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Review the attached article, “How Blockchain is Changing Finance” by Alex Tapscott and Don Tapscott. In 2-3 pages, discuss the article and explain how blockchain has impacted the financial world. What immediate changes have been made? What is yet to come? Is this change a good thing for the profession? Explain.rP
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REPRINT H03HJK
PUBLISHED ON HBR.ORG
MARCH 01, 2017
ARTICLE
FINANCIAL MARKETS
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How Blockchain Is
Changing Finance
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by Alex Tapscott and Don Tapscott
This document is authorized for educator review use only by Dana Leland, Ottawa University until May 2020. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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FINANCIAL MARKETS
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How Blockchain Is
Changing Finance
by Alex Tapscott and Don Tapscott
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MARCH 01, 2017
Our global financial system moves trillions of dollars a day and serves billions of people. But the
system is rife with problems, adding cost through fees and delays, creating friction through
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redundant and onerous paperwork, and opening up opportunities for fraud and crime. To wit, 45% of
financial intermediaries, such as payment networks, stock exchanges, and money transfer services,
suffer from economic crime every year; the number is 37% for the entire economy, and only 20% and
27% for the professional services and technology sectors, respectively. It’s no small wonder that
regulatory costs continue to climb and remain a top concern for bankers. This all adds cost, with
consumers ultimately bearing the burden.
COPYRIGHT © 2017 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.
This document is authorized for educator review use only by Dana Leland, Ottawa University until May 2020. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
2
It begs the question: Why is our financial system so inefficient? First, because it’s antiquated, a
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kludge of industrial technologies and paper-based processes dressed up in a digital wrapper. Second,
because it’s centralized, which makes it resistant to change and vulnerable to systems failures and
attacks. Third, it’s exclusionary, denying billions of people access to basic financial tools. Bankers
have largely dodged the sort of creative destruction that, while messy, is critical to economic vitality
and progress. But the solution to this innovation logjam has emerged: blockchain.
How Blockchain Works
Here are five basic principles underlying the technology.
1. Distributed Database
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Each party on a blockchain has access to the entire database and its complete history. No
single party controls the data or the information. Every party can verify the records of its
transaction partners directly, without an intermediary.
2. Peer-to-Peer Transmission
Communication occurs directly between peers instead of through a central node. Each node
stores and forwards information to all other nodes.
3. Transparency with Pseudonymity
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Every transaction and its associated value are visible to anyone with access to the system. Each
node, or user, on a blockchain has a unique 30-plus-character alphanumeric address that
identifies it. Users can choose to remain anonymous or provide proof of their identity to others.
Transactions occur between blockchain addresses.
4. Irreversibility of Records
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Once a transaction is entered in the database and the accounts are updated, the records
cannot be altered, because they’re linked to every transaction record that came before them
(hence the term “chain”). Various computational algorithms and approaches are deployed to
ensure that the recording on the database is permanent, chronologically ordered, and available
to all others on the network.
5. Computational Logic
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The digital nature of the ledger means that blockchain transactions can be tied to
computational logic and in essence programmed. So users can set up algorithms and rules that
automatically trigger transactions between nodes.
Blockchain was originally developed as the technology behind cryptocurrencies like Bitcoin. A vast,
globally distributed ledger running on millions of devices, it is capable of recording anything of value.
Money, equities, bonds, titles, deeds, contracts, and virtually all other kinds of assets can be moved
and stored securely, privately, and from peer to peer, because trust is established not by powerful
intermediaries like banks and governments, but by network consensus, cryptography, collaboration,
COPYRIGHT © 2017 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.
This document is authorized for educator review use only by Dana Leland, Ottawa University until May 2020. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
3
and clever code. For the first time in human history, two or more parties, be they businesses or
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individuals who may not even know each other, can forge agreements, make transactions, and build
value without relying on intermediaries (such as banks, rating agencies, and government bodies such
as the U.S. Department of State) to verify their identities, establish trust, or perform the critical
business logic — contracting, clearing, settling, and record-keeping tasks that are foundational to all
forms of commerce.
Given the promise and peril of such a disruptive technology, many firms in the financial industry,
from banks and insurers to audit and professional service firms, are investing in blockchain solutions.
What is driving this deluge of money and interest? Most firms cite opportunities to reduce friction
and costs. After all, most financial intermediaries themselves rely on a dizzying, complex, and costly
array of intermediaries to run their own operations. Santander, a European bank, put the potential
savings at $20 billion a year. Capgemini, a consultancy, estimates that consumers could save up to
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$16 billion in banking and insurance fees each year through blockchain-based applications.
