How Small Firms Reap Benefits from Blockchain Switch (as published in South China Morning Post on January 19, 2019)
South China Morning Post
How Small Firms Reap Benefits from Blockchain Switch
By Emir Hrnjic and Nikodem Tomczak
January 19, 2019
A recent research study conducted by the World Economic Forum and Bain & Company estimated that blockchain technology could boost global trade by US$ 1 trillion, much of it benefitting small and medium-sized enterprises (SMEs).
With this in mind, blockchain offers great potential for China’s SMEs, which account for over 90 percent of market entities there and generate over 90 percent of the country’s GDP. These SMEs can use blockchain to simplify internal processes, and in the long run, grow their businesses.
Blockchains are designed to enable transactions without the need for an intermediary or for transacting parties to trust each other. The public nature of many blockchains also offers greater levels of transparency.
Immutability of data on the blockchain also provides finality for transactions and a fully auditable record for regulators, helping to prevent fraud, mitigate risk, and decrease accounting costs. For retailers, provenance and supply chain auditability increases transparency and boosts consumer confidence.
Among many notable blockchain-enabled uses for SMEs, most significant is the enabling of fast, efficient, and low-cost solutions for interbank transactions.
In traditional financial systems, many intermediaries exploit their position to charge inflated transaction fees, even if they provide meaningful service and reduce transaction risk. Moreover, traditional international bank transfers can take days, whereas transfers on blockchain take minutes.
Blockchain also dramatically simplifies cross-border payments allowing SMEs to easily collaborate and pay partners and employees residing in different countries.
Blockchain-based payments are also especially cost-efficient for transfer of so-called micropayments – a key consideration for businesses relying on such transfers, such as emerging subscription-based services and microloans.
Another important feature of blockchain for SMEs is the ability to develop and apply smart contracts. These are blockchain versions of traditional contracts with transparent and guaranteed execution. Funds sent to the smart contract are locked and are only automatically released once until all the required conditions to finalize a transaction are fulfilled.
As companies are built on contracts, smart contracts can be used to expedite, secure, and automate business operations. At the same time, they cut operational and transactional costs by removing intermediaries such as lawyers, bankers and auditors.
For SMEs, smart contracts can speed up payments and reduce cash flow problems as they are executed as soon as the predefined conditions are met. Furthermore, smart contracts allow for interaction of multiple parties ensuring transparency and increasing trust and security.
Examples of potential smart contracts for SMEs include creating and enforcing contracts with merchants and customers, handling invoicing and transfer of assets.
Implementing blockchain technologies for SME owners that have never had any experience with this technology can be a daunting task. Until recently, the only option was hiring expensive blockchain developers to provide in-house solutions.
However, with more software companies providing affordable and practical blockchain implementations, the prospects for SMEs integrating blockchain technology into their business processes is becoming a reality.
The range of potential applications of blockchain technology offer vast scope for exploration that could reward first movers. For SMEs the most promising applications include supply chains, proof of provenance, digital identity verification, and safe distributed data storage. SMEs that are currently using or offering these with any other technology should seriously consider migration to blockchain-based solutions.
The blockchain is about much more than bitcoin or other cryptocurrencies. Among many applications, it offers fast, efficient, and cost-effective solutions, helps in preventing fraud, reduces costs and automates business operations. This opens the way for SMEs to compete with much larger players on a more level playing field.