Why Business Must Get to Public Blockchains

Description: Nearly all blockchains in enterprises are private, on proprietary networks. But if companies and the world don’t move towards public blockchains, the tech won’t generate the transformational value for society Paul Brody knows is possible.
The following transcript has been lightly edited and condensed for ease of reading. 

Why Business Must Get to Public Blockchains

(Transcription by RA Fisher Ink)

Kirkpatrick: Paul Brody is the Global Blockchain Leader at EY and he is the most clear speaker I have ever heard on this so I hope you will agree with me, that it’s very elucidating. I’ll come up and ask him a couple questions after he finishes, so Paul.
[APPLAUSE]
Brody: So, I want to talk about why we need to get to public blockchains. We are already sort of at public blockchains but our prior speaker, Manoush, she was really amazing. She introduced the topic. She teed it up nicely and she said, you know, blockchains are an amazing technology and then she said, by the way, when we add people into this mix, we’re probably going to screw it all up. And honestly, I think at EY, she may well be right. And so, what I want to do over the next few minutes is spend a little bit of time talking about how blockchains are evolving and why we are concerned about the direction of that evolution and what we think needs to be done in order to make blockchains serve the public interest.
Because if we’re not careful, we are going to sleepwalk into a time when blockchains are just another pile of highly centralized, monopoly-centric institutions that don’t serve the public interest. So, what do we mean by that? So, let me just start by saying we’ve spent the last three years at EY building a substantial blockchain business. At one time, of course, being the global blockchain leader meant me and my assistant. We now actually have people around the world. We do quite a bit of stuff, but the one really interesting thing that we’ve learned from our time with EY, is we do something unusual. We are one of the few companies that serve the world of public blockchains and the world of private blockchains. And some of you are thinking to yourself, well, wait a minute, I didn’t even know there were public blockchains and private blockchains.
The public blockchains were the ones that Manoush was talking about. This is where we have like Ethereum and bitcoin and we have initial coin offerings, which I’m sure all of you have invested your life savings in, mortgage the house, right? You know, I heard about a guy in Holland last year that actually mortgaged his house to buy bitcoin and I feel really bad for him. But we also serve the world of private blockchains and what you may not realize is that public blockchains are where all the speculative financial activity is going on today, right. That’s all of these initial coin offerings, all the payments and so on. But the reality is, there’s almost no productive business activity going on in public blockchains. All of the business activity, almost all the enterprise activity that’s going on today is happening in the world of private blockchains, where companies are setting up special purpose enterprise applications for their business partners. And having served these two universes and realize how different they are, we’ve come away with a few lessons that I want to be able to share with you. Three in particular.
Number one, public blockchains are a mess, right. And that’s the nicest word. I prefer to use the word cesspool, right. The reality is almost all of these initial coin offerings have been a catastrophe. And in fact, not just a financial catastrophe in the sense that their value has plunged over the last few months, almost all of them are below their initial value, they’re all below their peak value, most of them, almost half of them are basically worthless.
But what’s much more concerning to me is that 70 percent of the ICO fundedstart-ups that were funded last year still have no product. Now people always say, Paul, don’t worry, you know, 90 percent of startups fail. Yes, but 90 percent of venture-backed startups actually get to offer a product. And what this chart tells us, what this research tells us, and we went through and we looked at the 140 some ICOs last year, that raised about 90 percent of the ICO money, is that 70 percent of them have no product after a year and I would be very surprised if a year from now that number is much lower.
So, either with good intentions and bad management or no management and very bad intentions, the vast majority of ICOs were fraudulent, right. So, if there’s a reason why people are not successfully raising money with good ideas, it’s because trust in public blockchains is very, very low. And in fact, if you had understood a lot of the technology at the time, there were good reasons why most of these were going to fail, and in particular there’s three.
The first is privacy. Every transaction on a public blockchain is public. And by the way, if you’re using public blockchains for your illegal activity, this is a really bad idea. Don’t do it. Cash on the street corner, all right. So, if you are a large corporation and you want to buy items or track your mangoes on a public blockchain, your competition can see exactly how many mangoes you’re tracking or how much you’ve paid for them. That’s pretty much a non-starter, right. So, privacy, big problem for corporations.
Number two, complexity, right. A lot of these guys built a business model that was designed to support token sales, not the token sales supporting the business model. This idea you’re going to take dollars and you’re going to convert them to ether and they’re going to buy my specialty coin and then you’re going to convert my specialty coin, which is illiquid and volatile and kind of very difficult to handle, into some kind of product and service. That’s not a good sales pitch the average CFO if you want them to buy your enterprise product. I know, I’ve tried. It doesn’t work, right.
