Sometimes a technology intended to fill one purpose is found to have much greater potential filling a different purpose; a potential so impactful that it could literally change everything. Blockchain, the underlying technology behind bitcoin, has that potential.
While changing everything is perhaps an overstatement, blockchain is seen as a technological solution to the centuries old problem of how to create a secure and open ledger system of transactions.
Bitcoin is a cryptocurrency, which means it is a digital currency that uses encryption techniques to regulate the generation of currency units and verify fund transfers, all independent of a central bank. It exists completely outside of the government-controlled global monetary system in the world of bits and bytes, not as a physical entity.
While bitcoin is an intangible that lives in the virtual world of the Internet, bitcoins have value and are used for commercial transactions and as an avenue for currency speculation. Technology giant Microsoft accepts bitcoins for purchases of apps, games and videos from Windows phones and Xbox platforms. Dell, in collaboration with Coinbase, accepts bitcoins, as do merchants such as Overstock.com, TigerDirect and French retailer Monoprix. Bitcoins can even be used to purchase gift cards, and some physical stores are beginning to accept bitcoin as a form of payment.
As of June 4th there were 15,617,825 mined bitcoins with a current value of $581.76 per coin, making the global value of bitcoins worth over $9 billion. Bitcoin represents a value greater than the national domestic product of many countries.
Ledger the Real Innovation
While bitcoin is a potential game changer, the real innovation is the technology behind bitcoin that creates the ledger of all coin transactions from the first coin created to the latest bitcoin transfer.
Blockchain is an open, public and secure digital ledger that uses cryptography to create ledger entries unique to each individual that are free from intentional or accidental change that forms the basis of bitcoin. For example, when an individual buys, sells or trades bitcoins they present ledger entries representing value to complete a transaction that in turn is recorded as a blockchain entry. The up-to-date, transparent ledger is visible to all parties and shows the most recent transactions as well as the history of transactions.
Though it was first applied to bitcoin trading, bitcoin has been found to be an enabling technology that can be used for a variety of applications with a number of advantages. Traditional ledger systems often depend on a third party, such as a clearing corporation, which matches buyers and sellers. Blockchain takes this “middle man” out of the equation, making the transaction more profitable by reducing the cost, while ensuring the transaction is legitimate and accurate.
Blockchain can be used wherever there is a ledger system to track transactions involving anything of value that needs to be traded securely. Applications could range across supply chain management, manufacturing, corporate treasury and trade finance. In the food industry, for example, blockchain could be used to ensure the integrity of the product throughout the supply chain. Banks may even transition to digital currency alone using the technology.
It also has implications for the “unbanked.” By enabling micropayment capabilities (to the millionth of a cent), blockchain can enable people to make transactions that previously were impossible, due to the monetary units involved.
Of all the emerging technologies we’re currently seeing, blockchain has the potential to have the biggest impact on businesses and society at large. Enterprises are increasingly looking at how they can adopt this technology and revolutionize how they deliver products and services. As such, audit and risk professionals need to ensure they can bring knowledge and perspective to that conversation.
Editor’s note: Hale will present a session titled What Is Blockchain and What Are the GRC Implications at the 2016 Governance, Risk and Control Conference 22-24 August in Fort Lauderdale, Florida, USA. For more information click here.