If you keep hearing your tech-savvy colleagues and friends using the term “blockchain,” but still feel like you don’t quite understand what they’re referring to, you’re not the only one. Even top executives at large financial services firms are still getting a handle on the emerging technology and its potential impact.
Blaise Beaulier is vice president of enterprise projects and support at the Milwaukee-based life insurance giant Northwestern Mutual. He said that last year, at a lunch meeting of executive officers at the company, CEO John Schlifske sat down next to Beaulier. One topic on the agenda that day was blockchain, a way to create a public record of transactional data so that those transactions later can be authenticated, but which also allows the parties involved to keep certain information private by encrypting it.
“[Schlifske] said, ‘OK, Blaise. I stayed up all night last night reading a book on blockchain. Is this going to disrupt our company or isn’t it?,’” Beaulier recalled.
Beaulier didn’t have a straightforward “yes” or “no” answer for Schlifske, but said that prior to the meeting, engineers and software developers at Northwestern Mutual had been experimenting with blockchain technology and brainstorming potential applications for it in the insurance and financial services industries.
In September, the month after the lunch meeting, the company held a two-day, blockchain-themed hackathon, Beaulier said. The winning project came from a lawyer at the company, who pulled in two engineers to help him create a way to potentially replace the Entrust identity authentication tokens that some workers at Northwestern Mutual and other organizations are required to use when logging in to work remotely, Beaulier said. These tokens are physical objects, like USB drives, that contain digital keys and can be used in combination with a password or PIN number to prove the person’s identity.
“They created a replacement for [the tokens] on blockchain,” he said. “They were frustrated with the token—losing it, not being able to read it. They created a process that would do two-form authentication on blockchain.”
Beaulier said that employees at his company are now exploring whether they can turn the concept into a software product that can be used internally, or by customers of the insurer.
His comments were part of a panel discussion held on Thursday in Madison, WI, as part of WTN Media’s annual Fusion conference for business executives. Participants in the forum described a number of known and potential use cases for blockchain technology. They also brought up some potential legal and regulatory challenges that may lie ahead for officials tasked with monitoring the use of blockchain in the business world.
Before diving into some of the panelists’ specific examples, it’s probably useful to explain a little bit more about what blockchain is, and why so many leaders in the tech industry are bullish on it.
As Peter Kirby, co-founder and CEO of Austin, TX-based Factom, told Xconomy in 2015, blockchain is designed so that data on a transaction between two or more parties are stored “in blocks, which are then stacked like bricks in a wall or links in a chain.” These chains are visible to the public, but those involved in an exchange can use encryption tools to ensure that certain information contained in individual blocks is kept private. Blockchain technology underpins cryptocurrencies such as Bitcoin, which can help facilitate anonymous transactions.
One use of blockchain that has some leaders in the insurance industry excited involves the creation of “smart contracts,” said Ted Stuckey. He leads the global innovation lab at QBE Insurance, which is based in Australia but has offices in the U.S., including one in Sun Prairie, WI. Stuckey said part of the idea with a smart contract is the ability to input its terms into electronic devices ahead of time, so that a particular event triggers a corresponding action. This practice is sometimes referred to as “parametric insurance,” he said, and can make sense for things like coverage for hurricanes and other catastrophic weather events.
“At the onset of the contract, a source of truth is agreed upon by the insurer,“ said Stuckey, a member of Thursday’s panel. “If the storm hits a certain mile-per-hour top speed, then the contract executes. It’s really good for that because it’s very event-based. You can definitively say on the blockchain that X happens, so Y events take place. It gets recorded. Money gets paid out. Everyone is happy.”
Blockchain ledgers could also help with micro-insurance policies that farmers in the developing world take out on their animals, Stuckey said. As an example, he said, a microchip could be placed into a cow after it is born, and that would be recorded on the ledger. Then, if the cow were to die, the chip would pick that up and, depending on the terms of the contract, potentially prompt a payment to the policyholder’s mobile device, he said. (Stuckey noted that QBE does not sell this type of policy.)
Another panelist, Pramod Achanta, discussed a separate application for blockchain technology in developing countries, where counterfeit pharmaceutical drugs are common.
“What if we used blockchain to solve that problem, where you understand where that medicine is produced?” said Achanta, a partner in financial markets and blockchain at IBM (NYSE: IBM).
But for all the promise that blockchain seems to offer, what if there’s a disagreement over a transaction handled using the technology, and it ends up in court?
Elizabeth Brown, an associate professor of accountancy at the University of Wisconsin-La Crosse, said that from a legal perspective, there are both pros and cons when it comes to examining data recorded to a blockchain ledger. On one hand, if smart contracts become widely adopted, that could result in fewer people needing to hire lawyers to settle disputes.
But it could get tricky when, say, trying to establish which jurisdiction should govern a smart contract.
“That has huge implications because consumer protections can vary, sometimes quite dramatically, from one state to another,” said Brown, who took part in the panel discussion. “At this very initial stage, there is a lot of legal issues that need to be addressed.”