Blockchains,Cryptocurrencies and their impact and influence on procurement

Talk to The Chartered Institute of Procurement & Supply

15th. August 2018

                         Blockchains

Defined

Blockchains are the public, digital ledgers which record and verify all cryptocurrency transactions. Anytime a new transaction comes through, it is added on as a new “block” or link to this chain, which is verified again and again as new transactions join the chain.

It is important to note that blockchain transactions are permanent, and once they’ve been verified, they cannot be changed, reversed, or removed. But, by using public eyes and software to continuously verify these ledgers, blockchains ensure that no duplicate or fraudulent transactions are made.

The Blockchain is an ENABLING technology. Blockchain and cryptocurrencies are an extremely disruptive technology.

It is a distributed database that maintains a shared list of records. These records are known as blocks.

Think of what digital reproduction does. It recreates an exact replica of for example a pop song. So every song so produced is identical. But you don’t actually want that for money. The money in MY pocket is inherently different from that in yours – you own it as opposed to me.

Does anyone remember HHHHHancocks half hour , with Tony Hancock. If you are anywhere near my age you will, I am sure remember him as a peerless comic I always think of his wonderful skit when he deposited a £5 note in the bank. He changed his mind and asked for it back, only to receive another, different one which did not have his signature on it. He created havoc until he got back his original note. In a sense what the blockchain does is make sure you always get the same note with your signature on it.

So how do blockchains work?

Think first of all of one block. That contains data on the transactions that have taken place. That data requires validation, and in blockchain parlance these validators are called miners. In reality, this is a misnomer. They aren’t people, they are extremely sophisticated computer systems set up into “farms” that perform extremely difficult mathematical problems. Once solved, that indicates the transaction is correct and the data is saved in the block. Just a small aside here – and this is not an exact description – but think of each transaction as having two parts. The first part says “this coin was transferred from A to B”. Attached to it is the second part, what I refer to as notes. You can put whatever you want into these notes. This forms the basis of Smart Contracts which I will come to later. For now, let me just say that some techy people have put the exact details of their child’s birth into the notes of a particular transaction. As a result, correct to the exact nanosecond and NEVER to be lost or altered, the poor child has had its details recorded.

Moving on a bit, our first block has been filling up with data. At a particular point, that Block is full. All the transactions have been confirmed, and gosh here come some more transactions! This is the point where Nakamoto’s genius shone through. He realised he had to make sure that the transactions in block 1 had to be fixed forever – never to be altered, all exactly timed. How do you “fix” the block? You still have to have access to its data to check stuff.

Firstly, he made it so that all the data in that block was transmitted instantly to all the nodes on the network. In layman speak, a node is a computer on the network engaged in validating transactions. Secondly, he synthesised the data into what is called a hash. This is a shortened version of all the data in block one. Think of Bitly on the internet. So block one is closed, but there is a small packet of data ready to move on. Now think of a one way trap door. You can go one way but you cannot go back. As soon as the hash is created and pushed out of the block, WHAM! The trap door shuts. All the previously confirmed data is set forever.

But hey! Our little orphaned packet of data has nowhere to go. What’s it for anyway? Think of a window box with just earth in it. If you don’t put anything in it, you won’t have any flowers. But sprinkle some seeds and things start to grow. In the same way, our little orphaned hash gets pushed into block 2, seeding the whole thing. That means all the next lot of transactions can now be validated and recorded. Once that block is full, the same process takes place all over again.

I hope by now you will have grasped why this is called a block chain. It is a series of blocks of data linked together, with ALL the information available to all the nodes all over the world all the time.

Cryptocurrencies

Defined 

A crypto currency is any coin or currency that has the characteristics of fiat money. They are sometimes called Alt coins – literally alternative coins. At the moment there are over 1500 crypto and digital currencies, but there are only about 200 real world fiat currencies.

