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Permissioned blockchains are hosted on private computing networks, with controlled access and editing rights Exhibit 3. Private, permissioned blockchain allows businesses both large and small to start extracting commercial value from blockchain implementations. Dominant players can maintain their positions as central authorities or join forces with other industry players to capture and share value.

Participants can get the value of securely sharing data while automating control of what is shared, with whom, and when. For all companies, permissioned blockchains enable distinctive value propositions to be developed in commercial confidence, with small-scale experimentation before being scaled up. Current use cases include the Australian Securities Exchange, for which a blockchain system is being deployed for equities clearing to reduce back-office reconciliation work for its member brokers.

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The potential for blockchain to become a new open-standard protocol for trusted records, identity, and transactions cannot be simply dismissed. Blockchain technology can solve the need for an entity to be in charge of managing, storing, and funding a database. However, the mentality shift required and the commercial disruption such a model would entail are immense.

If industry players have already adapted their operating models to extract much of the value from blockchain and, crucially, passed on these benefits to their consumers, then the aperture for radical new entrants will be small. The degree to which incumbents adapt and integrate blockchain technology will be the determining factor on the scale of disintermediation in the long term. Blockchain might have the disruptive potential to be the basis of new operating models, but its initial impact will be to drive operational efficiencies.

Cost can be taken out of existing processes by removing intermediaries or the administrative effort of record keeping and transaction reconciliation. This can shift the flow of value by capturing lost revenues and creating new revenues for blockchain-service providers. Based on our quantification of the monetary impact of the more than 90 use cases we analyzed, we estimate approximately 70 percent of the value at stake in the short term is in cost reduction, followed by revenue generation and capital relief Exhibit 4.

Blockchain beyond the hype: What is the strategic business value?

Major current pain points, particularly in cross-border payments and trade finance, can be solved by blockchain-based solutions, which reduce the number of necessary intermediaries and are geographically agnostic. Further savings can be realized in capital markets post-trade settlement and in regulatory reporting. These value opportunities are reflected in the fact that approximately 90 percent of major Australian, European, and North American banks are already experimenting or investing in blockchain. Public data is often siloed as well as opaque among government agencies and across businesses, citizens, and watchdogs.

In dealing with data from birth certificates to taxes, blockchain-based records and smart contracts can simplify interactions with citizens while increasing data security. Many public-sector applications, such as blockchain-based identity records, would serve as key enabling solutions and standards for the wider economy.

More than 25 governments are actively running blockchain pilots supported by start-ups. Within healthcare, blockchain could be the key to unlocking the value of data availability and exchange across providers, patients, insurers, and researchers. Blockchain-based healthcare records can not only facilitate increased administrative efficiency, but also give researchers access to the historical, non—patient-identifiable data sets crucial for advancements in medical research. Smart contracts could give patients more control over their data and even the ability to commercialize data access.

For example, patients could charge pharmaceutical companies to access or use their data in drug research. Blockchain is also being combined with IoT sensors to ensure the integrity of the cold chain logistics of storage and distribution at low temperatures for drugs, blood, and organs. Over time, the value of blockchain will shift from driving cost reduction to enabling entirely new business models and revenue streams.

One of the most promising and transformative use cases is the creation of a distributed, secure digital identity—for both consumer identity and the commercial know-your-customer process—and the services associated with it. However, the new business models this would create are a longer-term possibility due to current feasibility constraints. The strategic value of blockchain will only be realized if commercially viable solutions can be deployed at scale. While many companies are already experimenting, meaningful scale remains three to five years away for several key reasons.

However, where there is strong demand and commitment, work is already under way to resolve this issue.

Public–private partnership

Standards can be established with relative ease if there is a single dominant player or a government agency that can mandate the legal standing. For example, governments could make blockchain land registries legal records. When cooperation between multiple players is necessary, establishing such standards becomes more complex but also more essential. Strong headway has already been made by industry consortiums, as seen with the R3 consortium of more than 70 global banks that collaborated to develop the financial-grade open-source Corda blockchain platform.

Such platforms could establish the common standards needed for blockchain systems. Globally, regulators have taken varying positions, but most are engaged rather than opposed.

Securities and Exchange Commission, December , sec. In , Standards Australia took a leadership position in developing a road map of priorities on behalf on the International Organization for Standardization and helping establish common terminology as a key first step. So far, many governments are following a technologically neutral regulatory approach—not promoting or banning specific technologies like blockchain. The relative immaturity of blockchain technology is a limitation to its current viability.

The misconception that blockchain is not viable at scale due to its energy consumption and transaction speed is a conflation of Bitcoin with blockchain. In reality, the technical configurations are a series of design choices in which the levers on speed size of block , security consensus protocol , and storage number of notaries can be selected to make most use cases commercially viable. These trade-offs mean blockchain performance might be suboptimal to traditional databases at this stage, but the constraints are diminishing as the technology rapidly develops.

