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What CFOs should do to prepare for blockchain tech

Blockchain's distributed ledger could someday be a useful tool for financial transactions and risk management. Experts say it's not too early for CFOs to get familiar with the basics.

It may still be early days, but the momentum behind blockchain technology will catapult it into the mainstream in short order. And that means CFOs need to start paying attention right now.

"We're in the early innings of blockchain, but there's likely to come a time when executive teams are going to turn to the CFO and ask what their blockchain ledger strategy is," said William Fearnley, research director for compliance, fraud and risk analytics at IDC Financial Insights, based in Framingham, Mass. "It will be the story of 2017, so it needs to be on the CFO's list."

Blockchain is more than just the underlying protocol behind the digital currency Bitcoin. A blockchain -- or a distributed ledger -- is an electronic ledger that is shared among a distributed network of computers in which electronic transaction records can be added sequentially but never altered.

"That's important for CFOs because it becomes one version of the truth," Fearnley said. "A CFO can then say, 'Let's look at all the transactions between two counterparties,' and they're all laid out in a string."

Blockchain technology allows businesses to work together more efficiently and with a heightened sense of trust and security, said Jerry Cuomo, vice president of blockchain technologies at IBM, which is based in Armonk, N.Y.

The blockchain provides an audit trail that enables the parties to go back into the ledger, look at the transactions and settle disputes very quickly, he said.

Getting familiar with blockchain tech

But how exactly do CFOs get ready for the impending blockchain revolution?

"What we're recommending is for CFOs to start researching it now in earnest," Fearnley said, "and participate [in] or join the consortiums that are out there. There are two major ones in financial services. One is called R3, and the other is the Linux Foundation Hyperledger Project."

David Schatsky, senior manager at Deloitte, based in New York City, said that despite the many promises made for the family of blockchain technologies, there have not been very significant commercial implementations of it yet. But Schatsky agreed that CFOs should become familiar with blockchain technology.

"They have to first recognize that Bitcoin is not blockchain," he said. "That's one thing that puts people off because they think that it's not relevant to them. They are not the same. People should recognize that and get past it."

The core concept of blockchain is the distributed ledger, and CFOs understand ledgers, Schatsky said. Therefore, they must get comfortable with the idea of a distributed ledger and start contemplating its implications, i.e., the ledger is shared among the parties to a transaction so everyone is looking at single source of truth, which is pretty important, he said.

"CFOs have to get up to speed on the concepts," he said. "There are whitepapers, vendors, consulting firms like Deloitte and others that are looking at this thing and can provide advice and education and guidance."

However, Schatsky noted that getting familiar with the concepts of blockchain is different from getting a deep understanding of blockchain technology, which isn't necessary at this stage of the game. "It's a little early," he said.

Next, CFOs should learn about the popular applications for blockchain that are most relevant to the finance organization in general, such as supply chain and trade finance, he said. It doesn't just pertain to intercompany transactions, but to intracompany transactions as well, including transfer pricing and corporate budgeting.

"There are lots of use cases, but pay attention to the ones that will directly change the life of the finance executive," Schatsky said.

CFOs should also experiment with proofs of concept by setting up blockchains and playing with them, Fearnley said.

"CFOs are showing interest in this because it can help to lower costs, provide new services and it can be an opportunity to reduce settlement times, which can improve liquidity," Fearnley said. "Blockchain people are saying, 'Remember the first webpage you ever saw?' That's where we are right now with blockchain."

The successful CFOs who are starting to understand blockchain are dreaming big, and they're trying to plot the incremental path to get there, Cuomo said.

"Picking your place to start using blockchain is important," he said. "Disputes, compliance, auditing [and] reporting are all things that nag at CFOs because they take time and they're error prone. In many cases, they're paper prone. So looking at those kinds of things as your first endeavor with a blockchain seems to be prudent."

Once they have an understanding of the concept and some sense of uses that are relevant to the finance organization, it would then be appropriate for CFOs to begin to evaluate the internal processes they are responsible for managing, according to Schatsky.

"Get a feeling for which processes are most costly, most error prone and most inefficient -- those are the areas likely to provide the greatest payoff to implement a blockchain-based solution," he said. "Conduct an assessment of the potential for applying blockchain to remediate or re-engineer those areas."

Blockchain tech could boost security of financial data

Although it's still early innings for blockchain in the enterprise, it will become much more useful and used in ways that observers probably aren't anticipating, said Jamie Steiner, general manager of financial services at Guardtime, an Estonian cybersecurity vendor that uses blockchain technology in its data-security offerings.

The critical thing for CFOs to realize is the different types of financial impacts that the nascent uses of blockchain can have on their enterprises and on their risks and their corporate valuations, he said.

"Today, most of the blockchain interest has been around disintermediation for financial services," Steiner said. "It's limited to the processing of financial transactions via a shared ledger. But it's not the only use for these types of things. It's just the one that I think is most well-studied at the moment."

CFOs need to identify the things within their organizations that, if comprised, would represent an existential risk or a large financial risk to their firms, Steiner said.

"They then need to make a concerted effort to use blockchain to secure that data so they can prove the state of that data to an external third party if audited, or to their shareholders or investors to prove that they've taken the necessary steps to secure the company's crown jewels of data," he said.

Next Steps

Get more blockchain advice for CFOs

Learn about blockchain and supply chain security

Understand potential impacts of blockchain as a service

This was last published in July 2016

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