 So what is it? A cryptocurrency is a fully decentralized, secure, digital currency whose creation is controlled by cryptography. Cryptocurrencies are not issued by central banks and their value does not depend on bank policies. Unlike regular currencies where new money can be introduced in the money supply through Quantitative Easing (QE), cryptocurrency prices are purely based on supply and demand. Bitcoin, created in 2009, was the first cryptocurrency.

Global Market Capitalisation

Current global capitalization for cryptocurrencies is around $250B. It peaked at just short of $900B at the end of 2017. However this has fallen back somewhat during this year.

Share Of Global Financial Markets

Current estimations are that cryptocurrency trading amounts to no more than 3% of total global financial markets.

As it gains an increasingly firm foothold on business I believe the market cap will continue on a steep upward spiral in to the next decade. But at the moment in terms of total financial markets turnover it is miniscule.

Origins :

In 2009 a Satoshi Nakamoto ( is it a pseudonym? A Group? Who knows?) Published a paper called “ A peer to peer electronic cash system” It solved the double spend problem. At its simplest, you can reproduce anything digitally ad infinitum. This is fine for books, records, tickets and so on, but not what you really want for hard cash. I know Central banks endlessly create more, but that is inflationary. Over the last 100 years, the goods that one OLD penny could buy (half a NEW penny) has risen to around £1. Even as recently as the early 1970’s someone on £1000 a year was doing very well. But the important problem this paper solved is what was called the double spend problem. Quite simply, it means you can be sure the money you are transferring is yours and yours alone.

Purpose (Movement of money)

Nakamoto was concerned at the time about the collapsing fiat money system and was looking to supplant it with a more trusted non-inflationary currency, useable in everyday life

Purchase & Storage of Cryptocurrencies

At the simplest level you have an electronic wallet into which and from which you transfer whichever crypto currency you choose.

At a deeper level, the Blockchain ( which I have already alluded to) is extremely technologically advanced. Bitcoin and cryptos could not survive without the blockchain, but the blockchain could be used in many many other cases

I repeat what I said before- The Blockchain is an ENABLING technology.

Fiat currencies

In general, you can use fiat to buy Bitcoin but to buy other cryptos up until the present time you have to buy Bitcoin. There are now beginning to be some exchagnges that offer direct purchase and sale of some other cryptos, but the vast majority of exchanges and crypto require you to buy Bitcoin with which to purchase your preferred crypto

Is crypto solid and tangible?

I should say at this juncture that there is in fact no such thing as a Bitcoin. You can’t see it or touch it, in much the same way as you can’t touch the Pounds and Pence in your online banking app.

What you see is the immutable trail of the transactions which led to your wallet holding a certain number of coins. If I want to define something digitally, I can do that in the minutest detail. For example, any particular apple is unique. It’s colour, variety, area where it was grown, what the weather was like whilst it ripened, who picked it, whether his picking certificate was up to date and all sorts of other data can be stored on the blockchain.

But wait, I hear you cry! All the apples in that particular orchard will be identical! Well, no they are not. No two will be picked at exactly the same nanosecond. Nor will they have the sun on them from the exactly the same angle The blockchain will record that fact. Each apple is therefore unique. For all practical purposes, that doesn’t matter too much, but it really really does if you are talking hard cash. Where did it come from? Where is it going? Why? Whose is it NOW? The blockchain can answer all these questions

Interrelationship - Cryptocurrencies

At present, in most instances you then have to use a THIRD crypto to transact in the crypto you want. For example, before we instituted our own exchange, in order to buy Scotcoin, you had to buy Bitcoin, with which you bought XCP (counterparty coin) and then you could buy Scotcoin with XCP. And the same when transferring back from Scotcoin to Fiat.

Impact on Business

Business Sectors/Segments

Blockchain technology will have a huge impact on whole sectors of business.

