Blockchain use case landscape across industries, enterprises and government.

What are Initial Coin Offerings and can they revolutionize corporate finance?

The previous posts in this Blockchain series have focused on introducing concepts and describing key components related to Blockchain technology. In addition, we have also provided insight into how blockchain technology will evolve in the coming years. In this article, we will discuss a specific set of use cases, highlighting the direction we envision Blockchain being used in various industries, businesses, individuals, and governments. 

It's all about trust

Wherever trust between parties is required for the exchange of information or commerce, blockchains can help foster collaboration without requiring as much in the way of trust as one would actually assume.  

Today, to gain trust in a partner, you get to know their way of working, identify similarities and differences in actions, knowledge, principles and values; you build a relationship. Relationships take time for trust to develop between parties, meaning that you are convinced that the other party will not do anything to harm you. 

On the one hand, blockchain is not a panacea that can eliminate all of the above-mentioned elements in trusting relationships, but rather a support system for collaboration and trade through a platform that does not require trust upfront from the other party. It does require trust in the platform of interaction itself as well as its components. 

Just like people, companies do not operate and act in isolation, but interact and share experiences with each other. The functions within a company that are aligned not only internally but also externally will benefit from the adoption of blockchain technology. The supply chain is a prime candidate. 

Supply chains aim to ensure that the supply and demand of products are seamlessly matched so that the right products are produced in the right place to be available at the right time when a customer demands it, quite a task for any organization. Over time, the focus of supply chains has expanded beyond internal corporate boundaries to include information from suppliers and customers to better develop and execute their own internal supply and demand plans. These supply chains have become extremely complex for many global, multinational organizations with multiple manufacturing sites: They source their products from different suppliers and deliver them to different distributors in different markets. So, it is easy to see how many organizations a company must integrate with if it wants to exchange and receive data. 

To incorporate external information, companies have relied on different system interfaces to interact with supplier and distributor systems. These systems link different system architectures and often do not store the information that could be relevant for an external party. As such they have limited incentive to keep these data records unless they were paid to do so through the agreement in place between them. A better system is possible with the application of the immutable ledger of a blockchain and the distributed consensus layer. 

In our dedicated post on pharmaceutical industry applications, we will explore two possible alternatives in which a blockchain-based solution could be developed to increase traceability and consistent visibility of information to multiple parties. The settings of a pharmaceutical organization are highly transferable to many other industries in the context of supply chain management with the necessary adaptations. 
For now, we will focus on supply chain traceability applications across industries and the benefits they can bring to organizations. 

Supply chain traceability applications

A real world example

For example, a blockchain application for a cross-enterprise, industry-wide solution in the wine industry would eliminate the need for controlled designation of origin stamps on bottled wine. At each step in the wine's journey, the relevant data would be fed into the blockchain by the relevant party in the form of a transaction. This would result in a wealth of data and a higher level of certainty regarding the origin of the product that the end consumer is buying. 

Today, when purchasing wine, a consumer has limited ability to clearly identify the origin of all the components of the product. The origin stamp is the closest thing a wine consumer has on hand to clearly identify where the bottle came from. Surely there is a demand from the consumer for more certainty about this origin. 

A blockchain capable of recording metadata within its transactions can document all these data points, accessible via an individualized QR code or other cryptographic method. Thus, the curious consumer could trace the grapes from the vineyard all the way back to the wine store while enjoying a glass of that wine; could this be a trending new hobby in the making? 

Participating in such a product traceability solution does not necessarily have to come at the expense of the organizations that support the development and transportation of the product. After all, with this transparency and trustworthiness, these organizations can benefit as well.

Companies operating in jurisdictions where transparency and compliance are not optimally managed, yet the companies themselves are transparent and compliant and pride themselves with these values, can be severely hampered when trying to penetrate new markets. This negative impact of the surrounding culture hinders any progress the companies may have when trying to distribute their product.

By participating in a blockchain network that makes its product provenance data publicly available, or at least makes it accessible to regulators and supervisors in the markets it seeks to enter, companies can free themselves from this obstructive externality. By proving sourcing practices and documenting process results on a blockchain, for example, for certifying a wine, the origin of cattle, or the origin of coffee beans, the company could now have access to a broader market because it has gained more trust and therefore credibility through the transparency of blockchain data. In this case, the cost of participating in a blockchain ledger is key to accessing a market and thus expanding business, and therefore is not perceived as a cost at all. This is an example of a true convergence of incentives to adopt a new technology: a fine example of blockchain transparency promoting meritocracy through disclosure of actions.

So, adopting a technology that requires change does not always have to come at a cost, sometimes that cost can be the ticket to change in fortune. 

Blockchain technologies with asset tokenization 

One of the most important use cases that blockchain technology will trigger in enterprises is leading to a broader application of asset tokenization, which we addressed in an earlier post. The combination of blockchain technologies with asset tokenization has sparked interest in the token economy, from creating fungible tokens to incentivize grouping participants in a community to exchange products or services through those tokens, to creating non-fungible tokens that digitally represent scarce physical assets, thereby increasing the liquidity and exchangeability of those items. 