And then finally, conflict of interest. Almost all of these initial coin offerings had tremendous conflicts of interest. Do you know what you are entitled to in almost every single case with an initial coin offering if you own some of those coins? I’ll tell you. Nothing. Literally nothing. Right, in fact, as accountants we have sometimes told our clients that initial coin offering money is basically a nonrefundable donation. That’s how you should record it on your books, right. That should tell you everything you need to know about an initial coin offering, right. In the battle between, say shareholders and coin holders in a pivot, and okay, startups never pivot, right. Of course they do, right. And when pivot, in the battle between the shareholders and the coin holders, the shareholders win. And the coin holders get nothing. In fact, of the 25 companies that have actually gotten to make product in the last year, about a third of them have simply abandoned their coins. They just said, you know what, this coin thing doesn’t work. We’ll just take good old fashioned, evil central-bank-minted fiat currency. So, public blockchains are a bit of a mess.
The alternative are private blockchains. Private blockchains are a good solution in a sense that they provide privacy for enterprises. You and I can transact; we can have our deals in secret, right. We can have some of the benefits of a public blockchain, but the problem is that they are not actually that great of a substitute, right. So, you know, first and foremost the key issue here is that there is this idea that I can create a private blockchain and I’ll connect you to your private blockchain and then I’ll connect you to your private blockchain and by the way, I’m going to charge you for all of those connections, right. And so this idea that we can have a public and permissioned blockchain that’s managed by a large company, is a little bit of a—I think the idea of a public and permissioned blockchain is an oxymoron. Right, these are not going to be hotbeds of innovation. They’re going to be lifetime employment acts for lawyers and potential monopolists, right.
So, public blockchains are a cesspool. Private blockchains are a bit of a mess, right. In terms of a temporary solution, you’ve basically replaced a bank as your intermediary with a software company or the network operator, right. And here’s the problem, public blockchains and private blockchains are on a collision course, right. We should know by now there’s only going to be one winner, right. This is the story of almost all the big technologies of the last 30, 40 years, right.
When you combine the economics of software with the power network effect, you do not get a world of hundreds of different options. You get one option, maybe two, right. So, we need to choose the kind of future we want. What future do we want? Do we want the closed and proprietary future, right? Any takers for token ring? Does anybody remember what token ring is? Yes, good. I remember what token is. So, do you want token ring or do you want TCP/IP, right? Do you want a network of, I mean, it’s messaging, right? All these different messenger services. They’re not great, right. Compare that to text messaging. Text messaging for all of its faults, works for everybody on every phone everywhere. So, we have an important choice to make about the future that’s coming ahead and our belief at EY is that if blockchains are ever going to deliver on their full value proposition, they need to be public blockchains, not private ones. And in particular, there’s three things that have to happen for public blockchains to be successful.
The first is secure private transactions. Now, I was in Prague a couple weeks ago for something called DevCon. DevCon is the big Ethereum developer get-together and there’s lots of incredibly idealistic people that who like privacy—that sounds terrible—how about radical transparency. And I’m like, listen, I’m all for radical transparency but let me assure you there are very few corporations that are in favor of disclosing their procurement policies and prices, right. That’s just a fact of life. If you want enterprises using your blockchains, you need to enable secure private transactions.
Number two, we need links to the real world for blockchains. And I believe, at EY we do enterprise software, but we also built, we are also one of the classic big four auditors. The future of audit is robust, honest links to the things that are on the blockchain. You want to buy a token that represents a bar of gold or barrel of oil, the most important question you should have is that bar of gold or that barrel of oil real.
Now, there are a couple of choices as to how we answer that question. I, for one, do not favor the answer. We have it in the back. You don’t. That is the job of auditors and the future of audit isn’t at the end of the year saying, did you do what you said you did. The future of audit is saying, we believe that this company accurately represents, on the blockchain, the things that they do, right? And therefore, you can transact with confidence in real time with these other companies, right. So, item number two, robust, reliable links to the off-blockchain world.
And finally, item number three, regulatory compliance without centralization. Don’t let anybody sell you a story about how blockchains are full of criminals and the only way to make blockchains safe for the enterprises is for some important corporation to control the blockchain. That is not a good response. We have regulatory compliance on the internet and we don’t have to have a completely centralized internet. I know there were people that used to be really nervous, and like, oh, we can’t do business on the internet, you know there’s, there’s bad stuff on the internet. We got past that. We need to get past that possibility with the blockchain and understand that you can have full regulatory compliance without imposing a central controlled grip off the whole network.
