ºÚÁÏÃÅ

Podcast Transcript

Sam: Welcome to Pragmatism in Practice, a podcast from ºÚÁÏÃÅ where we share stories of practical approaches to becoming a modern digital business. I'm Sam Massey and I'm here with Prashant Gandhi, Financial Services Principal at ºÚÁÏÃÅ. Prashant leads ºÚÁÏÃÅ financial service practice in Europe and is going to be talking to us today about blockchain, and how organizations can use this technology to deliver value to their customers.

Prashant, thank you so much for joining us on the podcast today. We're in our London offices, so there might be a bit of background noise, so bear with us, but it's a busy day here in London. But thank you for joining us.

Prashant Gandhi: Glad to be here Sam, thank you for doing this.

Sam: So we're going to talk about blockchain. This very big subject that's facing many businesses and many business leaders at the moment. Before we go into the business thinking behind what the future is for leaders and what does blockchain mean for them? In simple terms. For the uninitiated, for the person who's maybe just read about it on a Wikipedia page, what is blockchain and what does it mean for businesses?

Prashant Gandhi: Yeah. Okay, so there are a number of ways in which I've answered this before, but the definition I've liked the most is that it's a digital, decentralized, and a distributed ledger. And I want to focus on the ledger first because what ledgers do is they record facts. And facts could be anything. So a fact could be that your name is Sam Massey. You were born in, I don't know, Australia. You work for ºÚÁÏÃÅ. Those are facts.

Prashant Gandhi: The important thing is to remember who's recording those facts at the moment. Those facts have been recorded by a very centralized authority. So the UK government, or the Australian government, is the one who's saying Sam Massey is a passport holder for that for our country. The hospital, the local authority gave you the birth certificate. ºÚÁÏÃÅ gives you the saying that okay, Sam Massey is an employee of ours.

So all of those ledger facts are being recorded by a central authority. And central authorities themselves can become corruptible, right? For a number of different reasons. You are at the mercy of the governance processes that guide them. So what blockchain enables is networks, right? And within those networks you have a ability to say who can participate in that network, and what authority they have with the network, and how do the network participants come to an agreement on what the facts are. So that allows you to go get away from a centralized authority. And because it's digital, your facts are recorded digitally, and it's distributed, means that the copy of your records are available to all network participants. And any changes that are made to it are done in a universal agreed manner.

Sam: And this is not a brand new concept. I mean it's been around for however many years, the concept itself. And I think we were talking earlier on and you were saying that, you know, the actual the concept itself, the white paper that was written on this was in the early 2000s. So here we are nearly 20 years later and it's still a bit of an unknown to many businesses and many business leaders. So is there a way for us to make sense of it in a bit of an easier way? And what does it mean for the business leader who's looking at the horizon and thinking, "I know it's important to me..." I read a report recently which said around 60 percent of C level executives know that blockchain is part of the company's future, but it's the how and the why is it important to them. So could you help us understand that a bit better?

Prashant Gandhi: You have to start from what blockchain does. Blockchain is enabling something, right? What it's enabling is a way to think about how certain processes can be reimagined, right? So it gives you facilities to do so. And we can go into the reasons why it gives those facilities, but if you had a whiteboard today, and if you had to ask yourself the question, what would banking look like if I had to start new bank today? Or what would a supply chain look like, if I had to do a supply chain today? You would not have half the many processes that got into organizations. Those have been built over a number of years. And they have stayed in place because they have become market practices and people become experts at that. So what blockchain is doing is, it's allowing us to reimagine a new way of delivering the same outcome.

Sam: I mean, how are we going to do that? It's packing up the past and repackaging it for the future in this very idyllic, I think... When you know more about the concept of blockchain, it's a very idyllic future that it could become. But of course, living in the processes and the ways of working that we do currently within financial services, and the way that transactions happen... Like you say, it's a very old system. And in some cases, hundreds of years old. But technology is obviously the enabler for this new future, for blockchain.

Prashant Gandhi: So what blockchain is doing at the very base level, it enables different parties who normally are competitors with each other to cooperate in a structured manner. So if your blockchain will allow parties to transact with each other and you can be sure that the transactions that occur between parties can be very private. So you know, your data is not visible to anybody who is not party to those transactions. And there is an element of how you can agree on certain facts without having to use third parties or without going through elaborate reconciliation processes that are in place today. So that's what that technology offers. When you start reimagining it, you know, reimagining the industry value chains, you start thinking, "Okay, why would I need this intermediary anymore?"