1. Decentralised Internet. Programmers are currently working on decentralised internet platforms to distribute all the functions of the internet over distributed nodes which will increase the resiliency of the world wide web. This includes for example Maidsafe in Troon which is making huge strides in creating a truly secure internet environment, entirely decentralised

2. Decentralised Markets. One challenge with cryptocurrencies such as Bitcoin is the need to trade on centralised exchanges which can be shut down or hacked. Decentralised markets allow trading without having to trust a third party. Each transaction is confirmed multiple times so you can be certain it is valid.

3. Distributed Cloud Storage. Distributed cloud storage avoids the need to place faith in large centralised companies where personal data is vulnerable and pricing may escalate to cover the expanding number of data servers.

4. Decentralised Social Networking Sites. Social networking sites are centralised and are prone to censorship of information and plundering personal data. Decentralised social media platforms such as Steemit mitigate this and financially reward the content creators.

5. Encrypted Messaging. Peer to peer messaging can leverage blockchain technology to encrypt messages and store data bits efficiently on many different computers where they can only be accessed with a private key.

6. Proof of Ownership. Items that are purchased could be tracked on the blockchain to demonstrate proof of ownership and to prevent the sale of stolen goods which may eventually help to reduce crime.

7. Supply Tracking. Additionally having the ability to track product purchases all the way back to the beginning of the supply cycle, i.e. primary industry could also influence the effective tackling of slave labour and people trafficking practices, being compliant therefore with Modern Slavery Act (2015) requirements.

8. Authenticated Voting. While digital voting can be susceptible to tampering, blockchain voting technology is verifiable and would allow anybody to audit the blockchain to confirm votes are time stamped and legitimate.

9. Stock exchange. In traditional stockmarkets there is typically a delay of 2–3 days for settlement of stocks and bonds. Trading stocks on a blockchain is more cost effective and provides instant settlement. It can be done without any middleman. If I want to sell you 1000 shares in Megacorp, if they are on the blockchain, you can simply find a buyer. At that point he transfers the purchase price to you via the blockchain and you pass the shares over to him. You have instant settlement. As the ground-breaking business Overstock.com puts it, the trade is the settlement. Or if you prefer, the settlement is the trade.

10. Real Estate. Property titles, transactions and historic value can be built onto the blockchain providing transparency and reducing the time and cost associated with real estate transactions.

11. Internet of things. In the future, everything will have a chip. It probably won’t be a chip as we know it, but, for example, your sweater will tell you when it needs washing. One of the uses I particularly like. In the future we probably won’t need to own a car – or more properly a Personal Transport. You’ve all read about driverless cars, and yes, I know there are issues, not least about safety and security. But think of this. You want to go from A to B. You call up your vehicle from your phone (how many people? Any overweight?) The vehicle works out if it has enough charge. If not it pops along and recharges itself (or sends another already charged vehicle) It checks you have enough credit to undertake the journey. It checks it is in tip top shape. If not, it calls in at a repair facility, and sends another vehicle. All seamlessly and without intervention. It then picks you up and takes you to your destination, deducting the fare from your wallet.

Financial Market Place

Banking .

Traditional banking relies on a trusted third party to keep a tally of what is happening. Blockchain and crypto currencies do not require the third party. Transfers are directly peer to peer, from my wallet to yours, with no middleman taking his cut. There is an ongoing squeeze on costs throughout all businesses. Sending £1m via banks can cost as much as 3% or tens of thousands. Sending cryptos in any amount is generally around $5-10, but can be as low as 10 cents. Think for a moment about what happens when you make a financial transaction. I’ve just bought a meal and I give my credit card. The restaurant is happy to take that card, because it knows a third party – ie the credit card company or bank – will pay it for what you have eaten. So cash goes from your account to the bank and then to the restaurant. The bank takes it’s cut. With the blockchain, that is uneccessary. Funds transfer directly from you to the restaurant with no intermediary. Quite apart from the reduction in costs, there is little or no chance of the restaurant getting a claimback, because you are using a cloned card. I believe last year there were some £2.3b of claimbacks in the UK alone. Using a crypto currency that can never happen. Either there is crypto in your wallet or there isn’t. Nobody but you can get into your wallet to effect a transaction. As an aside, there is no reset for a lost password. Lose that and the funds are lost forever. And once crypto has been sent, it CANNOT be reversed. The cheque really is in the post and will arrive.