To be sure, blockchain may enable incumbents such as JPMorgan Chase, Citigroup, and Credit Suisse,
all of which are currently investing in the technology, to do more with less, streamline their
businesses, and reduce risk in the process. But while an opportunistic viewpoint is advantageous and
often necessary, it is rarely sufficient. After all, how do you cut cost from a business or market whose
structure has fundamentally changed? Here, blockchain is a real game changer. By reducing
transaction costs among all participants in the economy, blockchain supports models of peer-to-peer
mass collaboration that could make many of our existing organizational forms redundant.
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For example, consider how new business ventures access growth capital. Traditionally, companies
target angel investors in the early stages of a new business, and later look to venture capitalists,
eventually culminating in an initial public offering (IPO) on a stock exchange. This industry supports
a number of intermediaries, such as investment bankers, exchange operators, auditors, lawyers, and
crowd-funding platforms (such as Kickstarter and Indiegogo). Blockchain changes the equation by
enabling companies of any size to raise money in a peer-to-peer way, through global distributed
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share offerings. This new funding mechanism is already transforming the blockchain industry. In
2016 blockchain companies raised $400 million from traditional venture investors and nearly $200
million through what we call initial coin offerings (ICO rather than IPO). These ICOs aren’t just new
cryptocurrencies masquerading as companies. They represent content and digital rights management
platforms (such as SingularDTV), distributed venture funds (such as the the DAO, for decentralized
autonomous organization), and even new platforms to make investing in ICOs and managing digital
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assets easy (such as ICONOMI). There is already a deep pipeline of ICOs this year, such as Cosmos, a
unifying technology that will connect every blockchain in the world, which is why it’s been dubbed
the “internet of blockchains.” Others are sure to follow suit. In 2017 we expect that blockchain
startups will raise more funds through ICO than any other means — a historic inflection point.
Incumbents are taking notice. The New York–based venture capital firm Union Square Ventures
(USV) broadened its investment strategy so that it could buy ICOs directly. Menlo Park venture
COPYRIGHT © 2017 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.
This document is authorized for educator review use only by Dana Leland, Ottawa University until May 2020. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
4
capital firm Andreessen Horowitz joined USV in investing in Polychain Capital, a hedge fund that
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only buys tokens. Blockchain Capital, one of the industry’s largest investors, recently announced that
it would be raising money for its new fund by issuing tokens by ICO, a first for the industry. And, of
course, companies such as Goldman Sachs, NASDAQ, Inc., and Intercontinental Exchange, the
American holding company that owns the New York Stock Exchange, which dominate the IPO and
listing business, have been among the largest investors in blockchain ventures.
As with any radically new business model, ICOs have risks. There is little to no regulatory oversight.
Due diligence and disclosures can be scant, and some companies that have issued ICOs have gone
bust. Caveat emptor is the watchword, and many of the early backers are more punters than funders.
But the genie has been unleashed from the bottle. Done right, ICOs can not only improve the
efficiency of raising money, lowering the cost of capital for entrepreneurs and investors, but also
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democratize participation in global capital markets.
If the world of venture capital can change radically in one year, what else can we transform?
Blockchain could upend a number of complex intermediate functions in the industry: identity and
reputation, moving value (payments and remittances), storing value (savings), lending and
borrowing (credit), trading value (marketplaces like stock exchanges), insurance and risk
management, and audit and tax functions.
Is this the end of banking as we know it? That depends on how incumbents react. Blockchain is not
an existential threat to those who embrace the new technology paradigm and disrupt from within.
The question is, who in the financial services industry will lead the revolution? Throughout history,
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leaders of old paradigms have struggled to embrace the new. Why didn’t AT&T launch Skype, or Visa
create Paypal? CNN could have built Twitter, since it is all about the sound bite. GM or Hertz could
have launched Uber; Marriott could have invented Airbnb. The unstoppable force of blockchain
technology is barreling down on the infrastructure of modern finance. As with prior paradigm shifts,
blockchain will create winners and losers. Personally, we would like the inevitable collision to
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transform the old money machine into a prosperity platform for all.
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Alex Tapscott is Founder and CEO of Northwest Passage Ventures, a consultancy, advisory firm and investor in the
blockchain industry. He is the coauthor of the book, Blockchain Revolution: How the Technology Behind Bitcoin is
Changing Money, Business and the World. Follow him on Twitter @alextapscott.
Don Tapscott is the bestselling author of Wikinomics, The Digital Economy, and a dozen other acclaimed books about
technology, business and society. According to Thinkers50, Don is the 4th most important living management thinker in
the world; he is an adjunct professor at the Rotman School of Management, and Chancellor of Trent University. He and
his son Alex are co-authors of the book Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money,
Business, and the World. Follow him on Twitter @dtapscott.
COPYRIGHT © 2017 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.
This document is authorized for educator review use only by Dana Leland, Ottawa University until May 2020. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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