"Why do I have to participate in this network through somebody else who has created an entry barrier for me?" So you want to remove those barriers. You want to have transparency of information, you want to ensure that you're fairly treated. So those are the kinds of elements that start getting bubbled up. What blockchain promises is it allows you to look at the industry value chain and ask yourself some of the complexities that have arisen over the number of years, right? So any intermediaries that you might have, any unfair practices, fraud. Anything around entry barriers like... So an example of entry barrier could be, you know, in the US you have something called ACH, which is a group of banks that can only participate in clearing the payment transactions. Now if you're not part of the ACH already, it's very hard to get onto it and therefore you have to use an existing member to do your transaction. So that's an example of a entry barrier.

Transparency, you know, even in fairness, all of those are challenges that you can solve through the process of blockchain. And the reason, as I said, as I went back earlier, which is you're enabling people to cooperate with each other. Because that cooperation is very, very important in order for you to solve longstanding industry challenges.

Sam: You know, we talk about why is it important and how it's important and how it works. And the detail behind what is blockchain? I suppose for some it might be when is the right time to adopt, or think about it as part of a part of an organization's future. Do you think there is a right time for an organization to do that? And if so, what would be the approach to that or what would be your thinking behind when the right time is to adopt?

Prashant Gandhi: You know, we talk about the three horizons. McKinsey has given us the three horizons of thinking where you have the first horizon around existing businesses, second horizon around new and emerging technologies, and third to kind of reimagine a world where technology is not a constraint anymore. And so that that level of horizon thinking should exist inside every organization if they have to continue with the success. And blockchain I think belongs in the second horizon. But it's starting to become an established technology. It's starting to get used by a number of people. So let's say you are, for example, an energy company today. There are a number of places you can participate in a consortium in order to do blockchain-based transactions.

And if you don't have a strategy for it, if you're not already on those networks, there is a feeling that you're losing out on something. So yes, the time is now. There are lots of early adopters in this market. Those early adopters are benefiting from having some sort of cooperation. And if you need to influence the design or the strategy and how the industry walls, the standards and the practices. Then it becomes all the more important you have some form of blockchain strategy in place inside the organization. The time is now.

Sam Massey: The time is now. The time is now. You talked briefly about this consortium model. Is this...

Prashant Gandhi: I would distinguish... So public and private are the type of blockchains. consortium is the mechanism through which industry participants can get together to solve the challenges. Okay? So I'm going to answer the public private separately, but if I answered the question on consortium, let's say most of the places, and I think we touched upon this before. Most of the industries would have a set number of participants. So if you're thinking about, let's say, energy trading or oil trading, the large majors like BP, Shell, et cetera, do a lot of trades with each other. So you find yourself in markets like this where bulk of their transactions are with actually with each other, which means that they need to cooperate at certain level. Right? And then we already talked about how blockchain enables cooperation. So given that, if there is the longstanding industry challenges, it makes sense for organizations to come together and create a body that can fund the development of a platform or network that they can work with.

What that means is, and that can take different shapes, right? So we've seen consortiums which have basically created a corpus and use that corpus to fund a development to solve an existing challenge. Or we've seen them create a complete separate legal entity which can then become an independent company in its own right. And they would still develop the network but then they would be expected to build their own profitability over the years. And this is not a new model in a way, consortiums have existed a long time. We've seen... VISA, for example, is a consortium. It was formed with a consortium of banks and but now it's become an independent entity in its own right. And you still have the stakeholders who are the original companies. The reason consortiums are an important way to this because you do need to bootstrap this network in some way.

And that bootstrapping comes not just through funding. It comes through the expertise, subject matter expertise that the participants can bring in. Often they have the market power to be able to make the network very rich. So if you imagine a network where, in an energy network where you have BP and Shell, that you're almost covering 40, 50 percent of the market. And then if you add more majors to it, you are looking at 80 percent. Now with that power, you're able to do a lot of changes. You're able to do standardization of processes, you're able to ease some of the transactions between the parties. You're able to remove some intermediaries as you might require, you can create a place for sharing of your data in an easy manner.

So it benefits the consortium from solving, you know, as I said, longstanding legacy challenges that before blockchain was hard to solve. And it used to be the case where they would not come together before blockchain because nobody was solving the privacy and trust issue. It's blockchain is solving the privacy of trust issue and therefore that becomes an enabler for consortium going forward.

Sam: And it seems, and correct me if I'm wrong here. When I first read about blockchain a few years ago and I think I watched an animation on the internet, which explained it in a very simplistic way. But the feeling I got from that and the takeaway was, this seems quite fair. This is an unusual way to approach transactions between businesses, between partners, people, and what a fair way to view the future of how we transact between each other. And it feels like in its simplicity, it's fair. Do you think because of that, that will create a different kind of relationship between competitors or between businesses, between sectors that we don't see at the moment because they're not... The transactions aren't, quote unquote, as fair as you would expect or the culture around the transactions isn't as necessarily as fair.

