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Once classified as a technology experiment, blockchain has made the leap from theoretical to practical. Deloitte's Linda Pawczuk, Brian Hansen, and Rob Massey explain why blockchain is off to the races.
Linda Pawczuk: In the early days when the Texas Motor Speedway started, there were two interesting turns.
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Tanya Ott: Linda Pawczuk has been a race fan basically since birth. She grew up in a family filled with tinkerers, including several automotive engineers. One of her uncles restored classic race cars and was a competitive racer himself.
Linda: As I became an adult, I had the privilege then to travel abroad to LeMans and other races.
Tanya: But those early races at the speedway in Fort Worth, Texas really left an impression.
Linda: The track was an oblong. It had a little bit of an unusual trapezoid at the head of the racetrack.
Linda: And in watching what were typical oval track racers try and deal with what were two unusual turns in that track.
Linda: While we don’t like to see crashes, crashes happen. But I was watching both the rookies and, in this case, the pros really on a level playing field and navigating the turns and the early days of Texas Motor Speedway.
Tanya: Decades later, Linda’s still a huge fan and she draws on what she learned at the track to help drive innovation in the corporate world.
Tanya: I’m Tanya Ott and this the Press Room from Deloitte Insights, where we talk about some of the biggest issues affecting business. And today, it’s blockchain. A topic that can be super confusing for people, but is one of the biggest tech investments right now in business. And Linda’s going to help us understand why it’s so important.
Linda: I am an engineer by training and trade, working in technology for the 34 years of my career. I am privileged to be the global leader of our Deloitte Blockchain practice worldwide, combined with the head of our US consulting practice for Blockchain.
Tanya: Along for the ride with Linda, we’ve also got Brian Hansen, US audit and assurance blockchain leader for Deloitte & Touche LLP.
Brian Hansen: I’m spending a lot of my time building our audit strategy, both on serving audit clients as well as providing assurance in the space and serving of a lot of different companies throughout the ecosystem.
Tanya: And Rob Massey, a partner in Deloitte Tax LLP.
Rob Massey: I look after the Tax practice of Deloitte as it pertains to digital assets.
Digital assets and blockchain have been in the space for going on eight years. And we don’t have a lot of tax rules [for this] in the U.S. or around the world. So we work by analogy and work across many clients to develop paths forward as companies want to take positions.
Tanya: Back to racing. I started our conversation by asking Linda—blockchain and car racing?
Linda: Let’s be clear. The flag goes down and there’s been weeks and weeks and months and years of preparation, starting literally with engineering. You have people who specialize in suspension technology. You have people who specialize in power controls. You have people who specialize simply in the research and design of the actual wheels and rubber that hit the pavement. Depending upon the temperature of that track in the different geographies that those cars run, that can vary extensively. So, depending upon if you’re in a northern raceway or you’re in a southern raceway, you may use entirely different wheel technology to give you the grip you need at 200-plus miles an hour going around the track. So there’s a lot of thinking that goes into preparation. Again, it’s ongoing research. It progresses as we learn more, as we see more, as new materials are invented, as new technology allows us to create new materials. So that’s happening behind the scenes where you’ve got your vehicle systems and your engineers who are taking a look at the car.
So if we think about that [as] analogous to what we do: We have the multiple disciplines that we do work with every single day. We bring that confidence and that spirit of teamwork. Moreover, we’ve got a lot of other things around us that allow us to operate as a high-performance team that’s necessary for race.
Tanya: Linda, Brian and Rob conduct an annual survey of technology leaders to get a sense of how they’re thinking about blockchain. Earlier this year, they surveyed nearly 1500 executives and practitioners in 14 countries, including 100 people who are directly engaged in blockchain projects and received a minimum of $3 million in venture funding in the past year.
