Point of View

Making Blockchains Real with EY’s Paul Brody

July 18, 2018

HfS discussed the promise, the hype, and the reality around Enterprise Blockchain adoption in an unadulterated conversation with Paul Brody, the Global Innovation Leader for Blockchain at EY. Paul’s twitter handles states “rarely right, never in doubt” but of late he seems to be getting it right with the big launch of Microsoft’s blockchain-based royalty payments.  



Saurabh Gupta (Chief Strategy Officer, HfS Research): Paul, first off, congratulations on the Microsoft announcement. I think it’s a terrific achievement to help transition blockchain from “tourism” to some form “realism.”


Paul Brody (Global Innovation Leader for Blockchain, EY): Thank you so much. It really is a huge difference, and it’s been a colossal challenge, in terms of, you know, just getting things moving forward. But it’s very, very exciting to finally be there.


The Microsoft project is so exciting, because it encapsulates everything that we’ve said about blockchains to be useful. Gaming is a complex ecosystem. You have publishers, you have game houses, you have artists, you have contributors, you have IP owners. You also have all the participants in the ecosystem that are bound by the same transactional data and a lot of complex, unique, business processes – the game designer only gets paid based on how many games that you and I consume. The overall vision is that we keep adding more and more people to it, and we extend the network across the full value chain.


Saurabh: When we last spoke, you were talking about your ultimate vision of moving in to permissionless blockchains. Help us understand a little bit about what is EY’s vision for enterprise blockchain.


Paul: I think, very simply, blockchains will do for networks of companies, or business ecosystems, what ERP did for the single enterprise. That is, in a nutshell, by far the primary vision that we have for blockchain.

In the long run, the ideal scenario is that we have a world where we are building blockchains that run on an open public network. Even if you take the Microsoft solution that we have today, for example, is on a private network, but I don’t think, in the long run, that really scales. In the long run, you want to be able to run your blockchain nodes on anything, anywhere. I think this should do for commerce what email did for kind of general communication.  If you take something like a software license, that we’re handling the Microsoft Royalties blockchain, imagine being able to drop that into a manufacturing bill of materials and then out to the end customer.  If you have true cross-industry public blockchains, doing things like that are simple and powerful.


Saurabh: From your vantage point, is adoption getting real? We have this Microsoft example, but can you share some other examples, beyond Microsoft, where it’s becoming live, or in production?


Paul: We do have some other relatively mature solutions – we have the Wine Blockchain, which is for food traceability, and we have the package tracking with Schneider Logistics, which is in pilot.


But nothing as big as Microsoft. We were really lucky to find a partner that was not only enthusiastic about the project, but was willing to go first. We’ve had other clients, where we’ve done really successful pilots. The clients are like, “This is amazing, it meets all of our requirements. If we implement it, we might save as much a lot of money over our current process, and, you know, it’s good for the security, and stuff like that,” and we’re just high-fiving ourselves, thinking, “This is it, this is going to be our first really big corporate client that will do something like this.” But then the clients some back and say, “Well, but we’re not going to implement.” When we really probed, the answer fundamentally came back to, “Blockchains are new, and a little bit scary, and we just don’t want to go first.”


My hope is that trail-blazers like Microsoft will help everybody else get their nerve up.


Saurabh: That makes sense. You started to elaborate a little bit on what makes for a good blockchain use case, but what are the real no-nos?


Paul: In my personal opinion, there are two things that really epitomize bad use cases. First is notarization, just time stamping documents, is a simplistic blockchain use case. If you and I can notarize our blockchain-based business transaction, you know, yay! But how’s that useful? But if we tokenize it, say you make tires, and you represent those tires as digital tokens, and when the tire is made, you create that token, we have an event that is absolutely irrevocably timestamped in the blockchain, and if the tire is represented as a digital token, then I can buy it from you, and we can transact over it.


And the other use case that we’re going to discover isn’t successful is simple payments. First of all, I don’t think blockchains will ever replace centralized payment systems, for billions and billions and billions of payments because this breaks the “if it isn’t broken don’t fix it” rule.  Second, I am certain that blockchains will not get rid of intermediaries in the financial world both because we trust them and because in many cases they are required by regulators. We don’t trust banks because we love bankers. We trust banks because they are regulated, and they have to behave themselves.