One of the ways companies can take advantage of this technology is by funding their equity in the form of Initial Coin Offerings (ICOs). The concept of ICO arose from the rapid funding needs of startup blockchain companies that issued their tokens to interested investors. These were willing to support the project by purchasing the tokens associated with the blockchain platform being developed. 

In the same way that these startups have funded their operations through the issuance of their tokens, companies can also turn to this funding source to spur the development of new innovations that eager investors or supportive community members want to invest in and support. 

The obvious limitation of this source of funding through ICOs is the lack of comprehensive regulatory clarity on the classification of the issued token. It is difficult to understand whether the token is classified as a security, a commodity, or a utility in a given legal environment. This lack of clarity will hinder many, as long as there is no dedicated effort to provide such regulatory transparency for this type of innovation funding. 

It is also important to note that traditional ICOs do not necessarily lead to an ownership stake in a company. What they do offer, however, is a way to gain access to tokens with a specific intended use or a corresponding development path to such a use that is associated with a specific monetary policy. It is an investment within an ecosystem with or without an expectation of return, either through the valuation of the token economy as a result of demand or through the expectation of dividends. 

ICOs were all the buzz in 2017. However, in some cases, there were organizations that raised ICO funds with false promises about new blockchain solutions, which had a negative impact on the entire industry. 

What remains undisputed are the advantages that such a mechanism has for financing organizations, especially innovative companies. In traditional finance, the most similar approach to the ICO is the initial public offering (IPO), in which a company brings a portion of its equity to the public by issuing new shares. In many cases, the process of an IPO is extensive, as investment banks are hired to handle the underwriting. They are also involved in the marketing campaign for the issue, while also assessing the demand for the emission, as this will have a particular impact on the pricing of the shares distributed. In short, it can be a lengthy and expensive process with many regulatory requirements and many brokers. 

The ability to issue a token, replacing the IPO to some degree, is something revolutionary for financing operations. It can be a truly groundbreaking way for companies to fund themselves, given the cost savings that can be achieved through this route as opposed to the traditional IPO. 

The savings come mainly from issuing a token on a blockchain, which is extremely low and, in many cases, can be internalized within the organization. This is possible because many of the blockchain platforms today provide tools for token self-issuance. 

In an IPO, a company provides access to equity capital through a public emission. This is particularly the case for consolidated companies that are no longer in the start-up phase but want to grow and need capital to finance their expansion plan. On the other hand, access to early rounds of funding for startups, i.e., venture capital funding, is very much limited to accredited investors. This, in the name of investor protection, makes it much more difficult for the broader population to access the early funding stages of organizations. 

ICOs can change that. Access can be provided to a very wide range of users at an extremely low cost, unlike VC funding investments in early rounds where shares are illiquid, so they are locked in for a certain period of time or until certain metrics are met. With ICOs, this can be turned completely upside down. Once the token is issued and distributed, the funding organization should look to ensure liquidity of the token by listing it on an exchange or decentralized exchange so that investors can get immediate liquidity when needed. A token market can be created almost immediately after the token is issued. 

Alternative uses of tokenization for businesses

So far, we have highlighted how blockchain can replace existing means of corporate financing. In particular, the distribution of equity through an IPO, where shares are distributed to the public, is replaced by the issuance of a digital token, which can greatly reduce the cost of distributing that equity. However, if we focus on alternative uses of tokenization for businesses, we come to some other interesting use cases. 
Equity does not necessarily have to be the element that is shared by the organization. Blockchain-based organizations have shared parts of the token economy they create. Companies can tokenize assets, revenue streams, licenses they own, and any type of intellectual property (IP). A company can issue a token for future returns of any of its revenue streams or products to fund the very ideas that will evolve into those products. Early access to investors in certain ventures can help organizations with clever innovative ideas. It also provides an opportunity for those who may not be committed to an organization as a whole, but believe the idea is worth pursuing and investing in. Companies can offer a stake in future dividends of specific business units or even products through an investment vehicle, as opposed to a broad stake in the overall organization - flexible fundraising for organizations is now a reality.

The companies that need to transition the most or the fastest are clearly the financial brokers in these IPO-related or perhaps even more general corporate financing rounds. With the advent of self-service solutions that blockchain platforms are developing to support financing activities, many companies will flee to these options to save money. This leaves investment banks as one of the entities most affected by the use of ICOs. Not only because they would no longer play a significant a role in issuance, but also because the investor audience may be different than in the past. While investment banks previously approached their investor and customer base to raise funds for their underwritings with community- or product-based ICOs, organizations now have access to their investor base, as they may already be members of their community.

"We believe this mechanism (ICOs) can transform the role of finance in raising funds for businesses."
It is too early to fully understand how ICOs can revolutionize corporate finance, given the limitations in interacting with existing financial systems and controls. Nevertheless, we believe this mechanism can transform the role of finance in raising funds for businesses. In retrospect, it can be seen as one of the most important developments in corporate finance that we have seen in recent decades. 
What's next? 

In the first part of this post, we looked at some industry-wide applications that blockchain technology can bring, as well as a specification of the applications for businesses. The second part of this post, which we will publish in a few days, will focus on how blockchain can transform many activities related to government: In some cases, it allows users to take more ownership of their own data, as well as more influence over how they interact with the government. Curious now? Then be sure not to miss the second part! 

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