Distributed Ledger Technology (DLT) Has Begun a Business Revolution

Right now, the coronavirus pandemic dominates the news.  Indeed it all but drowns out everything else.  A vaccine will hopefully bring an end to virus fears and also a welcome end to this often-repetitive news tsunami.  In the meantime, the world’s future is taking shape in other areas that demand understanding.  DLT is surely one of them.

Considering how much media hype this subject once received (before that is the virus took all the oxygen out of the room), it is strange how little understanding of DLT exists.  With apologies to Winston Churchill, seldom have so many written so much to convey so little insight on a subject.  Part of the problem is that the system on which DLT rests, Block Chain, was introduced to the public through Bitcoin and as a consequence has become muddled by the truly overwhelming mathematics associated with cyber currency mining.  Though DLT has its own technical complexities, it is, in fact, much less mysterious and more straightforward than those distracting “mining” operations. 

If the hype about DLT has confused more than it has clarified, it is nonetheless largely justified.  Distributed ledger clearly has the ability to revolutionize business.  To be sure, its focus lies on one of the most prosaic of activities, but bookkeeping, dusty as it may seem, lies at the heart of every business operation, finance in particular, but also industry, manufacturing, transportation, and retail, as well as other essential activities not usually thought of as businesses, healthcare and government.

A distant historical precedent might hint at the power of this bookkeeping revolution.  Double-entry accounting took off quickly after it was introduced into the Republic of Genoa in the middle of the fourteenth century. The system, by balancing one transaction against another, brought greater clarity than ever before to what was happening in any business operation. Because the technique paired all inflows and outflows, it flagged errors whenever the sums on each side of the ledger failed to equal each other.  That quality not only made the accounting more reliable, but it also narrowed the field for fraud and helped with dispute resolution.

Most important of all, the system’s advances made all more efficient and increased trust among businesses. Both of which surely contributed to the tremendous advances in trade and wealth that followed its introduction.

DLT will not replace double-entry accounting.  But it will offer the world similar strides in business efficiency, clarity, and consequently the trust building that encourages trade and creates wealth.  

In schematic form, DLT works like this: It uses the tremendous and instantaneous communications abilities of the Internet to link all parties to a transaction in near real time.  Using pre-determined conventions, those parties can use the system to verify with each other all the elements of each transaction and confirm them with unique signatures.  In this way DLT creates identical versions of each transaction and automatically records them in the books of all relevant parties.  In this way, it does away with the need for a centralized ledger required by traditional methods.  More, it obviates the need for the traditional approach’s separate bookkeeping entries and their need for tedious and time-consuming reconciliations.  Because DLT also encrypts the information on each transaction, it ensures that only those involved have access to the record.  And by time stamping the transaction, DLT makes the record immutable unless changed by a subsequent transaction between the same parties.

The same sorts of advantages brought by double-entry bookkeeping are evident here. Eliminating the need for a separate record keeping allows DLT to reduce the chance of error and disputes and also helps expeditiously resolve those few disputes that might arise.  In the same way, it significantly narrows the possibility for fraud.  Aside from these immediate advantages, DLT can make its record keeping still more efficient by offering the ability to automatically accumulate any party’s transactions – “blocks,” as they are called – in a “train” so that it can update balance sheets for any involved party.  Of course, it can only record the transactions as they occur so that the accounting needs other inputs on pricing to create a picture of value, but the system goes a long way to producing a complete, secure, and all but error-free accounting picture, all in real time.  

It is still early days in the adoption of DLT, but its clear advantages say that it will become commonplace quickly and across a host of applications.  Finance and insurance have been the great pioneers.

According to Business Insider, some 40 percent of firms in the industry report at least some efforts to adopt DLT.

That is hardly surprising, since by nature firms in all aspects of finance have to deal with overwhelming bookkeeping demands. Currency trading, where there is a need for 24-hour access just about seven days a week, has always put players under tremendous accounting pressure. Traders, whether at banks or elsewhere, still need to maintain facilities to do the business, but DLT, by having the parties involved effectively make the record, relieves them of the need to staff back rooms as completely as before.  Credit market activity and insurance might not face quite the same pressure as currency trading, but it is clear how the settlement and tracking as well as verification offered by DLT has an appeal in reducing staffing costs, eliminating errors, and avoiding disputes.  

A different area where parties have only just begun to experiment with DLT but where there is huge potential is in regulatory compliance.  In place of the elaborate specialized accounting now largely required, the regulator, once made a party to each transaction, would receive a complete, verified record as a matter of course. The system could also shortcut the duplication of effort required by reporting to the often several different regulatory bodies concerned.  Indeed, a well-automated connection could allow the relevant regulator to raise questions about a transaction even before it goes forward, protecting all parties from subsequent trouble.  Adoption of DLT with trade credit may take longer, because of the complexities of cross-border dealing, product details, country of origin, and settlement currency, but it is also clear that all such issues are susceptible to software additions to the basic system.

Only about 12 percent of firms in industry, energy, and manufacturing report making efforts with DLT, but the potential is nonetheless clear.  In supply chain management alone, the error reduction and tracking capabilities implicit in the issuing of an immutable and identical record of each transaction promise efficiencies that would otherwise be impossible.  With DLT, each container arriving in a port can automatically be routed for further shipping.  In a similar way, DLT should have great benefits for retailing, which today reports only about a 4 percent exposure to the technology.  Travel, where firms are only just beginning to experiment with the approach, has even greater potential.  Consider, just for one obvious example, how DLT can embrace in a single transaction the multiple checks now required in ticketing and boarding, not to mention the further huge complications imposed by loyalty programs

Healthcare has made some strides in adopting DLT.  About 11 percent of those involved report such efforts.  The value in simple bookkeeping is the same as in other businesses, but here advantages increase because almost all transactions also involve an insurer who, once a DLT system was adopted, would also verify and confirm the service provided. Beyond even these accounting advantages, DLT could also enhance medical practice by offering reliable records of past treatments as well as drug prescriptions.  Especially because DLT embodies an ongoing encryption, such a system would avoid the privacy concerns implicit in a centralized system.  In DLT, the information would remain completely under the patient’s control.  Similar advantages would accrue to the application of DLT to drug distribution, even clinical trials for new drugs where the software would allow for automatic and easy aggregation of results.

This list of potential DLT applications is cursory and sketchy to say the least.  But it nonetheless speaks to the extent to which the system could improve the reliability and security of business and business-like activities in all aspects of life.  DLT indeed holds out the possibility of a revolution in the treatment of transactions and the data they create, a revolution even more profound than that created by its distant, influential ancestor, double-entry accounting.  

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