Linda: Our job as professionals and leaders globally in Deloitte is to eliminate the blindspots, to be out there in front of others that are investigating. What we found is not a surprise, but we’re finding consistency. We’re seeing much more sensible approaches to applying this particular technology and the transformative nature of it. And particularly during this time, the ability to create more frictionless environments to move, whether it’s information that’s of high importance or to simplify the many-to-many relationship around data—too much data is moving around and blockchains allows you to move data. So we’re seeing a lot of sensible insights, $3 million dollars or more of investment, whether it’s the banking institutions, whether it’s the energy companies, whether it’s the startup community that continued advanced new payment models, etc. We’re pleased to see the sensibility that we’ve been projecting now for the better part of eight years, that this is much more than a technology.
Every enterprise is being crushed under the weight of the accumulation of data. The more information that we share or exchange or process, the more complicated internal systems get. So in this particular case, we look at innovation going way beyond just the blockchain technology itself. But how do we create a more transparent, more trusted, more simplified channels around sharing capabilities? When you read our global report of the survey, there are some very critical and important insights there as the pace picks up in certain geographies.
Tanya: The survey results show that enterprises view this as a strategic priority, blockchain is definitely a strategic priority for them. Can you give us a sense of what you see driving this enthusiasm?
Rob: We’ve all grown up in a world where we see transactions executed and then paid for with fiat-based currencies.
Tanya: For those who aren’t familiar with the idea of fiat currency, which you’re referring to, that’s basically legal tender, that’s backed by a government that issued it. The US dollar is fiat money and so is the euro and other money around the world.
Rob: When you get to a digital asset that is either a store of value or a means of exchange, and you start calling it a programmable fund, and you say, gosh, not only is it a means of exchange, but it interacts directly with smart contracts enabled by blockchain that direct those funds based on external data points that allow a commercial activity to go forward without the need for as many human fingertips, because hardwired in contractual terms and a smart contract, you have a payment mechanism, which is a programable fund such that interacts with the contract and the terms validation and then the right parties are remunerated on a real-time basis. That is pretty cool.
So you’re looking at IP [intellectual property] rights management, whereby somebody who owns rights to intellectual property—could be a song, could be an avatar, could be some virtual good, could be an insurance contract—something that people have rights to, all of a sudden those contractual terms are enabled and validated through external sources and the access to that intellectual property and that contract is now coming in via a digital asset for a means of exchange such that it can then pass through to the other parties on a real time basis. It’s basically pulling the friction out of many commercial activities in a way that we’ve not seen before.
Linda: In our survey, we had a specific question around the importance of digital assets. In nonmainland China locations, 83% of our respondents said that they strongly or somewhat believe that there will be an alternative to the outright replacement for fiat currency in the next five to 10 years. In mainland China, that figure goes up to 94%. So even if it’s a slight variation of that, you’ve got a significant percentage of the participants of the survey and then, of course, outside of survey that believe that in the next five to 10 years, we will see a significant restructuring of what we know today around fiat currency. That’s partly what excites us: This is transformative globally.
There are obviously different governance and regulatory bodies from throughout the world. They are an important part of the overall design and architecture of what things look like going forward. This is not about just technology experimentation. So we embrace all of the participants, as I gave you the analogy in racing. If you imagine back in the '70s and '80s, [you would see the] “endo”: the end-over-end, car flipping over. Had there not been regulatory bodies looking at vehicle safety and protecting the driver, we’d still have cars flying up over the air. In fact, some of them maybe even injuring their fan base. So we can’t approach this with the sole aspiration of, “Isn’t technology cool? Look at this really cool use-case!” To do what? For what? In compliance with what? And we add on to that the importance of globalization, particularly with the movement of money where you must consider the local regulations in context with other governments and other geographies and the regulations there. Because the truth of the matter is both at the technology level, and at the transformation business-process level, it truly is about interoperability. Embracing, just like in racing, the governing bodies in conjunction with how the audit profession thinks or the tax elements is critically important to this. We think we see signs of that even this year. As we always say, sensible discussion around blockchain includes all of the disciplines.