The immaturity of blockchain technology also increases the switching costs, which are considerable given all the other system components. Organizations need a trusted enterprise solution, particularly because most cost benefits will not be realized until old systems are decommissioned. Currently, few start-ups have sufficient credibility and technology stability for government or industry deployment at scale.

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Major technology players are strongly positioning themselves to address this gap with their own blockchain as a service BaaS offerings in a model similar to cloud-based storage. Asset type determines the feasibility of improving record keeping or transacting via blockchain and whether end-to-end solutions require the integration of other technologies. The key factor here is the digitization potential of the asset; assets like equities, which are digitally recorded and transacted, can be simply managed end to end on a blockchain system or integrated through application programming interfaces APIs with existing systems.

Joint ventures and partnering

However, connecting and securing physical goods to a blockchain requires enabling technologies like IoT and biometrics. This connection can be a vulnerability in the security of a blockchain ledger because while the blockchain record might be immutable, the physical item or IoT sensor can still be tampered with. For example, certifying the chain of custody of commodities like grain or milk would require a tagging system like radio-frequency identification that would increase the assurance being provided but not deliver absolute provenance. The nature of the ecosystem is the fourth key factor because it defines the critical mass required for a use case to be feasible.

For example, a blockchain solution for digital media, licenses, and royalty payments would require a massive amount of coordination across the various producers and consumers of digital content. Natural competitors need to cooperate, and it is resolving this coopetition paradox that is proving the hardest element to solve in the path to adoption at scale. The issue is not identifying the network—or even getting initial buy-in—but agreeing on the governance decisions around how the system, data, and investment will be led and managed.

Overcoming this issue often requires a sponsor, such as a regulator or industry body, to take the lead. Furthermore, it is essential that the strategic incentives of the players are aligned, a task that can be particularly difficult in highly fragmented markets. Critical mass is much lower in some industries and applications than in others, while in some cases, networks need to be established across industries to achieve material benefits.

Our research and emerging insights suggests following a structured approach to answer the classic questions of blockchain business strategy. There is a plethora of use cases for blockchain; companies face a difficult task when deciding which opportunities to pursue. However, they can narrow their options by taking a structured approach through a lens of pragmatic skepticism. The first step involves determining whether there is sufficient accessible value at stake for a given use case. Companies can only avoid the trap of developing a solution without a problem by rigorously investigating true pain points—the frictions for customers that blockchain could eliminate.

Identification of specific pain points enables granular analysis of the potential commercial value within the constraints of the overall feasibility of the blockchain solution. If a use case does not meet a minimum level of feasibility and potential return, then companies do not even have to consider the second step of which blockchain strategy to adopt. Once companies have identified promising use cases, they must develop their strategies based on consideration of their market positions relative to their target use cases. As the technology develops, a market standard will emerge, and investments into the nondominant standard will be wasted.

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Leaders should act now to maintain their market positions and take advantage of the opportunity to set industry standards. As dominant players pursuing use cases with fewer requirements for coordination and regulatory approval, they can establish market solutions. The possibilities of billions of people connected by mobile devices, with unprecedented processing power, storage capacity, and access to knowledge, are unlimited.

And these possibilities will be multiplied by emerging technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing. Already, artificial intelligence is all around us, from self-driving cars and drones to virtual assistants and software that translate or invest.

Impressive progress has been made in AI in recent years, driven by exponential increases in computing power and by the availability of vast amounts of data, from software used to discover new drugs to algorithms used to predict our cultural interests.

The nuts and bolts of blockchain

Digital fabrication technologies, meanwhile, are interacting with the biological world on a daily basis. Engineers, designers, and architects are combining computational design, additive manufacturing, materials engineering, and synthetic biology to pioneer a symbiosis between microorganisms, our bodies, the products we consume, and even the buildings we inhabit. Like the revolutions that preceded it, the Fourth Industrial Revolution has the potential to raise global income levels and improve the quality of life for populations around the world. To date, those who have gained the most from it have been consumers able to afford and access the digital world; technology has made possible new products and services that increase the efficiency and pleasure of our personal lives.

Ordering a cab, booking a flight, buying a product, making a payment, listening to music, watching a film, or playing a game—any of these can now be done remotely.

Related accounting changes and impact on financials

In the future, technological innovation will also lead to a supply-side miracle, with long-term gains in efficiency and productivity. Transportation and communication costs will drop, logistics and global supply chains will become more effective, and the cost of trade will diminish, all of which will open new markets and drive economic growth.

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At the same time, as the economists Erik Brynjolfsson and Andrew McAfee have pointed out, the revolution could yield greater inequality, particularly in its potential to disrupt labor markets. As automation substitutes for labor across the entire economy, the net displacement of workers by machines might exacerbate the gap between returns to capital and returns to labor. On the other hand, it is also possible that the displacement of workers by technology will, in aggregate, result in a net increase in safe and rewarding jobs.

We cannot foresee at this point which scenario is likely to emerge, and history suggests that the outcome is likely to be some combination of the two. However, I am convinced of one thing—that in the future, talent, more than capital, will represent the critical factor of production.

