Blockchain to replace organizations?

The fourth industrial revolution described by the World Economic Forum (WEF) as the convergence of the physical, digital, and biological worlds, is often portrayed as being a unique opportunity for citizens to engage with public authorities, and sustain economic growth and unprecedented innovations in terms of speed (exponential growth), scope (disrupts almost every industry in every country) and breadth and depth (transformation of entire systems of production, management, and governance).[1]

Artificial intelligence, algorithms and now Blockchain are some of the most recent technologies with the potential to transform, if not automatize, global governance. As argued in this blog post, this new trend will most probably require global organizations to focus more on their knowledge production and advisory service, than on the delivery of international, which will increasingly be done through ICTs.

What is the Blockchain? Blockchain is “the first native digital medium for value, just as the internet was the first native digital medium for information”. [2] Blockchain is an open, distributed, global platform that will fundamentally change what we can achieve online, how we do it, and who can participate. Blockchain is a globalized and distributed database that records information and value – money, titles, deeds, diplomas, music, art, scientific discoveries, patents, and even votes – on millions of devices throughout the planet. It is a global digital ledger that stores (automatically or not) any type of transactions between two entities or individuals in a certifiable and enduring way.

Blockchain counts five characteristics that can help understand better this technology and its impact on society. It is a technology and therefore there is not one Blockchain but as many as we can imagine. It is used by a community of individuals for a specific purpose: to store data and act as intermediary of trust. Each member of a Blockchain sees all what the database contains and its history. Each Blockchain member is identified by a unique alphanumeric address, and can choose to be public to the other members of the network or remain anonymous. In all cases, transactions take place between Blockchain addresses. Since it is fully digitalized, it can be coded and therefore trigger automatically transactions between users. For a transaction (and its associated value) to be recorded on Blockchain, the two parties need to agree. Once they agree, the transaction is stored and recorded on all devices of the network. When the transaction is recorded, it cannot be further modified, since it is related to all previous transactions (which explains why it is called “chain”). This allows the database to be permanent, chronologically ordered, and available to all members of the network. [3]

Blockchain is not a disruptive technology offering lower-cost solution (that would replace traditional business models and forms of organizations): it is a foundational technology in the sense that it will create new economic and social foundations. Although probably triggering an enormous impact, this technology will be gradually adopted over the next decades, and its impact more diffuse.

In our globalized economy, trust becomes a key factor of success.[4] So far, traditional institutions such as like banks, governments, technology companies and marketplaces (tradefloors, eBay, etc) have offered this level of trust. However, in the coming years, Blockchain will probably replace these institutions since it ensures security without the need to centralize information. Trust is secured by the fact that all information is available to all members (although it can be anonymized) and recorded (including the history of each transaction). All transactions and contracts can be stored transparently and safely. Blockchain prevents any type of deletion, altering and correction, which means that any payment, practice, and process (this is where Blockchain becomes interesting for governance questions) has a digital record and identification that can be shared. “Intermediaries like lawyers, brokers, and bankers might no longer be necessary. Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction. This is the immense potential of Blockchain.” [5]

Blockchain can support international trade[6] by reducing some transaction costs (thanks to payment systems that run without intermediaries) and enabling new reputation systems based on social and economic capital controlled by the members of a network (without intermediaries such as rating agencies and credit rating services). [7] Don Tapscott (2016) in his recent book[8] describes how this new technology will shape the next era of prosperity in finance, business, healthcare, education, governance, and many other fields. It is not surprising that we are beginning to see bullish uptake reports from the industry. A September 2016 IBM survey found that Blockchain adoption within financial institutions is “dramatically faster” than expected, with over 65 percent of banks to produce Blockchain projects within three years.[9]

Beyond support private sector, Blockchain technologies can help international organizations reduce fraud and monitor the international aid supply chain, hence focusing on advisory and knowledge production. In 2011, former UN Secretary-General Ban Ki-moon argued that “corruption prevented 30 percent of all development assistance from reaching its final destination.” [10] Although a share of this misuse occurs in developed countries, a significant portion is lost in the global south, where it is most needed. Fraud results from various causes, among which inadequate government spending, corruption and inefficiency at the time of delivering the products or services, which leads to outbreaks of diseases in some countries.

The price of identifying the failures in international aid supply chains often surpasses the value of the products that are lost. Tracking fraud is very costly and cannot apply to ongoing and future operations. It can only be done for past activities, which reduces its impact (but not its necessity). For instance, the World Bank has 417 people dedicated to monitor financial and procurement standards, and for one single investigation in 2010 the Global Fund had to review over 59,000 documents.[11]

Blockchain technology can dramatically change this situation, by enabling to efficiently track money, products and services in real time. Thanks to this technology, international organizations such as the Global Fund or Gavi can (1) reduce the fraud, (2) save resources dedicated to monitoring and sanctioning fraud, and (3) and increase their positive impact: in other words, focus on their main mission, which is bring care to billions of individuals on the planet.

