What are Block Chains? – Jason Busch on the Future of Money, Trust and Transparency

Jason Busch provided a great view on Block Chains, and their impact on the future of funds in the supply chain, at the Global Procurement Tech Summit in Baltimore.

Jason started out by discussing the fact that a company ledger is just a source of truth. Because we are having more and morecomplexity in our supply chain trading systems, keeping track of all our transactions is becoming increasingly difficult.  In the old days, we had a single mainframe computer, and a single tape drive.  Over the last few years the number of different sources of information has grown at a logarithmic rate, making it very difficult to synch systems across different parties: SAP, Oracle, JD Edwards, and all the different legacy systems. How do we connect all these systems with trading partners? Most retailers and CPG spend time gathering data from sources to create a demand forecast for suppliers. Many will spend 3 weeks gathering data – and 2 days running analysis – just to produce a demand forecast. This doesn’t scale up!

To look at what the future looks like, Jason started with a simple question:  “What is money?” It is a unit of account, a medium of exchange, and a store of value. It is also a way of reporting stored up value.  Barter system led to commodity currencies. Shells, grain, Rai stones, swords were all used to represent money, which was often used to offset timing around a coincidence of wants. If a wheat farmer needs what a fruit farmer produces, a direct swap is impossible, as seasonal fruit would spoil before the grain harvest.  So money is used to store the value of the trade.

Increasingly complex trade economies, societies and governments led to paper money (the gold standard), and eventually to Fiat currency. But eventually the gold standard behind paper money wouldn’t scale and so we moved to fiat currency.  But given the level of global trade and uncertainty, fluctuation in currencies also makes this difficult to control and manage.  So we have volatility because currency is not backed by gold, and when the Euro drops, it is a statement of trust in other currencies (the US $ which most people seem to trust the most at the moment). And currencies are about trust, and people have great trust in the dollar. And it is not a virtual currency.

Jason pointed out that 8% of the world’s currency exists outside of electronic records! Who has it? For the most part, it is trusted parties including banks, accountants, brokers. Examples include FedWire, SWIFT ACH, CHIPS, SPEI. Government systems enable trust, and a mix of people in the financial world manage this responsibility, including banks, accountants, and others.   All these systems provide trust that enable us to get transactions done.

But there are problems. Trust is not efficient! Settling a stock can take days. Funds take days to settle, and 50% of businesses still pay by checks. This is very costly, and there are over $1T in fees paid by businesses, and over 62% of companies were targets of bank fraud in 2014.  And procurement systems are complex – 70% of payments require manual intervention. Over 76% of business report problems forecasting short-term cash flow. Accounts Payable should be automated and should eliminate manual intervention by 90% – instead, it is still largely manual. Banks are targeted for fraud… and suppliers don’t know when they will be paid due to uncertainty in the P2P process.

So how do we establish trust beween otherwise unrelated parties over an untrusted network like the Internet. How do we overcome these issues?

What the internet has done for information and the way we communicate, the blockchain will do for value and the way we look at trust. “The financial world is going to flip upside-down.”

What is a Block Chain? A very simple answer – “a peer to peer ledger maintained by a decentralized network of computers that requires no central authority or trusted third parties.”

Block Chains consists of three components

  • A transaction (pubic-private key cryptography)
  • A transaction record (a record in the blockchain – SHA-256).
  • A system that verifies and stores the transaction

Bit coin is just a history of transactions – which goes back to the history of the record – and it simply stores transactional details.  All that is needed is an address and a private key – a sequence of letters and numbers. The nodes chronologically store information on all transactions that have taken place in the chain. Each block is sealed mathematically to the block before it – altering any proceeding data that conflicts. This makes it difficult to hack…you have to hack not just a single moving train, but every train on the track.

Block chains are a very new idea that is only now beginning to emerge.  But there is no doubt that in this digital age, it may well replace the flow of funds as we know it today.  And maybe a new, trustworthy form of commerce may eventually emerge.