The promise of new technologies lies in their ability to drive down costs, increase efficiency, and create new ways of doing things that save time, money, or both. Unlocking that value takes time and the companies and products first out of the gate aren’t necessarily the ones that will win the race.
Blackberry lost out to the iPhone and America Online (AOL) to MSN. Netscape was the original go-to browser, but Google dominates now. Corel’s WordPerfect was overwhelmed quickly by Microsoft’s Word, even though some people contend to this day that WordPerfect was a superior product.
A year ago, the financial news was dominated by the hype and elusive promise of Bitcoin and other artificial currencies. They were taking on the global banking system and in short order would replace dollars and euros with electronic IOUs.
I suspect few average investors understand how these currencies work, how the coins are created and the high-level computer hardware that validates transactions and “mines” to create the coins. It is pretty complex and certainly not easily explained in one or two sentences.
The mania pushed the value of a Bitcoin to almost US$18,674 by the end of 2018 when the bubble burst. As of Jan. 9, Bitcoin is trading at about US$4,000 per unit, 21% off its peak value.
Whether crypto currencies replace the global financial order is still unknown. It’s an interesting idea, but it is hard to imagine that in its present form governments will get behind an unregulated, untaxed, and opaque currency that allows us to hide transactions – legal or otherwise. But perhaps it will play a role in mainstream financial transactions in a way that is not yet apparent.
Even so, the hype surrounding Bitcoin confused two related notions. The coins are a piece of computer code representing ownership of an artificial unit of money. The process behind the coins and the evolving commercial applications are more important.
The process is called Blockchain and in simple terms it allows transactions to be shared among participants on the same network. The important part is that nobody can change a transaction once entered, because it is part of a chain that cannot be altered. This is because the information is entered simultaneously on hundreds or thousands of computers on a network. Once validated, it would have to be changed on each one. Since all the computers are independent, the system is tamper-proof.
Companies are exploring applications that relate to this feature. The focus is initiatives to streamline their own operations, or those of their customers. By improving productivity, they are improving profitability. Many of the companies taking the lead are those we know and whose products we use – Walmart, Microsoft, IBM, Visa, and PayPal. Banking, insurance, financial services, healthcare, and food safety, are just a few of the sectors where Blockchain holds promise.
Here are some examples:
Walmart & Food Safety: Two outbreaks of E. Coli bacteria in lettuce and other greens this year sent 96 Americans to hospital, where five died. Eight Canadians were affected, and the outbreak prompted North America-wide grocery store recalls.
This included Walmart, (NYSE: WMT) which sells groceries at its big box stores and neighbourhood supermarkets. In 2016, Walmart and a group of companies including Unilever, Nestlé, and Dole teamed up with IBM to use Blockchain to create a tamper-proof way to track produce from farm to store. At the time, it took Walmart seven days to do that. Now it takes a few seconds via an IBM-created piece of shared software. It logs the voyage of a mango from the moment it is picked, to the pallet where it is piled, to when it was washed, the time it was packed, and the moment the truck left to deliver it.
As a result of the E. Coli outbreaks, Walmart is requiring all of its food suppliers to work with the IBM Food Trust network to create the same end-to-end traceability using Blockchain technology.
(The spring E. Coli outbreak was traced to contaminated canal water used to irrigate romaine lettuce grown near Yuma, Arizona.)
The Walmart executive who started the initiative has joined the U.S. Food and Drug Administration (FDA) in a senior role. He is using Blockchain to introduce tools to assist the FDA in tracing the causes of food contamination down to a specific distributor, farm or grower.
Delivering food aid: The United Nations sees potential in Blockchain to improve the delivery of food aid and reduce the risk of bribes and fraud by local officials.
As reported by Associated Press, the technology uses Microsoft’s Azure cloud computing platform to process and store information taken from retina scans. A retina scan, like a fingerprint, is a unique record. When refugees pick up their flour, rice, and other foodstuffs, the scan of their eyes records the delivery as part of a chain of all related transactions.
The UN’s World Food Program has been testing this since 2017 to manage aid for 100,000 refugees in camps in Jordan. It aims to extend it to 500,000 refugees. The World Bank, UNICEF, and the Red Cross are looking at ways to implement Blockchain into their own projects.
Other experiments: Facebook has formed a Blockchain unit headed up by the former president of PayPal. Facebook is developing a digital currency to be tested in India. It will be pegged to the U.S. dollar, will let users transfer money on Facebook’s WhatsApp messaging app. (India is a leader in implementing new forms of non-bank online payments.)
PayPal, (NDQ: PYPL) meantime, has launched an internal Blockchain pilot. Paypal does not accept Bitcoin as payment, but one day might. Its innovation lab built an in-house software application that rewards employees with electronic tokens for such things as work well done or contributing ideas. They can trade the tokens for rewards and the transactions are recorded on a blockchain ledger.
Insurance is another area of opportunity. Experiments are streamlining processes, data storage, and the many interactions involved in an insurance claim.
Maersk, the Danish shipping company, worked with Microsoft to develop a system that tracks ships and their cargoes down to the second.
The common denominator in these examples is mature players looking for ways to profit from a new technology. Tagging along with these multinationals is a low risk way to take advantage. They are potentially most affected and so most motivated to explore the potential. They have the wherewithal to invest in R&D, the resources to acquire startups to learn about the technology and the leeway to make mistakes.
(This article first appeared in the Jan. 14, 2019 issue of the Internet Wealth Builder investment newsletter.)