More Terms In Relation To Blockchains & Cryptocurrencies

Cryptocurrency Exchanges are platforms that allow users to buy, sell, or trade cryptocurrency. Popular exchange websites like Coinbase, Kraken, and Shapeshift help users set up virtual wallets, track exchange rates, and manage their cryptocurrency through an online account. Other popular sites are Exodus and Wirex.

Hashpower (also known as “hash rate”) is the speed at which transactions are verified on the blockchain.

Mining is the process of verifying transactions on the blockchain. Mining often requires expensive, specialized equipment and large amounts of power. This is challenging for individuals to do on their own, so there are mining pools to help them get involved. By joining these pools, users allow their computers to solve complex algorithms to help verify the blockchain.

Miners take the place of third-party banks that would typically verify all transactions in the real world. However, miners do not hold your funds like banks do, and can earn cryptocurrency in return for their efforts. I prefer the term validators – mining gives the wrong idea of what actually happens

P2P (Peer-to-peer) is the process of passing information directly from one computer (peer) to another, without needing to pass through a central location. This is one of the most successful aspects of cryptocurrency as it expedites the transaction process, and does not limit users without access to financial institutions or third-party entities.

Proof of Stake is the framework in which a user’s stake determines how much say they have in verifying each blockchain. Therefore, users who have more stakes can then have more power in determining which blocks are approved or denied.

Proof of Work is the process by which miners are rewarded for their work to verify the blockchain. Often, there is a competition between miners to verify transactions, as rewards are earned by solving each complex algorithm.

Tokens are used to transfer or pay through cryptocurrency, and represent just about any asset that has worth and can be traded. While the word “currency” can often be misleading, it is good to note that cryptocurrency tokens can represent anything from loyalty points, to digital goods, rewards, or even other cryptocurrencies

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Influence on Procurement & Supply

How will blockchain impact some of your specific requirements?

Smart Contracts. Smart contracts can be built on top of a ledger and operate as decentralised applications. These programs can run functions which are becoming more sophisticated and may diminish the need for standard legal contracts. In the simplest terms it operates like an escrow for goods and services. You can write in terms such as “until this happens that won’t happen”.

In reality there is nothing that “smart” or clever about them. In essence, they represent an escrow situation. In your own cases, suppose you want to buy a product from China. A smart contract can be constructed to cover the purchase. There can be various gates or processes that can be built into the contract. The next step is not allowed to happen until the previous step has been confirmed. The final step, which might be payment on delivery, can be built in as well. The moment the product is delivered, the contract will trigger payment to the vendor. Now you might say that’s what happens now, but it’s entirely dependent on somebody checking each part of the process. With smart contracts both vendor and purchaser can be confident both delivery and payment will take place. It has the capability to disrupt a range of traditional Procurement & Supply processes including Purchase Orders, Contracts, Framework Agreements, Requests For Quotation/Invitations To Tender (RFQ/ITT), Supplier Payments etc.

One of the areas they will be most useful in is conveyancing. Once the parameters are set for the first transaction, every transaction thereafter will be already in the system. The conveyancer will simply enter the price and the date of settlement. The bank transfer will be linked into the contract, so no more hanging about for settlement.

RFx Request for Quotation or Information etc.

The request and reply can be time stamped and immutable. The exact terms can be stated and a smart contract can be used to ensure compliance

Supplier Payments Protocols

Accelerated Supplier Payments / Paying Suppliers Faster

A smart contract can ensure payment as soon as the terms have been fulfilled. No more waiting for the letter of credit to be paid out

Regulatory payment

Payments that are now regulated or auditable, possibly compared to how it used to happen?You don’t need teams of accountants ticking invoices any more. Once confirmed, the information is time stamped and filed - it’s like having a notary public at every transaction.

