Disruptive Technology: Blockchain
Brief Overview
If you haven’t heard of blockchain already, you should Google it. With the “Digital Revolution” and digital transformation that followed the mass adoption and success of the internet, a new record-keeping technology has too emerged, called the blockchain.
Blockchain was pioneered by Satashi Nakamoto’s whitepaper, which also influenced the rise of cryptocurrency by solving the double-spending problem. Quoted in Nakamoto’s (an alias for the creator of cryptocurrency) original Bitcoin: A Peer-to-Peer Electronic Cash System, “Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments.” (1) To eliminate trusted third parties, the solution was blockchain or a distributed ledger system.
Without the internet, blockchain technology would not be possible; however, currently the internet does not provide a solution for a variety of problems which cause silos and bottlenecks in economies. Problems such as centralized ledgers slowing supply chains, reliance on intermediaries for verification (i.e. commercial banks), and unsecure records. (2)
If, and when, the blockchain is accepted on a mass scale (est. market size of $60B by 2024 (3)) information such as health records, voting ballots, monetary assets, intellectual property, music, art, and more could be recorded securely, instantly and without an intermediary. These records could also exist outside of any organizational database, allowing information to essentially “just exist,” rather than the contrary of information existing in a siloed state. For example, a Facebook profile exists within Facebook and can be transferred outside of Facebook if permitted. If Facebook collapsed tomorrow, then so would the profile.
Consumer, Organizational, and Industry Application
Consumers — How will this integrate with businesses and persons? Any platform with user data (i.e. social media platforms) will experience a paradigm shift where the users control their content. For example, content could be centralized on the blockchain, serving as the umbrella overtop of each social media platform, so a user’s content on Instagram or LinkedIn is not siloed to that single app or organization. If users desired specific data to be public, other apps and platforms could then retrieve that information from the blockchain. Now imagine how this could apply to all user data and content, or in other words: banking, legal and/or health records. Information that is currently held in the hands of intermediaries could be put into the hands of the individual.
Organizational — At the organizational level there is now an opportunity to use “token engineering,” custom “tokens” or crypto on an as-needed or as-desired basis, to create environments in which organizations could make payments instantly without the need of any financial intermediary streamlining the supply chain. Tokens would be backed by the organization’s assets; think collateral on a loan except without a need for interest. In our discussions with BlockScience, a blockchain and token engineering research firm, the analogy of ALDI shopping carts was used to depict a token engineering model. Shoppers start their experience by inserting a quarter into a shopping cart to unlock it. The quarter is returned to the customer upon returning the cart safely back inside the store. In the same way customers exchange quarters for shopping cart use at ALDI, customers and vendors in a supply chain could use their assets as collateral to participate in a blockchain environment where the flow of funds would be instantaneous upon exchange of goods and services. Smart contracts are another capability of blockchain, which automates the flow of funds based on the predetermined contract. We plan to keep our eye on organizations like Sweet Bridge, Token, Inc., and ODEM, a few that are applying token engineering.
Industries and Global Adopters
- Consulting firms: Accenture is focusing internally for their blockchain capabilities, but they did acquire First Annapolis to enhance their consulting practice around emerging payment technologies, one technology being blockchain. McKinsey & Company, Boston Consulting Group, and Bain Consulting Group all actively publish content on the technology but have not demonstrated activity beyond that.
- Technology providers: Organizations like IBM, AWS, and Microsoft started offering Blockchain as a Service (Baas), and cloud providers, such as Google, are now starting to offer blockchain technology as part of their cloud service.
- Banking: The big banks are on board as well. Bank of America claims to have 50 patents in the space according to the CTO. JP Morgan is also investigating blockchain applications and recently announced a prototype to streamline capital markets infrastructure. Wells Fargo demonstrates very similar activity to JP Morgan and BofA in filing for blockchain patents and developing prototypes. It’s a little too early to see a leader out of these large financial institutions.
- Big 4 Accounting firms: Since as early as 2015 and 2016, all Big 4 accounting firms have demonstrated their acceptance of the new technology, but are now starting to find their place in the space. PwC’s China and Singapore operations acquired VeChain, a blockchain service provider, in May ‘17. In the meantime KPMG was acquiring Matchi, Rainmaker Labs, and establishing partnerships with Microsoft’s Blockchain as a Service (BaaS) platform. EY more recently acquired technology assets and related patents from Elevated Consciousness, Inc. a San Francisco, CA-based firm. Deloitte is also active in the space and has internally developed a services and solutions group dedicated to the technology, yet hasn’t closed any notable acquisitions to expand its service offerings.