So, this is our vision. This is what we believe is important. We are putting our money where our mouth is. We’re going to try to talk the talk, and walk the walk, right. Number one, we are committed to full regulatory compliance on public blockchains. So, we audit some of the world’s largest bitcoin exchanges, some of the world’s major Ethereum exchanges. Our vision is a world in where your transactions are safe, legal, and reliable. That’s item number one.
Item number two, R&D investment to make secure transactions possible. I’m actually really proud of the fact that we built, at EY, the very first secure private transactions on the public Ethereum blockchain. This is really, really important. Zero knowledge proofs are very difficult. They’re not yet very mature and industrialized, but using them you could actually have an entirely private token transfer with a full audit trail on a public blockchain, right. So, you can do business in front of your competition in complete privacy.
Finally, we think that it’s really important to design public bought private blockchains that are ready for public consumption, right, for public transition. Because it’s not going to be an overnight transition. It took 10 or 15 years for people to get comfortable with the public cloud. I think it’s about the same, right, if you go back to 2006, people launched Amazon Web Services, lots of people said, “Oh my gosh, you know, is that a good idea, should we be on the public cloud?” Lots of people said, “No way, not a chance, right.”
Ten years later the majority of new ERP and other deployments are on the public cloud, right. So, I think it’ll take about the same time with blockchains, right, 10 years from, “Absolutely no, I’m not going to do this,” to “Of course we’re doing it on the public blockchain.” So, our goal is to be ready for that transition. So, I am out of time, but I want to say thank you very much and hopefully you got a couple questions.
Kirkpatrick: A couple questions, we don’t have tons of time. But for many people in the audience, or maybe, maybe a quarter of you, a lot of what you just [said] is gibberish, which worries me because frankly, you know we try to be in common parlance here, but this is an arena where it’s so complicated and it’s moved so quickly and there’s an awful lot of inside/outside shop talk, but I’m going to overcome that and ask you, you seem so certain that in the end, public blockchains or one public blockchain are going to win.
Brody: I am, yes.
Kirkpatrick: Okay, but tell me this, what is that going to enable in the world that couldn’t have happened otherwise?
Brody: So, today when we, two companies, do business, we do things in completely different separate systems. First, we get a bunch of lawyers together to negotiate contracts. Then I send you a purchase order through EDI or email. You receive a tracking number from FedEx or an ASM in EDI and then eventually I invoice you and you pay me through the banking system. Every single one of those things happens in a different system today. With a blockchain, two companies can transact together in a single environment all of those processes. And I think ultimately blockchains are a kind of productivity and operational revolution where we can vastly simplify what are very complex administrative processes.
Kirkpatrick: So, it’s almost like universal ERP in a way.
Brody: That’s exactly what it is. In fact, a lot of times when I’m talking to people at EY, I say, if you were to boil down everything we believe about blockchain into a single sentence, it would be this, we believe that blockchains will do for networks of companies and business ecosystems, what ERP did for the single enterprise.
Kirkpatrick: Excellent answer. I told you, this guy’s pretty good at explaining complicated stuff, right. So, but, but okay, you also, pretty much think that one blockchain’s going to win and my read is, because I did talk to you on the phone, is the answer Ethereum and why?
Brody: Yes. So, we are about 10 years into the blockchain era and if you go back and look at prior kind of technology revolutions, typically 10 years out, you have the evidence of the major platforms that are likely to be the winners. We are 10 years into the blockchain era, 98 percent of the world’s blockchain developers, develop on Ethereum. Something like 99 percent of all the ICO money’s on Ethereum, right. You can have all these angry debates about which blockchain is better or worse. The way I look at it is, Ethereum is the VHS—sorry I’m old, so I remember them—it’s the VHS of blockchains. Might not be perfect. There might be better ones out there, but it’s the one we’re all using.
Kirkpatrick: Well, it’s interesting, you maybe mentioned the word bitcoin once. I mean, you didn’t even really mention it, so you’re kind of just leaving it over here on the side, like, yes, thank you for inventing all this stuff but we’re moving on kind of. Is that the answer?
Brody: Yeah, I think, so bitcoin is an amazing proof of concept, right. I think there’s a role potentially for cryptocurrencies. And I come from an enterprise background; I spent 15 years at IBM, a few years at McKinsey. I think if you ask what enterprises want to do, they want to transact in their fait currencies: dollars, euros, yen. They want to transact with their other business peers. That’s something that blockchains, that Ethereum makes possible and bitcoin doesn’t support quite as well.
Kirkpatrick: Okay, thanks, Paul.
Brody: Thank you. Thanks for having me.