Currency of payment 

Can be any fiat currency, depending on where the supplier would be in the world.

The first part of the transaction would be via a crypto currency. At the moment, banks are trialling a coin called Ripple. That doesn’t mean to say it will become the standard, but if you are sending £1m from here to China, a bank will probably charge you up to 2% of that amount. The first country to country transaction will perhaps be a mere 50p. Then the transfer from Ripple to fiat takes place. On foreign exchange markets, the margin is under 0.1%??? (for business) getting cash for your trip to Benidorm is an entirely different matter. But even at 1% that is going to save you £10,000 a time.

Procure to Pay

It is basically the process that covers the stages or processes from a purchase order being raised till the supplier is finally paid. P2P refers more to non manufacturing organisations that do not have a back office ERP system; not really being necessary. Organisations will most likely have their own variant however they’re all the same in terms of how they operate. It’s something that could be covered by a smart contract within the blockchain and quicker invoice clearance and payment due to more simple and better auditable processes. This should provide the opportunity to take real cost out of the end to end process by removing unnecessary “fat” from both the client’s and seller’s finance processes. 

Data authentication 

Basically confirming information . This is an area where the blockchain excels. Once the data is entered and confirmed, it is immutable. It’s also time-stamped to the nanosecond. So if there has, for example, been an update to a process or a product, you can tell precisely which version you are working with. In fact, blockchain technology came out of the requirement when Linux was being developed, that thousands of developers HAD to know they were working with the very latest version – otherwise their input was wasted if something had changed.

Inventory management and stock control.

 An ideal infrastructure for machine-based activities that the Internet of Things (IoT) has been lacking.

Automated inventory tracking/management / Automated ordering/ replenishing

Could, for example, apply to MRO and be the next logical evolution of the “MRO vending machine” that many companies are using to improve their MRO purchases:

Asset Tracking

Using smart contracts. A container is transported from the manufacturing plant to the retailer's site, in a multi-stage process. At each stage, the carrier performs a handshake with the recipient to confirm that the container is delivered where expected, and then posts to a smart contract to sign that delivery. The recipient follows along to confirm reception. The process can even post the availability of empty containers to ship goods back the way thus offering a much more effective way to streamline freight movement.

Systems simplification 

How the blockchain would be much more efficient and simple than existing back office systems

This is almost self explanatory. Back office systems are inherently hackable and can be tampered with. Once a transaction is confirmed on the blockchain, it CANNOT be altered at all. So you can be certain not only of the transaction itself but of the exact time it happened.

An increasing number of supply chain startups have recognised the opportunity to provide blockchain-enabled supply chain solutions to improve efficiencies and reduce costs for the massive supply chain industry. More will most certainly join them as they realize the potential and demand for blockchain-enabled solutions to transform the supply chain and logistics industry.

Audit trails

Again this is a perfect use of blockchain. You can’t “lose” the data or change it or delay it or anything. So accountants requirements to check invoices is reduced dramatically. If they know that all the relevant data has been stored on a blockchain, they only need to look at a very small data subset to confirm the whole lot

Future business direction

Regulated v Unregulated.

There is not a hope in hell’s chance that regulators and central bankers will allow millions to be transferred around the world without anyone knowing who is doing it and where the money came from. As a result, in our view all cryptos that are allowed to survive will be KYC (Know Your Client) and AML (Anti Money Laundering) compliant. I.E. you will have to register in the same way as you do at the moment for a bank account or broker account. We at Scotcoin set out on this path nearly two years ago and it is coming to fruition now. We believe that unregulated coins will be banned. The EU and most other regulatory areas have stated they will produce crypto guidelines around the middle of this year. There is already a push against crypto currencies and Initial Coin Offerings or ICOs from regulators. That will only intensify as time goes on. In my view that is quite right. ICOs should have the same financial probity attached to them as offerings on the Stock market

RISKS

Despite all of the above, the blockchain technology has its downside. First of all, it is still in its infancy although great progress has been made during 2018. Most implementations are at an early stage of development and most organizations are test driving it. There are still some unanswered questions and relatively few applications other than cryptocurrencies.