In addition to being a key economic concern, inequality represents the greatest societal concern associated with the Fourth Industrial Revolution. The largest beneficiaries of innovation tend to be the providers of intellectual and physical capital—the innovators, shareholders, and investors—which explains the rising gap in wealth between those dependent on capital versus labor.

Technology is therefore one of the main reasons why incomes have stagnated, or even decreased, for a majority of the population in high-income countries: the demand for highly skilled workers has increased while the demand for workers with less education and lower skills has decreased.

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The result is a job market with a strong demand at the high and low ends, but a hollowing out of the middle. This helps explain why so many workers are disillusioned and fearful that their own real incomes and those of their children will continue to stagnate. It also helps explain why middle classes around the world are increasingly experiencing a pervasive sense of dissatisfaction and unfairness.

A winner-takes-all economy that offers only limited access to the middle class is a recipe for democratic malaise and dereliction. Discontent can also be fueled by the pervasiveness of digital technologies and the dynamics of information sharing typified by social media. More than 30 percent of the global population now uses social media platforms to connect, learn, and share information. In an ideal world, these interactions would provide an opportunity for cross-cultural understanding and cohesion. However, they can also create and propagate unrealistic expectations as to what constitutes success for an individual or a group, as well as offer opportunities for extreme ideas and ideologies to spread.

An underlying theme in my conversations with global CEOs and senior business executives is that the acceleration of innovation and the velocity of disruption are hard to comprehend or anticipate and that these drivers constitute a source of constant surprise, even for the best connected and most well informed. Indeed, across all industries, there is clear evidence that the technologies that underpin the Fourth Industrial Revolution are having a major impact on businesses. On the supply side, many industries are seeing the introduction of new technologies that create entirely new ways of serving existing needs and significantly disrupt existing industry value chains.

Disruption is also flowing from agile, innovative competitors who, thanks to access to global digital platforms for research, development, marketing, sales, and distribution, can oust well-established incumbents faster than ever by improving the quality, speed, or price at which value is delivered. Major shifts on the demand side are also occurring, as growing transparency, consumer engagement, and new patterns of consumer behavior increasingly built upon access to mobile networks and data force companies to adapt the way they design, market, and deliver products and services. These technology platforms, rendered easy to use by the smartphone, convene people, assets, and data—thus creating entirely new ways of consuming goods and services in the process.

In addition, they lower the barriers for businesses and individuals to create wealth, altering the personal and professional environments of workers. These new platform businesses are rapidly multiplying into many new services, ranging from laundry to shopping, from chores to parking, from massages to travel. On the whole, there are four main effects that the Fourth Industrial Revolution has on business—on customer expectations, on product enhancement, on collaborative innovation, and on organizational forms.

Whether consumers or businesses, customers are increasingly at the epicenter of the economy, which is all about improving how customers are served. Physical products and services, moreover, can now be enhanced with digital capabilities that increase their value. New technologies make assets more durable and resilient, while data and analytics are transforming how they are maintained.

A world of customer experiences, data-based services, and asset performance through analytics, meanwhile, requires new forms of collaboration, particularly given the speed at which innovation and disruption are taking place. And the emergence of global platforms and other new business models, finally, means that talent, culture, and organizational forms will have to be rethought. Overall, the inexorable shift from simple digitization the Third Industrial Revolution to innovation based on combinations of technologies the Fourth Industrial Revolution is forcing companies to reexamine the way they do business.

The bottom line, however, is the same: business leaders and senior executives need to understand their changing environment, challenge the assumptions of their operating teams, and relentlessly and continuously innovate. As the physical, digital, and biological worlds continue to converge, new technologies and platforms will increasingly enable citizens to engage with governments, voice their opinions, coordinate their efforts, and even circumvent the supervision of public authorities.

Simultaneously, governments will gain new technological powers to increase their control over populations, based on pervasive surveillance systems and the ability to control digital infrastructure. On the whole, however, governments will increasingly face pressure to change their current approach to public engagement and policymaking, as their central role of conducting policy diminishes owing to new sources of competition and the redistribution and decentralization of power that new technologies make possible.

Ultimately, the ability of government systems and public authorities to adapt will determine their survival. If they prove capable of embracing a world of disruptive change, subjecting their structures to the levels of transparency and efficiency that will enable them to maintain their competitive edge, they will endure. If they cannot evolve, they will face increasing trouble. This will be particularly true in the realm of regulation.

Current systems of public policy and decision-making evolved alongside the Second Industrial Revolution, when decision-makers had time to study a specific issue and develop the necessary response or appropriate regulatory framework. But such an approach is no longer feasible. How, then, can they preserve the interest of the consumers and the public at large while continuing to support innovation and technological development?

This means regulators must continuously adapt to a new, fast-changing environment, reinventing themselves so they can truly understand what it is they are regulating. To do so, governments and regulatory agencies will need to collaborate closely with business and civil society. The Fourth Industrial Revolution will also profoundly impact the nature of national and international security, affecting both the probability and the nature of conflict. The history of warfare and international security is the history of technological innovation, and today is no exception.