Distributed ledgers in business – will they work?

Distributed ledger technology (DLT) is starting to play a larger role in business operations around the world. IBM has partnered with both Walmart and Maersk to use DLT to track shipments of goods. In fact, IBM has nearly 400 clients testing out the technology and has dedicated approximately 650 employees to the technology’s advancement. As a rival to this IBM-based technology, Microsoft, JPMorgan Chase and approximately 28 other companies have separately created the Enterprise Ethereum Alliance, with the same goals of using DLT for private enterprises. As Jerome Powell, a member of the Board of Governors of the Federal Reserve System, notes, these uses are examples of the larger trend of “banks and market infrastructures collaborat[ing] with technology firms to explore the use and further development of DLT.”

How does the distributed technology work, though, in the inherently centralized context of businesses? Will such a system function? “In contrast to Bitcoin’s open architecture. . . work by the financial industry has focused on the development of ‘permissioned’ systems, which establish criteria to determine who is permitted access to particular systems, ledgers, functions, or information,” says Mr. Powell. As IBM demonstrates, such private systems are not limited to the financial industry. Businesses have begun using DLT in order to develop new products or services and cut costs. For example, IBM is developing the DLT technology in order to make up for declines in its traditional hardware, software, and services business, and Maersk is looking to improve its operational infrastructure to cut costs.

However, companies adopting such technology still must address several problems with these DLT systems. Private “permissioned” DLT systems move faster than public ones such as Bitcoin, but experts have wondered whether they are essentially centralizing a system that was meant to be decentralized, leaving the system vulnerable to cyberattack. DLT supporters envision faster processing and lower operating costs, yet upgrading technology is costly, lengthy, and risky, especially since the technology has not been proven.

Beyond the issues companies face internally, these DLT-adopting companies must also face external challenges. Maersk, like other companies, has found out that adopting these technologies in the first place requires the cooperation of a wide variety of actors involved in the distribution chain. Moreover, as private DLT systems begin to interact with other private DLT systems, companies must develop strong risk management and governance mechanisms to ensure interoperability. This is especially true to allay concerns of sharing otherwise confidential data with competitors. Second, as such new technology crosses international legal borders, companies must understand the legal framework in order to adapt the technology to the law or even change the law to fit this new technology.

Private DLT systems may become more widely adopted than the public ones as large technology firms and companies that rely on large distribution networks adopt the technology. However, these companies must address the problems and seeming contradiction in adapting a public ledger system to private, centralized companies.