Scalability. The way records are processed and that make the blockchain a secured repository has a price: speed. It can be too slow for real-time applications and even for a good usability. On top of that, scalability relates to the scope. If, as mentioned earlier, an organization uses the blockchain to track and monitor all movements in its supply chain from the extraction of raw materials to the end-user of its product, this can create a gigantic mass of data. An amount of data so large that it would hinder the process it is supposed to improve and that would quickly become unusable (big data can easily turn into fat data).

Risk Of Being Locked In. Except in the case of organizations running their own blockchain network (which would go against impartiality, one of the advantages mentioned earlier), a 3rd party operated blockchain could become “a prison for data that will come with hefty prison maintenance fees.” Think of old fashioned copier contracts . However, as most blockchain implementations are opensource there is inherently less chance of this.

Unhackable?

  Blockchain technology heavily relies on cryptography and peer-to-peer networks that make it very robust and resilient. But history has proven that almost nothing is unhackable. The blockchain may be extremely difficult to hack, however, someone with the right motivation (fame, money,…), tools, and probably a lot of time, could, possibly, one day, hack it. However, it has been calculated that the chances of a successful hack are less than one grain of sand, but not just those on earth, abut ALL of them in the universe.

Back Office Interface. Even if we assume the blockchain to be totally unhackable, systems around it are not. Systems and programs connected to the blockchain may be vulnerable to attacks and/or bugs. Smart programs are an example, the DAO attack is a reminder of that kind of risk.

SWOST

SWOT

I would ask you to make your own SWOT analysis. Every business is different in its requirements and the analysis will be different for each one. Suffice to say that there are areas where blockchains excel – recording and confirming data and facts particularly. The opportunities are myriad and again will vary with the business, and I’m sure every one of you will be able to think what would work best in your own organisation. Weaknesses up to now have been costs associated with tranasactions. The Bitcoin blockchain is costing as much as all the electricity consumed in Switzerland to maintain. But there are many other systems and blockchains being made and trialled which will reduce this to pennies. We at Scotcoin are working with a system called PoET, standing for proof of elapsed time. The costs are a minute fraction, it is inherently faster both in individual transaction times and in the number of transactions that can be confirmed per second ADD GRAPHIC OF BITCOIN vs SCOTCOIN

To conclude

Blockchain represents a step forward that Procurement & Supply should not ignore because it opens the door to further improvements from streamlining paper-based processes to enhancing cooperation.

However, organizations should make an informed decision about testing blockchain. Doing it because others are doing it or because of the hype are not good reasons and could lead to regrets in the future.

I hope this very brief expose of blockchain and crypto currencies has whetted your appetite to discover more of how the world will change over the next few years. As ever with new things, I’m quite certain blockchain uses and direction will be quite different from what we now think.

Remember Betamax recorders? Everyone thought they would be forever. In the end they only lasted a very short time and even the VHS machines were rapidly overtaken by newer and better technology. And don’t forget Viagra. It didn’t start life as a byword for sexual activity. In 1989, British Pfizer scientists Peter Dunn and Albert Wood created a drug called sildenafil citrate. They believed it would be useful in treating high blood pressure and angina. I would have loved to be the first man who trialled it and found he suddenly had an erection!

So human ingenuity and lateral thinking will for sure change the way we presently think about the blockchain. The challenge is to use this extremely powerful tool to make our lives and processes easier and more efficient.

ANY QUESTIONS?