Although blockchain got its start in financial services, because the intermediaries in this market are highly regulated, the value proposition of blockchains may not be as strong here, especially for things that are already digital, like payments and stock trades.  There will be a role for blockchain in financial services, we believe, but it will be in those areas that have a lot of intermediaries (rather than just a few) or those that have resisted going fully digital, such as trade-finance.


Blockchains are all about enabling trust-worthy transactions without intermediaries, and so they may turn out to be most valuable in those markets where there aren’t regulated and trusted intermediaries.  Take a market like software licensing: there is no global central software licensing authority, and there’s no regulator on this topic, and because there are no regulators, and there are no centralized software licensors, the result of that, I think, is a system where there’s a need for a decentralized system, where everybody can work together, but you’re not creating a central, all-powerful intermediary. Does that make sense?


Saurabh: It does. So, essentially, what you are saying is, instead of thinking about replacing an intermediary, think about use cases where there is no intermediary, because, one, the adoption will be much faster, and then, two, you will have much lesser political resistance.


Paul: Precisely. Exactly.


Saurabh: Got it. Are clients are taking blockchain seriously? Or they’re just curious about it?


Paul: Oh, yes, they’re taking it seriously. The ones who are making progress are taking it very seriously, and they’re making tremendous progress, it’s just a very, very, very slow process, and a lot of it depends on where you start in a process.  Proof of concepts are easy.  Production is really really hard.


The number one problem that we have right now is when it starts with a, sort of, corporate innovation department, it’s not necessarily driven by urgent business need or sponsorship. I want to do is I want to sell to the VP of Supply Chain, to solve a specific problem. When that happens, we are all in a much happier place.


The Microsoft project is a really, really good example of that as it was created to solve a problem in the licensing business. It wasn’t sold to an innovation department, it wasn’t sold to a blockchain department.   The number one question I always ask is, what is the problem that we are actually solving? And when we know what the problem is that we’re solving, then everything else follows so elegantly from that.


Saurabh: Do you see the enterprises being as gung-ho about blockchain as they were about RPA, maybe a couple of years ago, or they are about AI, right now?


Paul: I sit next to my peers, who do RPA, inside of EY, and machine learning, and what we’re learning Blockchain is much, much harder than RPA. Here’s the thing – RPA is quick system integration, so the level of enthusiasm for RPA is really high, because you can solve sticky problems, maybe not with great elegance, but it works well and quickly. RPA is like the business process equivalent of duct tape. You can stick it somewhere and hold things together.


Blockchain is much more fundamental. It is more like ripping up the floor in your bathroom and replacing the plumbing. If you do it right, it’s a much bigger deal. Not if you do it like that notarization thing, then you’re using the blockchain almost like RPA. But if you’re out there using blockchains for transaction processing, where you’re getting in to the details of how transactions are approved and are paid, that’s ripping up the plumbing of your business, and it’s much harder than RPA, but have a much more fundamental impact.


Saurabh: So, how do you filter out the good versus the bad? Do you turn down work, if you think it will not add value for the client? Because everybody wants to put blockchain in everything right now.


Paul: I know. That is a big problem, and so we have our little five-point test, which is useful. And then we’ve declined to do some things. If you have a project that’s really on target with our strategic vision, and gets us towards where we want to go, then you will discover that we are able to deploy our best people, and that our pricing is very aggressive.


Saurabh: Tell me a little bit about the role of consortiums in blockchain. Blockchain, yes, is a new idea, but consortiums is not. And I’ve seen very rarely a consortium being successful. So what makes people believe that, this time, all these consortiums will be successful?


Paul: Candidly speaking, many consortia will struggle. If you remember from the last dotcom-go-round, the consortia struggled because information is very powerful, and in any kind of centralized system, even if it’s a consortia, somebody in the middle has access to all of that information, and it’s valuable and expensive. Design by committee is also really slow, and there are lots of startups that are going to move way faster.


But more importantly any end-to-end process involves procurement, logistics, finance, insurance, and cross-border tax, tariffs and duty. But all of these consortia are being formed as industry verticals but all the work most companies do crosses many of those different verticals.


If you just take tracking food as an example: right now, blockchain traceability is additive.  If you want to ship, insure or get paid, you either stick with existing systems (in which case now you have one more) or you integrate to several industry blockchains.  Either way, it looks clumsy and probably difficult for your average farmer.  SI companies may find a gold-mine in integration here, but if it gets too complex, I think many will wonder if the value-add over EDI is worth it.  I wouldn’t bet on it.