Rob: It’s interesting. Again, going back to the racing, you see each of the members of a team specialized in what they do specifically and very well aware of everyone else’s role and those areas of expertise. Here again, you have the overlap in different competencies that we have with tax and with audit and controls, collaboration with attorneys on securities laws and money transmission included. People engaged in this space [are] really aware of all the other dependencies such that we can serve these unique and complex business models collectively. That’s really the key, right? It’s not just a collection of people with their competencies, it’s a team that is working in concert together, aware of what everybody else is doing real time. So I love the analogy, just like seconds matter in the pits, right, when you’re going through a change, there’s something on the field, everybody’s not just doing their own thing. They’re very well aware of the rest of it. The analogy is perfect to what we’re dealing with here, because the pace of change is rapid and it requires lots of specialists so they can pivot instantly.
Brian: What Rob’s talking about is making sure you’re surrounded with people that can give you the confidence of engaging. One of the main risks here can be that you’re not doing all these things upfront. Right? You’re not getting all the people surrounding you giving you all the different angles of what you need to think about as you’re adopting blockchain or a digital-asset strategy. You really can get stuck with, “I went too fast, I focused too much on the technology, and I wasn’t thinking about all these different elements, early on.” We found in this area, you can get ahead of yourself. It’s really hard to circle back and try to fix things later.
Tanya: What you’re talking about is that overconfidence. It’s this idea that, I drive a car, I could probably be a race car driver or something like that.
Linda: Think about that. Also in the final laps of a race, whether it’s a green flag out or a yellow flag out, when that driver who is truly in the lead position comes around and they’re on the radio and they’re talking about perhaps the last ticket, a yellow flight coming into the pits, they are so precise, the telemetry of that vehicle, which means the expertise of tax professionals, audit professionals, risk professionals, industry professionals, technical professionals, network professionals, it’s all those people in the pits. And that car may come into the pit and maybe it only has a left rear wheel change and it doesn’t get 5 gallons of gas, it gets 1.6 gallons of gas because it wants to limit the weight to assure its best position to win. Why wouldn’t you consider that with investment you’re making in a transformative nature? Bring the right pit crew to the table. Think about whether it’s a rear wheel or front wheel change as you go into that final few laps of the race. Why disadvantage yourself only to be marginalized and passed by someone in the last few seconds of the race? And we believe that’s the way to propel this forward. We even used the example in our survey that the absence of regulatory harmony in a blockchain and digital-asset construct offers management, regulators, standard-setters, and professional-services providers the chance to work together in forging common guidance in the establishment of best practices. This wasn’t talking about just a bunch of technology professionals. This was talking about all of these disciplines to establish the best practice that goes well beyond the protocols.
Tanya: So even when companies feel confident about tackling something like this, it is really hard to do. And there might be a gap between their perceived comfort level and their actual understanding of what it takes to do it effectively. Can you give us some examples of the places where they might find the biggest challenges?
Brian: There’s absolutely a need to think about all these different disciplines right away. The pitfall that we see is you think about the technology. Maybe that’s the analogy to the engine of the car. You’re not thinking about all these things that Linda’s talking about. One example from an audit and assurance—a lot of times we see companies not thinking about who actually is going to be impacted by blockchain and digital assets? Who are the stakeholders? What are all the different design and development elements we need to be thinking about? They oftentimes forget about a lot of those things. One specific example in my profession is, what do external auditors actually need to do to audit this? We have spent a lot of time thinking through this with companies, saying hey, you have a whole different way of doing things now. You’re going to have different expectations by external auditors, internal auditors, and regulators on what kind of data they’re getting. You’ve got to think about the control environment. Auditors are very interested in the control environment in this area. You can’t gloss past that. They’re very interested in the data integrity, very interested in the auditability, as I mentioned. All those things have to be thought of right at the very beginning. Otherwise, you kind of race past and all of a sudden the wheels fall off because you haven’t thought about this at the beginning of the race.
Rob: It’s also interesting to remember, as we’re talking about being ready at the very early stage of these models, it doesn’t mean that you have to boil the ocean on every topic at the early stages. But what it's done is it's created a level of comfort in our profession, across all technical competencies, that you can iterate with the entrepreneurs, you can iterate with the business and throw caution flags if you think there’s a problem very early, say, look, that direction we can have a problem. Maybe we can fix it? Have everybody at the table from the start representing competencies just to iterate with the business, and then once you have a model you think is going to go forward, then you can prioritize going deep on every topic as you need. But to Brian’s point, if you wait too long to go deep on a topic, you may find [it] very difficult to get out of trouble.