Transaction Tracking
In YTD-18 alone, there were 289 transactions. The most active month from a transaction perspective was Jan. ‘18, with 58 recorded M&A transactions, a 29% increase from Dec. ‘17, and a 1350% increase from Jan. ‘17.
As depicted below, we saw a tremendous uptick in global M&A market activity as organizations are racing to take the lead in this competitive and extremely young environment by adding blockchain capabilities.
The graphic below presents M&A transactions from 2015–2018 and forecasts through the end of 2019.
Historical and Forecasted Transaction Counts by Month
LEXIT, an organization creating one of the first M&A platforms based on blockchain technology, tracked multiple notable blockchain transactions. Here are just a few:
- In Jun. ‘18 Coinbase acquired Keystone Capital Corp., Venovate Marketplace, Inc. and Digital Wealth LLC, in efforts to “tokenize” existing types of securities by becoming an SEC-regulated broker-dealer. In Apr. ‘18 Coinbase acquired Earn.com, a platform enabling users to earn bitcoin for responding to messages, for more than $120M.
- Spotify acquired Mediachain Labs in Apr. ‘17, in efforts to explore using the technology for connecting artists. Using blockchain technology Mediachain offers a decentralized database for sharing information across multiple applications. Mediachain, according to Crunchbase, took on $1.5M in funding from VC giants like Andreessen Horowitz and Union Square Ventures among others in Jun. ‘16. (4),(5)
Transactions by Target Geographic Locations
The U.S., Canada, and China lead in acquisition activity for 2018 with YTD M&A transaction counts at 102, 55, and 48 respectively. Chinese blockchain-related transaction counts jumped from 1, in YTD-17, to 48 in YTD-18 compared to a U.S. increase of 467% in 2018 (102, up from 18 transactions).
Potential Barriers to Mass Adoption
Although large amounts of time and capital are being invested in further blockchain, currently there is not a leading governance or monitoring strategy among blockchain technologies, creating some hesitation. As with any technology — or any system, for that matter — oversight needs to occur as the system’s use evolves over time to adapt to the changing environment of users. Since Blockchain is a new technology created to bypass intermediary organizations, replacing them with an intricate system to put the power in the hands of the majority (i.e. the users), installing a governing body or governing organization would contradict the technology itself. Therefore, oversight looks much differently in this landscape than ever seen before.
Tezos claims to be a self-amending ledger; to address this, it requires a rapidly changing environment that will need to be updated and adapted. Users can propose changes which are then voted on by other users, enabling the majority to rule. However, in this case there still would not be an overseeing or governing body. Transferring between two blockchains can also be challenging because “you must be able to transfer the first blockchain’s value set of all its past transactions as well.” (6) These are just some of the arising issues in applying blockchain to more than just cryptocurrencies. Will these issues stop the adoption of the technology? No, they are only things to consider in this radically different process of decentralized ledgers.
Final Remarks
The blockchain environment is still relatively young, filled with a plethora of excitement, making a bubble almost inevitable, like the dot-com. Also, like the dot-com bubble, the potential positive impacts of blockchain technology are so great that organizations of all sizes are trying to take part in the transformation. Are you?
Others to keep an eye on: Boardwalktech, Bitfury, Digital Asset, Berns Inc., SoftwareMill, Enaxis Consulting, Shopin, Minddeft, ProArch, VIA
Author: Garth Martin, Associate at 7 Mile Advisors
About 7 Mile Advisors
7 Mile Advisors provides Investment Banking & Advisory Services to the Business Services & Technology Industries globally. 7 Mile Advisors advises on M&A and private capital transactions, and provides market assessments and benchmarking. As a close-knit team with a long history together and a laser focus on our target markets, 7 Mile Advisors helps its clients sell companies, raise capital, grow through acquisitions, and evaluate new markets. For more information, including research on the M&A markets, visit www.7mileadvisors.com.
All securities transactions are executed by 7M Securities, LLC, member SIPC/FINRA.