The only way we really believe that any of this works is when we’re all running on the same public , and when you put your produce on one blockchain, and everybody else is on the same blockchain, and you can sell those little produce tokens to anybody, and you can tender them for shipment to anybody, and you can get them insured by anybody, and it all works together. That’s why we are so passionate about public blockchains, is because we can’t really see any other way that this scales.


Saurabh: So, let me be the devil’s advocate. What you’re talking about is sort of an industry, or cross-industry, utility, and utility doesn’t have a high success rate either, right? I can only think of Sabre, being a utility which does work. So why do you think this will work, this time around, with blockchain?


Paul: This isn’t really utility. I believe that the future, really, is going to look much more like Ethereum, or like email. It’s a public, decentralized system. Sabre was a utility, but it was still a central authority, and it was very successful, in part because the government required full transparency during the regulated era, which was when IBM built Sabre for American Airlines, and so everybody had to publish their fares in a single central database, and it was all regulated, so there was no competitive advantage to secrecy.


On the public blockchain, we’ll have the same environment, except for now, you won’t be paying your competitor to complete your transaction, it’ll run much more like email. So, I think it’ll be a utility a lot like the banking system. Maybe with fewer bankers.


By the way, the one thing the consortia are doing that’s quite useful, is they’re doing a lot of good work about defining standards, and if they have data standards that are successful, or token standards that are successful, they’ll get widely deployed


Saurabh: Do you want to talk a little bit about any initiatives that EY is taking to help this market mature, in a way?


Paul: Yes, absolutely. we think that there are three things that need to happen, in order for blockchain to  deliver.


The first is that you have to be able to transact on public networks for the network effect to take place. Without public networks, you’ll never get this massive network effect that comes from everybody being on the same network. And to get people on public networks, we need to build zero-knowledge proofs in to public blockchain technology, i.e., enabling secure private transactions over the public networks. From an R&D perspective, this is our biggest priority.


Item number two is fiat currency tokenization. We want to pay for our stuff in dollars and euros and yen and that will be on the blockchain too. And so the second thing that has to happen is, we have to have widespread tokenization. The future of blockchains is the exchange of my product and service tokens for your money tokens. Right? That’s really kind of how it works. And those money tokens have to be dollars, or euros, or yen, if we want enterprises to embrace this technology.


And from an audit perspective, we are working on what we call attestation. As more and more assets from the “real” world are digitally represted as tokens on a blockchain, a key question for all parites will be: how can I trust this information.  Attestation means we can verify that what’s on the blockchain is truthful. In the case of a tokenized fiat currency, we would want to look at the blockchain, and we would say, “There’s a billion US dollar tokens on the blockchain,” and then we would look in their escrow bank account, and we’d say, “There’s a billion US dollars in the escrow bank account,” and those match up.


And because those match up, you can have confidence that each dollar token on the public blockchain is actually worth a dollar.   This, of course, gets much harder when we leave behind easily countable and valued items, but the principle remains the same.  We believe trustworthy attestation will become extremely valuable in a future where real-world assets are bought and sold on blockchains.


Priority number three is implementing rules and regulations into blockchain smart contracts.  Since public blockchains are decentralized, there is no final authority that can control or prevent mis-use of assets or tokens.  However, it is possible to write in rules to smart contracts, tokens, and exchanges that make mis-use difficult or impossible without resorting to centralization.  Enterprises are fundamentally risk-averse in these areas and they will want to see good evidence that they will be in fully compliance with the law.


Saurabh: Wonderful. Then, finally, what’s your one wish for blockchain, if you could make it come true?


Paul: My one wish for blockchain….some of these ICOs would just disappear. There are ICOs out there that I can only barely describe them as, like, the runner up in a high school business plan competition. They look good on the surface, but spend more than five minutes on the white paper and it’s obvious the business ideas terrible.  I’m worried people are buying investments they don’t understand and when it ends badly, they’ll want to throw out the baby with the bathwater.  There are some good companies with sincere and thoughtful entrepreneurs out there raising money, but finding them is not easy. 


Saurabh: Paul, this was an extremely useful and interesting conversation! Let’s speak again soon. 

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