Concretely, Blockchain technology will allow international organizations to monitor the supply chain of the international aid. For instance, when food or medicine delivery is provided with a digital identity, each box of products can be tagged with a QR code, scanned throughout the transportation chain from the production site to the local village. Once the product has reached its final destination, the transporter and the village user (both part of the Blockchain network) agree to finalize the transaction, which is added to the Blockchain. From this moment onwards, there will be a permanent proof of where the box went through, who transported it, when it arrived, and who accepted the products. Each single one of these transactions is added to the Blockchain, which will make it impossible for these products to be lost, altered or switched with imitations, without the network to be informed. The Blockchain can even contain crucial information such as expiration dates, loading and storing conditions. In the case of India, where each citizen has now a biometric identification, it Blockchain could even help matching each product (a medicinal drug or a vaccine for instance) with the individual who received it, including date, place and circumstances of the delivery.

Such tracking and permanent recording system will also allow international organizations to prevent out-of-stocks, and know when medicinal drugs are about to expire and therefore alert local doctors and plan a new delivery. Since every step of the delivery is monitored and cannot be altered, Blockchain can help donors pinpointing where there is insufficient staffing, or where medicinal drugs are used inappropriately. This leads to dedicating more resources to patients and less on monitoring and compliance. Also, donors will be able to know where each of their dollar or euro aid is used.

Smart contracts enabled by Blockchain automatically trigger transactions when certain conditions are met, such as for instance, the delivery of a product (that triggers payment), the out-of-stock or the passing the expiring date (that triggers a new shipment). Smart contracts allow international organizations and funding agencies to send only a small amount of money corresponding to each transaction. This reduces the administrative burden carried out by international organizations, and at the same time, enable these organizations to avoid transferring large amounts of money to ministries and local public administrations that are more difficult to trace and control.

Similar to banks and financial institutions, an increasing number of development agencies and international organizations, including the International Monetary Fund, the United Nations and the World Bank group, show an interest in using Blockchain technologies for their international aid programs. For this revolution to happen, some barriers —technological, governance, organizational, and even societal—will need to fall.[12] Pilot programs must be run to detect potential technical and security flaws. Nevertheless, Blockchain is a foundational technology that will change the role of international organizations, and will most probably replace a major part of the administrative tasks they carry (if not all). This will necessarily require these organizations to focus more on advisory services and knowledge production, since the delivery of international aid will increasingly be done through ICTs.

[1] Schwab, Klaus (2015). The Fourth Industrial Revolution: what it means, how to respond. Foreign Affairs. Retrieved from https://www.foreignaffairs.com/articles/2015-12-12/fourth-industrial-revolution

[2] Tapscott, Don & Tapscott, Alex (2016). The Impact of the Blockchain Goes Beyond Financial Services. Harvard Business Review. Retrieved from https://hbr.org/2016/05/the-impact-of-the-blockchain-goes-beyond-financial-services

[3] Iansiti, Marco & Lakhani, Karim R. (2017) The Truth About Blockchain. Harvard Business Review. Retrieved from https://hbr.org/2017/01/the-truth-about-blockchain

[4] Botsman, Rachel (2015). The Changing Rules of Trust in the Digital Age. Harvard Business Review. Retrieved from https://hbr.org/2015/10/the-changing-rules-of-trust-in-the-digital-age

[5] Iansiti, Marco & Lakhani, Karim R. (2017) The Truth About Blockchain. Harvard Business Review. Retrieved from https://hbr.org/2017/01/the-truth-about-blockchain

[6] Liao, Rebecca (2017). How Blockchain Could Shape International Trade. Foreign Affairs. Retrieved from https://www.foreignaffairs.com/articles/2017-08-16/how-blockchain-could-shape-international-trade

[7] Tapscott, Don & Tapscott, Alex (2016). The Impact of the Blockchain Goes Beyond Financial Services. Harvard Business Review. Retrieved from https://hbr.org/2016/05/the-impact-of-the-blockchain-goes-beyond-financial-services

[8] Tapscott, Don & Tapscott Alex (2016) Blockchain Revolution. New York: Penguin Random House.

[9] Kelly, Jemina (2017). Banks adopting blockchain ‘dramatically faster’ than expected: IBM. Reuters. Retrieved from https://www.reuters.com/article/us-tech-blockchain-ibm/banks-adopting-blockchain-dramatically-faster-than-expected-ibm-idUSKCN11Y28D

[10] Till, Brian M., Afshar, Salim, Peters, Alex W. & Meara, John G. (2017). Blockchain and global health. Foreign Affairs. Retrieved from https://www.foreignaffairs.com/articles/world/2017-11-03/blockchain-and-global-health

[11] Till, Brian M., Afshar, Salim, Peters, Alex W. & Meara, John G. (2017). Blockchain and global health. Foreign Affairs. Retrieved from https://www.foreignaffairs.com/articles/world/2017-11-03/blockchain-and-global-health

[12] Iansiti, Marco & Lakhani, Karim R. (2017) The Truth About Blockchain. Harvard Business Review. Retrieved from https://hbr.org/2017/01/the-truth-about-blockchain