Bitcoin, other cryptocurrencies, blockchain, and most recently initial coin offerings (ICOs) are expected to have a far-reaching impact on the global economy—eventually. Blockchain use cases are rapidly emerging in various industries, and startup businesses continue to announce ICOs as an alternative means of raising capital, even amidst regulatory investigations. While some see these technologies as obscure, or even faddish, others expect distributed ledger technologies to end up changing our economic and social systems in some truly fundamental ways.

Still, some treasury and finance managers' understanding of these technologies is plagued by misconceptions. Key among these is the idea that blockchain, bitcoin, cryptocurrency, and ICOs are interchangeable terms.

A cryptocurrency is, essentially, a decentralized alternative to the fiat currencies that are backed by central governments. It utilizes technology to generate money and verify transactions. Cryptocurrency utilization started in 2008, when Satoshi Nakamoto, an anonymous person or group, released a white paper detailing a peer-to-peer electronic cash system that would allow direct online payments that wouldn't pass through a financial institution. Despite some bad press due to perceived connections to an online black market, as well as well-publicized hacks, cryptocurrency utilization has become much more common over the past decade. In the fourth quarter of 2017, the market cap for all cryptocurrencies broke $600 billion—nearly as much as the GDP of Argentina—according to coindesk.

Bitcoin is a cryptocurrency, but it's one of hundreds currently in existence. Others include etherum, ripple, and litecoin.

An ICO is the crypto world's spin on an initial public offering. In an ICO, a startup in this sector raises capital by issuing a new token and selling a percentage of the issued units, which backers pay for with either some form of legal tender or an established cryptocurrency. Tokens sold in ICOs can be called a variety of names and have different functions—some providing access to a product or service and others featuring the potential for profits based on issuer success. 2017 was the year of the ICO. Last December alone, investors poured 50 percent more money into token sales than venture capitalists invested in the space over the course of the entire year, and three times more than the total for all of 2016's blockchain-related venture capital deals. Moreover, the total number of ICOs so far in 2018 is nearing the markets' 2017 volume, and total funding is on pace to be more than double last year's.

Certainly, ICOs can be a faster way to raise capital from a wide variety of investors, with lower administrative burden than many traditional approaches to funding, but regulatory questions still surround the transactions. Compared with more highly regulated IPOs and more carefully vetted venture capital investments, ICOs present heightened risks around valuation, management experience, and in some instances unproven business models. Security issues are another concern. Recent research by Ernst & Young estimates that more than 10 percent of funds raised through ICOs are lost or stolen in hacker attacks. Finally, businesses that pursue ICO funding rather than venture capital are losing the possibility that their investors may provide strategic business advice, in addition to the capital.

Blockchain, meanwhile, is the fundamental technology that makes cryptocurrencies possible. Blockchain technologies are, essentially, stores of transaction data for which no single, central party is responsible—thus, they are also known as "distributed ledger technology," or DLT. A shared digital ledger enables transactions to be recorded and verified electronically. When a transaction occurs, everyone on the network knows about it. Benefits may include increased transparency, faster transactions, and improved efficiency. Blockchain systems are expected to accelerate the disruption from other emerging technology trends such as Internet of Things (IoT), artificial intelligence, and robotics.

Use Cases in the "Old Economy"

Bitcoin and other cryptocurrencies function in roughly the same way as fiat currencies, except that they are not backed by a central government and valuation is highly volatile. Some companies have found cryptocurrency to be worth exploration, while many others are holding off for now. Whether or not an organization decides to make or accept payments in one or more cryptocurrencies, the possible use cases for cryptocurrencies are pretty obvious to the typical treasury professional. Bitcoin futures are live on the Chicago Mercantile Exchange (CME), and several large financial institutions plan to facilitate their clients' ability to trade in these instruments. Large companies, including Microsoft, Overstock.com, and Subway, accept payments in bitcoin. Bitcoin also is serving as an increasingly important currency in nations with central bank policy concerns, such as Venezuela and Zimbabwe.

In contrast, blockchain technologies have a host of use cases, both for financial transactions and in a range of other areas. A blockchain is tamper-proof and virtually instantaneous, registering a transaction or other data point the moment both parties have verified it. Moreover, once data is saved, it cannot be changed or deleted. The "chain" in the word "blockchain" refers to the history of a transaction, which is stored indefinitely. The combination of these features makes blockchain technologies both secure and transparent. It is a tool with almost limitless potential in supporting activities in which multiple separate entities would benefit from a shared, independent record of information.

