IBM, Everledger and the market disruption of Blockchain

Exchanging assets for money can be a complicated – and sometimes expensive – process: for instance trading stock can happen in a millisecond, but settlement can take days to complete. Imagine a world in which such transactions can be handled in the digital realm in a system which creates an immutable record recording the provenance, contract and transaction in a peer-to-peer way through a shared ledger and without the middlemen who prolong the process and can add significantly to the cost. In parts of Africa sending money home across long distances used to – and still can – involve trusting a taxi driver to deliver envelopes of cash for up to 30% of the money. Blockchain applications have the potential to simplify these processes, but need to be applied differently and built specifically by (sometimes very small) industry sectors.

For IBM’s Systems group the Linux Foundation’s Hyperledger is the fastest growing Open Source project it has ever been involved with. While in many sectors blockchain represents both an opportunity and a threat to established players (think Banking, Insurance, Stock Trading), there are a number of industries where it can be built and supplied now. One such is the diamond industry, where provenance is vital as the products move from rough diamonds through the cutting process. As well as listening to a number of IBM presentations at this year’s Edge conference on the subject I also had a chance to speak and ask questions of Leanne Kemp of Everledger – a company involved with building a system for ensuring provenance for the diamond trade. I think it’s a good time to think about the opportunities and threats of blockchain technology.

There are 2 major blockchain initiatives predating Hyperledger. In particular:

1. BitCoin – developed by unknown programmers was launched in October 2008 and made Open Source in 2009 – it is the original and most widely known blockchain development and is now accepted as payment by around 100k merchants worldwide. As a peer-to-peer payment system BitCoin users can reduce the commissions otherwise paid to banks and other middlemen down to 0% to 2% of the transaction. Unfortunately much of the major news coverage of BitCoin has been its use for criminal activities. I expect it will receive more positive coverage now blockchain is becoming popular.
2. Ethereum – based on a white paper by Vitalik Buterin (one known co-developer of BitCoin) published in 2013 this project was launched by Swiss company Ethereum in 2014. The DAO (the ‘platform for the autonomous governance of investment capital’ according to Wikipedia) was hacked in June 2016, resulting in Ethereum closing it down, launching an Ethereum hard-fork to return lost funds before the DAO was re-established. Microsoft has partnered with ConsenSys to add Ethereum to its Azure PaaS platform.

The Linux Foundation announced the launch of the Hyperledger Project in 2015 – an effort to build an Open Source blockchain platform.  It is headed up by Brian Behlendorf; it had 30 founding members including Accenture, ANZ Bank, Cisco, CLS, Credits, Deutsche Börse, Digital Asset Holdings, DTCC, Fujitsu Limited, IC3, IBM, Intel, J.P. Morgan, London Stock Exchange Group, Mitsubishi UFJ Financial Group (MUFG), R3, State Street, SWIFT, VMware and Wells Fargo and has been growing substantially since then.  The Linux Foundation reports it has had 2.3k membership requests already. It describes its development as a public blockchain as opposed to the previous ‘permission’ offerings, which are restricted to a set of companies. Hyperledger adds encryption to stop strangers accessing records, more stringent access policies and digital signatures to blockchain projects.

IBM Blockchain

Although Hyperledger code should work on any Linux computer (including laptops) IBM has developed value added blockchain development services designed for all developers to share code. Initially it has introduced 2 development offerings, which are:

• Starter developer network on IBM Blockchain – a relatively simple starter pack for software developers to get used to programming in Hyperledger; very useful as blockchain is new to almost every company and organisation.
• High security business network on IBM Blockchain underpinned by IBM LinuxONE. A fuller version, hosted via the IBM Cloud including an additional set of features to enable customers to author and share production applications. The security features of IBM LinuxONE add another layer of protection and privacy to the resultant blockchains.

By the nature of these services the applications developed will be available as cloud-based services. IBM is of course also working with customers (including Everledger) to develop in-house applications as well. At its recent Edge conference IBM encouraged all of the 5.5k attendees to get started with Hyperledger and blockchain quickly. It pointed out that these business applications are subtly different from others and encouraged us to experiment – perhaps by buying something or other using BitCoin. In the conference we heard that as much as 50% of the opportunity for blockchain applications will be in logistics, property records and capital markets – most of which have mature IT trading systems ripe for disintermediation and disruption.

Everledger brings blockchain digital certification to the diamond trade

Until recently the diamond trade involved fax machines and embossing stamps; the IT systems, for what they’re worth, were based on simple databases. The Kimberley Process was set up in 2003, with the aim of curbing the sale of ‘conflict stones’ through a new verification system running in the 81 countries involved in the diamond trade.

Certification continues to be at 3 separated stages as the stones are processed – rough, cut and polished. The trade was open to criminal activity such as the substitution of genuine for fake diamonds after cutting and polishing certification. In fact Everledger believes that $45b is lost in diamond theft in the US and Europe, $100m is paid out by insurers for diamond theft and 65% of fraudulent claims going undetected.

It has taken advantage of the lack of computerisation in the diamond industry to deliver one of the first Hyperledger-based blockchain applications. The development is headed up by Leanne Kemp (opposite), who I was lucky enough to speak to over an analyst lunch at Edge. Leanne said that Everledger had the advantages of the UN work and mandates to stop the illegal trade of diamonds across the world and the lack of previous IT-supported transaction systems. The system she and her team has developed is based on Hyperledger code ensures the provenance of the stones through the use of digital images.

Blockchain’s potential for process modernisation, widespread disruption and disintermediation

IBM itself has some 60k programmers and it has been busy modernising its own supply chain processes through the use of blockchain. The new system has some 2,459 blocks to connect IBM with its suppliers and allows a simple clear view from contract, engagement, through delivery to payment for their offerings and services. Where projects have multiple participants it shows where and who hold-ups there are in each contract and has an advantage in being much better to run analytics programmes over than before. There are clear advantages for IBM’s suppliers as well in identifying holdups.

The long queue for membership of the Linux Foundation’s Hyperledger project is clear evidence for the widespread current interest in blockchain from all kinds of companies and organisations. It seems clear that its use will be widespread as a means of modernising payment processes, ensuring provenance of products, which will speed up many general and specialised processes. It represents both opportunities and threats to many established organisations involved in current processes. For Leanne – apart from the work to add new parts of the diamond business – coloured stones are an obvious next step. She liked my idea for developing something for the trade in fossils – something my daughter Lizzie and I would be very interested in. There are other areas you could image would benefit and many of us at the conference enjoyed talking about our ‘worst favourite’ processes we hope will be disrupted.

I don’t believe that blockchain will be instrumental in creating an ‘Internet of Value’ to add to the current ‘Internet of Information’ as predicted by Don Tapscott in one of the Edge presentations: if it does I’d prefer to think of it as an extension of ‘Systems of Record’ to a ‘System of Trusted Transactions’ perhaps. In any case – like the Internet itself – researchers are liable to miss its importance because the revenues associated with blockchain will be virtually impossible to track. Despite that I’ll do my best to follow key introductions over the next few years.