What I'm trying to say is, blockchain is the idyllic future of what financial services could be. And it's becoming that. Because of that it's certainly changed my attitude about the future of money and the future of banking. I got the sense that I feel like the future looks good providing everyone gets on board with it. And if we don't adopt this, does it mean that we're going to sort of half co-exist in this past where things are the way they are, or can we all adopt? Can everyone move forward?

Prashant Gandhi: In order to unpack this, let me start with the idea of permission versus private versus public blockchain. So in a public blockchain, everybody can participate in the network. So if you wanted to set up a Bitcoin node yourself, it could do it. It's no use to you. You lose a lot of computing power, but you could set it up. I don't know if you have a place in Iceland, you can do that as well. So that's public blockchain. But that public blockchain have a purpose. And what one of the trends that we're seeing is what you call as a Web Three. And in Web Three, it is completely reimagining the kind of economic models that are possible. What I mean by that is, for example, if you did think Amazon, Amazon has something called S3. S3 is where you can store a lot of data, but it's owned by Amazon.

It is, again, a centralized place and you get nothing out of it. Amazon gets everything out of it, right? You get it as a shared service. There is a competing service called Filecoin and it's based on a system called IPFS. What it does is it says, "Hey, you got a laptop, you've got some storage capacity. What if there was a way to store people's files on it," right? You connect to the network, they can store files on it. And the more storage you give, the more money you earn and that's a service. So what now you've done is, you unlocked certain value of assets that exist without... That you didn't even know you had. And that is the kind of power that Web Three wants to enable.

You know, there are other services like Golem, which looks at computing power. So if you ever had the SETI... I don't know if you remember that. SETI used to be a program that you used to run on the computers, but it was like search for extra-terrestrial intelligence. So it was using your computing power to do that. But you can also donate your computing power to actually earn some money. So Filecoin and Golem are examples of what Web Three could be looking like. And they have been, you know, they have been growing on the side. The stuff that we talked about around consortiums, that kind of comes from a permissioned network. And in a permissioned network, you have a limited set of participants who are part of the network. So you and I can not join the energy consortium either.

You need to be an established company, you need to have gone through a certain approval process on that side to join that particular network. Permissioned network is designed to solve a specific problem as a starting point. And usually where it starts is it's trying to, what I call as a digitalization of processes and data. So you know, having shared data that all the parties can trust. Having standardized processes and so on. And it doesn't stop there. Where the market is going as well is it is, there is an enabler on those set of things as well. So the maturity would be, once they kind of had those things in place, you can do something called as asset tokenization, which means representation of a physical asset in digital terms.

And that again, you know, brings up a number of possibilities with it. So you know, for example, if we had to do supply chain tracking, if you want to do provenance of say, is this wine coming from border region? And the only way you might be able to trust it is if along the way, on its path to your doorstep, you could see that it was harvested here, it was packed here, you know... It's sealed in this kind of bottle and so and so, it bottled here and so on. So that that provenance becomes a visible thing for you. And that's called asset tokenization.

A level above that is where you can make it programmable. So you can start now doing things like settlement with it. What that means is assume that you have, you know, you bought some goods. And when the goods are delivered, you need to make a payment. Typically today, what happens is you have marketplaces that facilitate those transactions. In a blockchain world, those things will happen on a contractual basis. So as soon as the courier says they're delivered and as soon as you say I have ascertained the quality of goods, payment is made to the merchant. And everybody's happy. And you removed the need for any kind of intermediary playing a role in between.

Sam: And that's where this idyllic future looks good, right? Is that this fairness across the whole buying cycle is good for all. Or at least it feels like it's good for all because there's a huge level of actual trust that becomes reality, and no one along that supply chain is cheated out of anything, because it's fair for all. And I think that's where, as I said before, when I first read and learned about blockchain on a very simplistic level, the immediate gut feeling was, this feels like the fair way to do things. And it's so surprising that it's taken us this long to get here. But I think where my next question was going to be was, that at the heart of this is technology. And there must be some constraints and challenges that businesses are going to face along the way. Right?

Prashant Gandhi: Absolutely.

Sam: And so what are they?

Prashant Gandhi: Again, I think it's not just a technology problem, right? Technology... I mean it is a constraint. What we've seen, and I'm now going to talk mostly about the enterprise implementations. What we're seeing is there are lots of POCs, proof of concepts, where people have tried our technology, they have done live demos and it's proved that yes, this technology can do this set of transactions and that those transactions are not visible to a third party. So it's proved the privacy and it proved everything else around that. What you need to then do is to make it into something real. And I think that's the big leap that lots of enterprises need to make, from POC to actual production. And a number of things to impact there. So there is the whole technology implementation side of things where you need to start worrying about things like, how are your users going to work with it?

