The coronavirus pandemic has impacted many parts of our society, and emerging technology is no exception. Both the public health emergency and its economic fallout are likely to accelerate the pace of adoption for some technologies while pushing others onto the back burner.
Distributed ledger technology (DLT), or blockchain, is likely to experience acceleration due to its ability to enable digital services that are either too expensive or too cumbersome to build on existing infrastructure. As all industries around the world adjust to our new normal, we will likely see dramatic increases in the domains of digital payments, supply chain management, and digital identity.
Fueled by e-commerce and platform-based interaction, the digitization of payments has been growing for years. The volume of digital payments in the U.S. was already expected to grow by 15% in 2020, and is now accelerating due to heightened risk of virus transmission through cash, the spike in e-commerce activity due to social distancing, and the need to quickly disburse unemployment and stimulus payments.
Most of the immediate growth will come from existing digital solutions, but we also expect to see newer, blockchain-based solutions emerge in the near-term, as the past few months have revealed limitations of today’s digital payment infrastructure.
The benefits of using DLT for digital payments include that it is natively digital, programmable, offers a real-time gross settlement system, and has an immutable audit trail. Most existing payment systems lack these features because they were architected before the internet and don’t take full advantage of a 24/7 connected world. For example, the Automated Clearing House system that most states in the US use for unemployment benefits was built 40 years ago and still offers same-day payments only for certain use cases. DLT-based payments always settle in real time.
Another benefit of DLT is the ability to use smart contracts to control how, when, and where funds are sent. Programmability is a core component of every DLT network, and during a crisis the ability to put strict rules on how funds are disbursed is a powerful tool for governments injecting stimulus. For example, grants given to companies to prevent layoffs could be programmed to be usable only for payroll — something that is not possible today.
These benefits, along with the possibility of their deployment by unregulated tech companies, have also sparked a global debate on the possibility of central bank digital currencies (CBDC). There is no consensus definition for a CBDC, but the World Economic Forum defines one as “a new form of digitized sovereign currency, generally conceived to be equal to physical cash or reserves held at the central bank.” Central banks are both the issuers of money and managers of payment infrastructure in most countries, and the proponents of CBDCs argue that they are a natural evolution of both functions. But like any other kind of major upgrade, CBDCs also pose risks in the domains of illicit activity and financial stability.
CBDCs don’t have to use blockchain technology, but ongoing research at most central banks keeps tilting in that direction due to the perceived benefits of greater financial inclusion and programmability.
Supply chain management
One of the lessons learned from the crisis is how difficult it is to track the movement of items through the global supply chain. Supply chain tracking has been a known problem for some time, thanks to a globalized economy that has outgrown its supporting infrastructure. The shipping industry, for example, still relies on paper records and fax machines to track the movement of containers around the world.
Supply chain tracking is a system-wide issue that requires cooperation among countless entities all over the world. This is why many believe in a blockchain solution — IBM, for example, is developing one network for shipping and another one for food.
One way to think of any blockchain network is as a trusted and shared data layer for affiliated parties who need to agree on both the history and present state of some event. For a supply chain, that state could be the physical location of items, along with other information that might be relevant to the final recipient.
One of the technological consequences of the COVID-19 crisis is the need for more sophisticated digital identity solutions for both businesses and individuals.
Digital identity (ID) has always been important in financial services, as the lack of a comprehensive approach is a major cost center for banks that need to perform “know your customer” diligence on every client. Digital ID can reduce costs and eliminate various frictions within banking and pave the way for new business models — such as the storing and issuing of credentials — that are becoming increasingly relevant during the pandemic.
For businesses, the lack of digital ID came to a head during the application process for emergency funds through relief programs such as the U.S.’s Paycheck Protection Program. To qualify for the funds, businesses had to be onboarded and vetted by their banks — a process that, due to the lack of digital ID, still relies on physical documents and manual processing. This resulted in bottlenecks for loan approvals and delayed payments, not to mention higher costs for the banks working around the clock to help their clients.
In addition to helping businesses operate post-COVID, digital ID solutions for individuals could also help ensure a safer return to work. For example, companies could use digital certificates to track which employees have contracted the virus or have been vaccinated (when we have a vaccine). Since decentralized digital ID is based on credentials that are digital, portable, secure, and verifiable, it is an ideal qualifier for a fast-moving crisis in which certain credentials can change quickly. Unlike physical ID credentials, digital ones can be revoked instantaneously or programmed to automatically expire. An added benefit is the inherent privacy of sensitive health data given the user-centric approach.
Unfortunately, the digital ID infrastructure is probably not yet mature enough for solutions to be deployed immediately, but the industry is doing its best to get up to speed. A new consortium of over 60 industry participants recently launched to create new standards pertaining to immunity, and various startups are trying to build end-to-end solutions.
DLT positioned to have impact
Most people agree that the COVID-19 crisis will accelerate the adoption of digital technology in general. There is some disagreement, however, on which specific tech will rise to the occasion and why. Although still relatively early in its maturation, DLT is positioned to be a big winner as it solves some of the problems of today while serving as the core infrastructure for the solutions of tomorrow.
Omid Malekan is the blockchain innovation expert at Citi Ventures. He’s the author of “The Story of the Blockchain, A Beginner’s Guide to the Technology That Nobody Understands” and an adjunct professor at Columbia Business School.
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