Blockchain: The Death of the Salesman?

blockchain2

I was recently asked about our perspective on Blockchain and particularly its relevance to investors in the medium term.   

In addition to this short musing, our most recent podcast delves into this topic as well.  Have a listen.

Blockchain 101

There is no shortage of literature online that delves into the details of Blockchain, bitcoin, crypto-currencies, online exchanges and more.  It is still somewhat clouded in techie-mystique, anti authoritarian bias, mythology on its origins, and media infatuation of nefarious uses.  There has been mostly skepticism of its broader appeal in particular by institutional bodies regulating standards across currency, trade, property, national security, to name a few.

And there is certainly self inflicted damage that further cloud its future.  Most recent exhibit A:  Bitcoin breakup.

In case you have never seen a Blockchain and its bitcoin exchange format, it looks like the image below.

blockchainlook

A long alphanumeric chain associated to a bitcoin (BTC) form of currency (crypto currency).  It might be the first and last time you see it in this form, but it is important to know that it is in fact a chain of characters that form a ‘block’ that can also be connected to other blocks.  It is a unique chain that will never be duplicated within the Blockchain network.

One of our favorite public presentations on Blockchain comes from Citibank.  It provides a good framework and a clear definition.   If you enjoy perusing PowerPoint, here you go … click for the full presentation.  Citigroup did a solid job defining Blockchain:

“A Blockchain is a distributed ledger database that uses a cryptographic network to  provide a single source of truth.   It allows untrusting parties with  common interests to co-create a permanent, unchangeable and transparent record of exchange and processing without relying on a central authority.  It is a disruptive   platform designed to facilitate the exchange of value and reduces the need for trusted intermediaries to process transactions, via a distributed ledger.  They are platforms upon which various applications can be built, well beyond currencies.”

The figure below is also part of the presentation.  If there is one busy chart to store in memory on this subject, we suggest it should be this one.

citiblockchain

 

 

Do not think of Blockchain as a currency [i.e. Bitcoin] exclusively.  In fact, the more you can separate Blockchain as simply a trusted ledger from Bitcoin, the more adept you will be in understanding it and explaining it to others.

There is an heated race afoot by hundreds of startups and a handful of incumbent companies globally in a battle to emerge as the ‘Blockchain’ ledger leader for a wide array of uses.  As a ‘source of truth’ for everything from financial transactions to property authentication.  There are many ways that Blockchain will find a disruptive use across industries.

With so many startups tackling opportunities with this new technology it can be overwhelming to sort out its possible impact to established industries. [Note: CBInsights is always a good resource to keep abreast of startup happenings.]

Three observations

1.  Brokers & Intermediaries in the cross hairs: 

Across most industries, if the company is making money & high margins by performing an intermediary role between two parties, then it is the target for disruption.

Blockchain could provide most of the needed trust and security in multiple types of exchanges between parties.  It will diminish the role of intermediaries we are accustomed to; tracking and authenticating everything from currency, commodities, assets, access rights, ideas, processes.  It is a long list.

Banks, exchanges, recordkeeping, settlement, mortgage title companies, leasing management, brokers of all stripes.  Anyone, any industry, that monetizes settlement risk;  evaluating, coordinating, executing the exchange of two separate parties for trade, currency, ownership, contracts, processes taken, origin authentication, etc.

Blockchain is such a simple concept and technology that it will be used to remove ‘friction’ from activities that are easily overlooked as possible uses but that in aggregate are highly burdensome and costly.  Examples include healthcare information, personal identification (drivers license, passports), legal contracts, securely tracked as it is passed from one entity to another.

2.  Financial Services most likely in first wave of nimble challengers:

It is very clear, especially when reviewing all the activities across many of our Financial Services covered companies, that some of the sharpest organizations and minds see the disruptive opportunities, are actively testing ideas (“use cases’) and developing services around the Blockchain platform.

In the Financial Services space in particular, refer to R3 is , a consortium of global banks uniting to develop services for the Blockchain platform. We found research suggesting that the top 100 financial institutions in the world plan to spend $1 billion on Blockchain related projects over the next two years.  Consortiums have a tendency of building an insular echo chamber culture and assuming the competitive moat is more substantial that reality suggests.  This one might be different.

We are clearly in very early days.  But, industry disruptions tend to materialize occur quickly at the tipping point.

We have our eye out for startups trying to carve out markets – and incumbents defending them – in areas such as:

  • Digital wallets -> credit card companies
  • Merchants services in payments, records, product management -> payment processing companies
  • Tiny transactions of all types – currency digital goods . Micropayments/ micro-transactions have traditionally been too costly for credit card acceptance.
  • Any asset that requires a ledger in order to be transferred—from stocks and bonds to car titles and houses.

3.  Investment Thesis:  Incumbents have the advantage (currently)

It might be counter intuitive for many observers, but we believe that currently , industry incumbents from Nasdaq to Visa still have the clear advantage within their competitive markets.

With their scale and breadth of operations, they can – only if they decide to of course – incubate innovation and determine adequate products and service  utilizing the new Blockchain platform – or ‘new rail’ as we like to say.

In fact, Blockchain could be considered the next logical platform removing  friction from global commerce, trade, and merchant exchange.  No different to the emergence of a trusted currency 2500 years ago all the way to today’s payment facilitators (e.g Visa, Mastercard, American Express, PayPal).

So, who will emerge in the winners category?  Much too early to tell, of course.  But there are two key signals we look out for at this very early stage of the journey:

  • Does Executive leadership acknowledge and even embrace new opportunities to cannibalize their business model?  Do they see their markets ripe for the Blockchain effect and do they want to actively leverage their assets to compete?  Or, are they complacent?
  • Is the company engaged with the broader ecosystem of start-ups to cherry pick the highest potential.  Is M&A an integral part of their R&D?

These questions are integral to our Piercing View methodology in assessing and scoring companies for our investment priorities – the IoE Score.  Of the 30+ companies in the Financial Services industry we cover, we find that Visa [$V] and JPMC [$JPM]are scoring particular high in their incubation and pilot tests in this arena.

As always, detailed findings and reports on this and other industries including Industrials, Consumer Discretionary, Oil & Gas, Health Care, and Financials are available to Piercing View members.  Join us!

Thank you,  Serge

www.piercingview.com

@PiercingView

Downloadable PDF:  Click Here

Musing - Blockchain&FS

 

2017-10-04T18:56:43+00:00 03.22.2017|POV|