Like you know, identity. So if you are an employee of a company and if you are to work with that system, I need to make sure that Sam Massey is authorized to work on that. Right? So there is need... And what happens is we have our identity in ºÚÁÏÃÅ. That identity needs to carry through in that network. And so you need to integrate with an identity system. You need to have compliance in place. So what that means is, if you're not authorized to do something, you shouldn't be allowed to do that. So it's one of the challenges to you to think through. You need to think about how you might share certain information. You know, especially in the days of GDPR, where your private information is... Or you cannot share PII to with people, it becomes all the more critical that you have data governance standards applied to that.

Then you need to think in terms of if you're to share documents with somebody, how does that happen? How do you integrate with your existing systems? Because you're not going to work directly on the blockchain. You're going to work on your system, and that transaction then needs to flow through from the blockchain to the network. So those are the kinds of considerations that you need from a technology perspective. And those are not, you know... Again, not insurmountable challenges, but they definitely present a big challenge for a lot of the POCs to sort of go into a live mode. That's one part of the problem. The other part of the puzzle is how do you make that network something that is useful? And we talked about having a consortium and a legal entity, which might carry or run the network on behalf of the consortium.

You have to think about that network becoming valuable over a period of time. So a little bit of product thinking that has to come into play here. How do you make something valuable or reputable, and how do you make sure that there are customers who are attracted to that network? How do you ensure that you start with a huge market power, but you might want to cover the entire market. How do you ensure that you know you have the power to talk to the regulators to make certain kinds of kind of changes, right? So that level of product thinking, customer adoption has to come into play. It remove any kind of friction that might exist for somebody to adopt the platform. And often in transactions, you will find that there are cases where individuals or individual companies might not be able to participate.

So if you're on a small company, in a small energy company, I don't really have the money to go and join a network, but I still want to participate in some way. How do you make it easy for them to participate because you are an essential component but you don't have the money to do it. So lots of thought that needs to be paid on both the business side as well as technology side to convert it into a viable business, if you like. So that is the important bit, I would say. How do you move from one stage to another?

Sam: A lot to consider, obviously, before just saying, "Yeah." This is going to be part of our strategy. And you know, it's interesting because I think when you're talking about that, it leads to what's next, what's the future for this big subject matter that many businesses are looking at. And either they are already there and they're going through it, or that they know it's part of their horizon too, or they're not at all and they're to just very confused about how it's even going to be brought into their world. So it's an interesting... I think what you were saying there, all the considerations. It's not as simple. It's not going to be a simple thing to just adopt this new technology, this new way of doing things. So what's next, do you think, for businesses?

Prashant Gandhi: For businesses? I think where if somebody is not tried out blockchain, they should definitely look at doing more POCs. They should look at use cases. They should look for within their industry. If there are already bodies being formed, consortiums or platforms being formed. And you know, it's becoming a crowded space in certain areas, certainly. For example, if you say trade finance, there are multiple blockchain platforms out there. And you know, it depends on, and there is, there is an element of a winner takes all ultimately. You know, there will be a case of one network which will be much stronger than others, and people will abandon to go and join the main network. But so that... There's probably already something out there which they can meaningfully participate in.

They can look at their own internal capabilities and do a POC, you know? All the consultancies are all gearing up to do this job, right? So the other thing that has happened in the industry, especially for enterprises, is the technology. And I keep saying blockchain, but what I should really be saying is distributed ledger technology. The distributed ledger technology has been maturing very, very fast. So you know, your Corda, your Hyperledger, your Quorum. From where they were four years back to where they are now, it's been a significant leap. And there has been a lot of thought being put into how they can work for the different enterprises. So you know, prior to mature technology, quite a few of them are afraid to use. So that is the other way to be, to get into that cycle as well.

Sam: Well Prashant, I'm a bit wiser than I was a little while ago and I really think that others will be too. But is there anything else you wanted to mention whilst we're talking here?

Prashant Gandhi: This, it's a huge topic and it can get quite intimidating if you were looking for a path to sort of understand all of blockchain. The technology aspects, the implementation aspects. And we can certainly help people in thinking through the right thing. Where organizations should be focused on is think through where the industry is moving to and figure out how they can play a part in that evolving economy, right? The Web Three is happening. The decentralized finance is happening. Asset tokenization is happening, standardization's already happening. So being aware of those changes in the market can be most useful thing that businesses can do today.

Sam: Thank you for sharing your time with us today, Prashant.

Prashant Gandhi: Thank you for having me.

Sam: Thank you for listening. If you enjoyed this episode, help spread the word by giving us a rating wherever you listen to your podcasts.