As an example, a financial institution can use blockchain to improve post-trade processes by increasing efficiency and reducing settlement times and collateral requirements. Blockchain technologies are most popular among early-stage companies, but some long-established businesses are also using them. A year ago, business leaders wanted to understand these technologies' potential uses but did their research quietly. Now, it seems no week goes by without a major company announcing another blockchain pilot. A sampling of recent activity includes:

Financial services firms using the blockchain in asset management, insurance, clearing, trading, international payments, and trade finance.
Energy and utilities employing blockchain technologies in energy exchanges; consumer trading; and the opportunity for real-time energy price transparency, automation, and demand response.
Healthcare providers using blockchain-based systems to share error-free medical and service records in real time.
Supply chain tracking utilizing blockchain applications to verify components or orders across sprawling geographies.
Transportation and logistics companies exploring use of blockchain systems for everything from monitoring of fleet maintenance to detection of payments fraud.

Building a Foundation for Adoption

Full integration of blockchain technologies and cryptocurrencies into the global corporate and financial system infrastructure will take years, if not decades. But when this transition does occur, the ramifications will likely be vast. It is estimated that banks, as an example, could reduce infrastructure costs by billions annually by using blockchain technology in areas like central finance reporting, compliance, and operations. These technologies represent a great opportunity not just in financial services, but across the global economy.

The pace of integration is likely to depend on four key factors:

1. Cultural acceptance. According to a recent Forbes article, only 0.5 percent of the world's population is using any type of blockchain technology today, although 50 percent use the Internet. Because blockchain systems represent a shift to a decentralized network, they require the buy-in of all their users and operators. Gaining widespread buy-in will take time, as many people currently do not even understand how or where blockchain might be used. Broader education focused on the value proposition of this new technology—both for consumers and institutions—should be helpful in breaking down this barrier. There are many different organizations that specialize in educating their members as well as their respective industries about blockchain technology, which a corporate treasurer or finance manager could explore for education and potentially for identifying, prioritizing, and piloting blockchain use cases in their organizations.

2. Security. Real and/or perceived cybersecurity concerns need to be addressed before the general public will entrust their personal data to a blockchain solution. There is a widespread concern that a blockchain can be hacked and data compromised. In reality, the technology is rather secure, but data could be vulnerable in the event of a stolen private key, a hacker accessing proof of work within a blockchain, or a software vulnerability. To mitigate these potential causes of data loss, companies are continuing to invest in secure storage and security protocols. In some instances, insurance may also be available as a risk-transfer mechanism.

3. Regulatory status. The Commodity Futures Trading Commission (CFTC) designated bitcoin as a commodity and has allowed the CME and CBOE to launch futures, while also approving a platform for trading and clearing. However, the debate continues about whether cryptocurrencies should be viewed as currencies or commodities—and, as an extension, how they should be regulated. Cryptocurrenices' regulatory status varies globally, particularly when it comes to ICOs; class-action filings in the U.S. allege that ICOs violate the Securities Act, and other governments have banned coin offerings altogether.

4. Integration concerns. Implementing blockchain technologies may require significant changes to, or the complete replacement of, an organization's existing systems. Making major changes to the corporate infrastructure is potentially time-consuming and expensive. Even companies that buy into the idea that blockchain offers tremendous cost savings may be deterred by the high up-front tech spend.

Risk Considerations

With any new technology come both benefits and risks that early adopters must understand, manage, and potentially transfer. Exposures will evolve as increasing numbers of companies utilize or develop blockchain-based solutions. Risks—and, potentially, insurability of systems and transactions—will vary depending on the structure and features of the technologies. Across a variety of coverage areas, corporate insurance terms and conditions do not contemplate cryptocurrencies and may not address all blockchain technology use cases without modification. As an example, crime or employee theft insurance is typically designed to cover money, securities, and other tangible property; these standard definitions do not automatically address cryptocurrency.

As these technologies continue to transform global business, both established firms and companies founded for the express purpose of leveraging distributed ledger technologies will need to consider the risks inherent in these tools and the possibility of risk transfer. The convergence of the digital economy with digital currency has created an environment where change is rapid and exposures are developing just as quickly. Understanding the nuances among blockchain, cryptocurrencies, and ICOs—as well as the risks and opportunities they present—is essential in this rapidly changing innovation economy.

Jackie Quintal is managing director and financial institutions industry practice leader at Aon, a leading global professional services firm providing a broad range of risk, retirement, and health solutions. She joined Aon 11 years ago after working for another global insurance brokerage. Quintal holds an MBA from the University of Pennsylvania's Wharton School.

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A Crypto Primer for Corporate Treasurers

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