Linda: Tanya, just to add something with a bit of a different vector on the topic we’re talking about: You know you mentioned it’s hard, at the technology level is it’s no more difficult than most things that we do, whether it’s a large AI implementation or other evolving and new technologies. The reality is, and I’m going to intentionally go back to a really fundamental point here, the value generated by blockchain is the democratization of trust. It’s taking what is today, where we have middlemen who serve as the adjudicators of information flow between companies or between consumer and companies, and it’s providing, in an oversimplified reference here, something that’s much more straight-through. Now, it’s not about straight-through processing. That is not what I’m talking about for the purists that might be listening. If I go to the economics of every business who is swimming underneath a high Op X [operating expenses] component, looking for ways to reduce their related costs because of complex and heavy structure, processing, big IT organizations, just to get through the morass of stuff, the process transactions, what’s happening behind all of that is companies are passing data, pretty much individual company to individual company, point to point. But what blockchain allows you to do in the context of an industry is bring the multiple parties together who are largely transacting around the same types of transactions and create a peer-to-peer environment, much like you see with music exchange or other peer-to-peer solutions. By the way, the technology has existed for decades. The 1990s was when peer-to-peer started. Cryptography started in the ‘70s and ‘80s. The technologies have existed. How we’re instantiating the technology is different.
So we’re looking for ways to deal with the peer-to-peer exchange of information versus point-to-point information, that is critically important. We talk about this as how do we deal with taking the friction out of particularly noncompetitive activities, where we are consuming and ingesting data at an exponential rate; now, what will 5G do to the pace at which data will be consumed and processed?
Tanya: Let’s take these sort of headlines. What are the tips for companies on how not to crash?
Rob: This is always the question, right? What do we do to keep ourselves out of trouble? We alluded to this, but it’s bringing your advisers in early, finding the people you can trust. Finding the people that can work together, that can work in concert as you iterate through these business models and instill a tone of collaboration. That doesn’t mean that you have to boil the ocean on every topic from the beginning, but you need the right people to be able to pivot as the field will change. We are living in a world where there is not going to be a static state of regulatory insight for a while, probably. So find the people to have your back as the regulatory environment evolves.
Brian: I would 100% agree with what Rob said there. I would add [that] you’ve got to make sure that you’re surrounded by those that are helping stand up this higher ecosystem. This is evolving, just like Rob said, regulators are figuring this out, standards-setters are figuring this out. Everybody’s issuing various guidance, but the reality is not everything has crystal clear guidance. There’s a lot of interpretation that has to be made.
Linda: We believe, like Brian was just mentioning, in some organizations that are very sensibly focused, such as the Chamber of Digital Commerce, bringing together the right cross-pollination of professional services and companies that are together thinking about how to advance the ball for the good of all. It’s not a competitive environment. It’s how to break through and solve the riddles associated with some of the problems that we face today. That’s another venue to stay dialed into because again, our job is to collectively figure out the unknowns and then to illuminate those blind spots and turn them into knowns. That’s just the cycle of change.
Rob: And Linda, you’ve talked about blind spots for years, and I love how we pride ourselves in trying to help people find the blind spots and see around the corner. It’s so interesting that we’re talking about racing, because when you’re driving the car, you can’t see around the corner, you can’t see but for this limited vision in front of you. But your pit crew can. And that’s why you have to have excellent communication, real-time communication. Trust others to help you see where you can’t. Trust the others that they’re going to make the right decision and you’re going to execute based on the people you trust, because you can’t see the field. You can’t see around the corner. You have a limited data set, but you have people you trust.
Tanya: There were two things that came up in the survey that I really wanted to follow up on. One of them is that the respondents seem to agree that blockchain is broadly scalable and that they’re going to lose a competitive advantage if they don’t adopt it. But one of the questions that you’ve asked each year that you’ve done this survey is, “To what degree [do you] agree with the statement that blockchain is overhyped.” And it did see a significant increase this year in the that percentage of respondents who said it’s overhyped. Why do you think that is?
