surveys, the future of the financial services industry and the evolution of the fintech ecosystem, digital strategy, the Internet of Things, emerging business trends and innovation strategy; and blockchain.
Send news tips and comments to divina_paredes@idg.co.nz
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