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Companies will ignore blockchain at their peril

ANALYSIS: Large companies will ignore developments in blockchain technologies at their peril, regardless of the sector they operate in.28 Feb 2018

That is the central message I took from a recent event on 'blockchain for business', organised by technologists The Pathfounder, and hosted at the London offices of Pinsent Masons, the law firm behind Out-Law.com.

Blockchain, a distributed ledger technology (DLT), can be likened to a type of database that, using cryptography, can be operated as a digital public or permissioned ledger for recording information, such as the transfer of assets between two or more parties.

The technology is synonymous with the digital currency bitcoin, because it records the exchange of assets in bitcoin transactions; however, as The Pathfounder event highlighted, blockchain has potential applications in many contexts across sectors.

In financial services, for example, it has been identified as a possible solution to the burdensome requirements of 'know-your-customer' (KYC) rules. In a healthcare context, blockchain could be used as the platform for enabling and controlling access to up-to-date medical records.

However, the consensus at The Pathfounder event was that blockchain's development as a technology is still in its early stages. Vinay Gupta, chief executive of Mattereum and the man who helped launch the cryptocurrency ethereum, said the situation is analogous to where developments with the internet had reached in "spring 1991" – in short, quite some way from ubiquitous and mature use of the technology.

Blockchain in the energy sector

The position is not uniform across industries, however. It is perhaps in the evolving energy market where most progress is being made.

"This is an industry that is having to change because the technology of distributed energy is changing that market anyway and therefore blockchain is just an enabler to facilitate that change, and I think that is why you are getting some of the adoption that you are not getting in other markets," said Paul Massara, the former Npower chief executive who is now an executive director at Electron, a blockchain platform provider in the energy sector.

Massara's reference to 'distributed energy' is a reflection of the shift that is taking place in the energy market – energy is generated from an increasingly diverse number of sources and fed into the grid to power homes and businesses. This is replacing the dominance of major power plants, he said.

Advances in battery storage technologies, alongside a reduction in their cost, are helping to spur the change. The combination of batteries with renewable technologies such as solar can enable property owners to take charge of their own energy generation and consumption and even feed excess energy back to the grid or to other energy users, in return for payment.

Maria McKavanagh, chief operating officer of VERV, a business that uses artificial intelligence and an internet of things device to relay real time information to property owners on the use and cost of their home appliances, explained how the company is exploring the potential of blockchain for peer-to-peer (P2P) energy trading in a project on a Hackney estate in London.

"If you take a place such as this estate in Hackney where they have got solar panels, we have put in battery storage as part of this project – now these residents can trade energy with each other," McKavanagh said.

To test the theory, all of the 40 homes have been allocated a section of the solar panels, but only some of the properties have been given a battery to store the energy generated.

"If [you have] a solar panel on [your] roof [you will] generate double the energy [you] actually need in a year, but it will all be in the summer, and if you have no way of storing it you get nothing in winter," McKavanagh said. "If [you] can then store that in [your] battery and I do not have battery storage or a solar panel then I can buy it off [you] cheaper than I can get it from the grid."

The same concept applies to electric vehicles, according to McKavanagh. Electric vehicles can serve as batteries in their own right and, when the vehicles are sitting idle, can share stored energy with the grid at times of peak demand, or even used to power household appliances, like your washing machine, she said.

Blockchain helps to solve a problem that exists in terms of enabling the trading of energy and providing enhanced visibility to regulators on both the demand and supply side. It even has the potential to bring about the end of fuel poverty in the UK, McKavanagh said. However, there are challenges to overcome before blockchain enters into mainstream use in the energy sector.

Paul Massara said: "The reality is that you have got to move from a traditional, physical market to a new market and you cannot blow up the old market and say 'don't worry you can all do it on blockchain tomorrow' because no regulator is going to sit there and go 'that's fine we are going to trust blockchain to balance our energy supplies; sorry the lights have gone out' – that just does not happen. So you have to be able to transition."

"The issue is not the underlying technology actually. The issue is building the consortiums and then working out what the migratory path is between the traditional world and the real world or where you want to take it to and also essentially to make that profitable and have an underlying business generating real revenues as you do it," he said.

Data protection issues

Because it essentially serves to record and verify information, there are inevitable questions about how blockchain technology can be utilised in a way that complies with data protection laws.

Luke Scanlon, specialist in financial services and technology law at Pinsent Masons, neatly identified the issues that organisations face when considering how they might use blockchain in accordance with the EU's imminent new data protection laws – the General Data Protection Regulation (GDPR).

He said: "The benefit [of blockchain technology] is having verified information forever and not being able to roll back that information. However, the issue for data protection law is that now there are new rights for data subjects … to be able to erase their data forever."

Scanlon said that UK-based businesses hoping that the UK's forthcoming exit from the EU would result in less stringent data protection laws being applied to their blockchain projects would be disappointed.

"What the EU has done [with the GDPR] is extend data protection laws for the whole world," Scanlon said. "It would be very difficult for the UK to nuance that law in the future and get out of sync with the single market. Getting well out of sync with the GDPR is highly unlikely to happen."

However, Kuhan Tharmananthar, director of ConsenSys, a company that builds software for blockchain environments, said that blockchain "in some ways … does hold out the dream for GDPR" compliance because of its potential to provide for "self-sovereign identity".

The technology could be used to give consumers control over which third parties have permission to access their data, or elements of it, and could provide those individuals with the chance to withdraw their permission when they wish, he said.

However, according to Tharmananthar, there is a challenge over how you address the "footprint" that is left on the systems of those who access the data – there are companies exploring "various ways" to ensure that individuals can withdraw their consent and exercise their rights to the erasure of their data in the context of blockchain at the moment, he said.

A complicating factor is that compliance with data protection laws is not an organisation's only regulatory consideration, Tharmananthar said.

He gave the example of a bank needing to prove to regulators that they have met their KYC obligations at a certain point in time. In theory, that information will be recorded on the ledger. However, if data protection rights are exercised then the bank may no longer have permission to access the information, or the data may have been erased, he suggested.

Collaborate to succeed

Despite the technology still being at an early stage of development in terms of practical application, and facing a number of legal and regulatory hurdles, blockchain is capable of being transformative across a number of industries.

Large companies would do well not to miss this particular trend. They should consider partnering with technology companies that are active in developing blockchain technologies to see how they can transform and work in their particular industry.

As investor Jamie Burke, founder and chief executive of Outlier Ventures, said at The Pathfounder event, "the important thing when you are thinking about blockchains and decentralised web technologies is they inherently require collaboration, so it doesn't make sense to be thinking about blockchain in a silo – 'how can I apply this just specifically to my organisation' – because you are talking about industry standards; interoperability".

Partnerships might begin with a 'proof of concept' agreement to test initial ideas, and develop into more formal joint ventures or involve outright acquisitions. In all these scenarios there are legal and commercial pitfalls to be wary of, not least around ownership and licensing of intellectual property and compliance with data protection laws. However, these are not outright barriers to successful collaboration.

We are currently having discussions with clients from the financial services, energy and infrastructure sectors about the transformative powers of blockchain and how they can structure their investments into, or collaboration with, emerging technology companies. Mike Butcher’s Pathfounder event underlined the importance of blockchain for businesses across all industries

Thilo Schneider is a specialist in corporate transactions in the technology sector at Pinsent Masons, the law firm behind Out-Law.com.