Linda: Let me take you back again in time. If we all remember the early days in the ‘90s, the very first time you typed on the keyboard www.dot. And we look past the ‘90s and we recognize that there was early innovation, there were some crazy things that were being thought about. There were even jobs that were screen scraping, turning what an analog brochure into a digital brochure. And we had people called content managers.
If you went to the ‘90s and you got into early 2000s, there were probably a lot of people in the early 2000s that thought thing called the internet is really overhyped. But isn’t that part of the spirit of innovation: thinking outside the box, experimenting and trying with new things. Perhaps in the early days, much like the marketplace with the VCs [venture capitalists] and the ICOs [initial coin offerings] and coming up with new ideas, some things stick and some things don’t. Some companies emerge and some fall by the wayside. Some companies, such as the corporations that have been here for a long time, may even be sideswiped by things that are changing the landscape like digital assets.
So, of course, there’s been overhype. I think it follows the identical pattern of any new breakthrough technology. AI [artificial intelligence] is in the same spot. Cloud was there over a decade ago. Cryptocurrency clearly got the attention of the world, which gave it its marquee as being maybe overhyped. But we shouldn’t fall on the sword that this is any different than any other innovation, including I suppose if we went back talking to the farmers with the horses, they were kind of frustrated about this thing called the steam engine being overhyped.
For those who made this purely a technology experiment, I would fully agree. Overhyped, no value generated, try to plug in some technology versus looking at it as a transformation of business models with multiple parties.
Tanya: Linda, Brian, Rob, thank you so much for the conversation. Fascinating, complicated topic, but you helped make it a little bit more accessible.
Linda, Brian, Rob Thank you.
Tanya: Linda Pawczuk is global leader of Deloitte’s blockchain practice worldwide and head of the U.S. consulting practice for Blockchain. Brian Hansen is US audit and assurance blockchain leader for Deloitte& Touche LLP, and Rob Massey is global and US tax blockchain and digital assets leader for Deloitte Tax LLP. You’ll find their 2020 blockchain survey at deloitte.com/insights.
If you stuck with us all the way through this conversation and you still aren’t quite sure what blockchain actually is—first, thank you! And second, we’ve got an interview in our archives that might demystify it for you.
Bill Briggs: Go back hundreds of years in the middle of a town square. There was a big tome, a physical book that everyone would go to look up who was married to whom, who begat whom. Child legacy and lineage, property ownership, and transfers: That was all being written in one central ledger that was owned by the town, and there was control about who could go and write to it. There’s one physical place you would go and see the history. Say I sold my cow to my neighbor. I would write a new entry to say that I sold my cow to my neighbor and you could actually go back, if you had the patience, and find who I bought that cow from a year ago, and the whole history of it was right there in a place that everyone could see.
Tanya: Blockchain is the 21st century version of that great big ledger. You can hear that interview when you go to deloitte.com/insights and search the podcast archives for my 2016 conversation with Bill Briggs. Great stuff there.
There's a lot more to explore, including our Tech Trends series on Insights In Depth. We talked with business leaders who are out in the field, adopting and adapting technology to work for their organizations. People like Rob Carter, CIO of FedEx:
Rob Carter: We’ve placed a few bets that are really important. We’ve placed some bets on blockchain, for example. When you think about what we do for a living, we create custody chains of information from the time we first take a shipment from a customer to when we deliver it to the end recipient. And we have a very strong custodial chain that moves along that path. We very much think that the future will expand those custodial chains for supply chains all the way back to the point of manufacturing. The reason that that’s so important is for the provenance and authenticity, of whether it’s pharma or whether it’s luxury goods or whether it’s food products, we believe that that heritage of products as they move along the supply chain is something people are very much going to want to know.
You can find our conversation with Rob, and with many other industry leaders, by searching for Insights In Depth: Tech Trends 2020 on your favorite podcasting app.
This podcast is produced by Deloitte. The views and opinions expressed by podcast speakers and guests are solely their own and do not reflect the opinions of Deloitte. This podcast provides general information only and is not intended to constitute advice of services of any kind. For additional information about Deloitte, go to Deloitte.com/about.