Guest editorial Free

The focus of this special issue is on blockchain technologies and its applications in finance. A blockchain is a decentralized, distributed and public digital ledger that is used to record transactions across many computers so that any involved record cannot be altered retroactively, without the alteration of all subsequent blocks. PriceWaterhouseCooper call this “connected cyber-physical system the 4th Industrial Revolution (4IR) ^[1].”

As Prajapati et al. (2019) ^[2] point out the idea behind blockchain technology can be traced to 1991 when Haber and Stonetta (1991) described the work on a cryptographically secure chain of blocks ^[3]. However, blockchain technology as we know it at present gained significance and prominence from 2008 when pseudonymous Satoshi Nakamoto published the bitcoin white paper titled, “Bitcoin: A Peer-to-Peer Electronic Cash System ^[4].” Nakamoto gave practical impetus to blockchain technology and solved the problem of double spending. Thus, we can argue that blockchain was conceptualized and operationalized in 2008. Nakamoto improved the design in an important way using Hash cash-like method to add blocks to the chain without requiring them to be signed by a trusted party. Subsequently, Nakamoto implemented the design as a core component of the crypto-currency bitcoin, where it serves as the public ledger for the transaction on the network. Nakamoto contended that e-commerce was hindered by an overreliance on financial institutions to play the role of middlemen between merchants and customers, who were increasingly forced to share personal information to verify their identities. “What is needed,” Nakamoto wrote, “is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party” (Gambacorta) ^[5]. The underlying technology that would bring this idea to life was the blockchain, a decentralized ledger that permanently records transactions in chronological order across massive public or private networks – in other words, a database controlled by a network of peer-to-peer (P2P) computers.

Blockchain, often called the chain of trust, can support a new generation of transactional applications and streamlined business processes by establishing the trust, accountability and transparency that are essential to modern commerce. The Economist stated it well, calling blockchain “the trust machine” and “the great chain of being sure about things ^[6].”

Iansiti and Lakhani ^[7], argue that contracts, transactions and the records of them are among the defining structures in our economic, legal and political systems. They protect assets and set organizational boundaries. They establish and verify identities and chronicle events. They govern interactions among nations, organizations, communities and individuals. They guide managerial and social action. And yet these critical tools and the bureaucracies formed to manage them have not kept up with the economy's digital transformation. Blockchain addresses this critical void. Ferrer et al. (2019) propose a novel model to encapsulate cooperative robotic missions in Merkle trees, one of the fundamental components of blockchain technology ^[8]. As the digital revolution and disruptive technology flourishes, we will see more applications of blockchain technology in the forthcoming years.

In this special issue, we have offer a collection of papers, each discussing different applications of the blockchain technologies. Hashemi Joo, Nishikawa and Dandapani discuss Cryptocurrency, a successful application of blockchain technology. Hemang Subramanian discusses Security Tokens: Architecture, Smart Contract Applications and Illustrations using Simple Agreement for Future Equity (SAFE) instruments. Nikbakht, Ehsan; Shahrokhi, Corriette offer another application, namely, Blockchain and Distributed Financial Data. Yuka, Hashemi Joo and Dandapani present initial coin offerings (ICOs), the next generation of initial public offerings (IPOs). Shahrokhi and Parhizgari, discuss Crowdfunding in Real Estate (CFRE). Sheth and Subramanian present Blockchain and Contract Theory: Modeling Smart Contracts using Insurance Markets. Gonzalez discusses Blockchain, Herding and Trust in Peer-to-Peer Lending. Smith and Dhillon offers assessing Blockchain Potential for the Cybersecurity of Financial Transactions. Finally, Nitin Gaur of IBM Blockchain presents Blockchain Challenges in Adoption.

Hashemi Joo et al. (2019) identify the applications and contributions of blockchain technology to global financial payment systems and pinpoint areas where this technology can make a substantial impact. Bitcoin and other cryptocurrencies are the first successful application of blockchain technology, and have been successfully used as the main fuel of the global money transfer network. This study examines numerous cryptocurrencies developed and used over the last decade and illustrates the success of Blockchain technology.

Subramanian (2019) examines the role of blockchain technologies in modern crowdfunding and capital-sourcing through a variety of financial instruments implemented as smart contracts. Smart contracts provide a unique mechanism to not only create a unique one-of-a-kind financial instrument but also enable innovations atop existing financial instruments, due to underlying efficiencies. In this work, the author examines the security token architecture as an application of smart contracts and illustrates the implementation and design of a commonly used financial instrument known as SAFE, using security tokens which also have smart contract functionality. These smart contracts are an important progression and evolution of blockchain technology toward market completion and sustainability.

Nikbakht et al. (2019) develop an integrated conceptual framework for blockchain electronic transfer and investigate the emergence of blockchain to determine its feasibility for electronical transfer payments. The three “markers” of classic money (store of value; medium of exchange and unit of account) are assessed in the case of blockchain technology. They also survey executives from financial and manufacturing sectors to identify the five major variables for the emerging distributed financial data based on blockchain, and conclude that the blockchain technology has the potential to have widespread change in how firms operate and implement a new method for electronic payments transfer through cryptocurrencies. Another interesting aspect of the study is that the knowledge/awareness of participants about blockchain, the value-added convenience for end users, and participants' willingness to embrace and accept new applications are significantly different between the two sectors examined in the study, underscoring challenges in implementation.

Nishikawa et al. (2019) recognize the benefits of ICOs as a way of raising funds from capital markets and present a detailed comparison between the ICO and the traditional IPO to realize the future possibilities that this new blockchain-based funding method holds. ICOs have brought billions of dollars of funding to startups and projects worldwide in the last few years. Concurrently, many successful ICOs yielded extremely high returns to investors. This work is an exhaustive review of the mechanism of crowdfunding and blockchain technology; the authors find the benefits and current shortcomings of the ICO and the potential future development of the ICO as a convenient and efficient way of raising capital. The future of this innovative funding method highly depends on further development and placement of appropriate regulatory supervision, better understanding of risk and benefits, and attaining the confidence of users.

Shahrokhi and Parhizgari (2019) analyze the determinants and the operational aspects of Crowdfunding in Real Estate (CFRE henceforth). Their work ascertains CFRE growth, drivers and platforms in light of modern digital technology including the blockchain. They compare this with the traditional real estate funding and identify the ease and advantages that CFRE offers to real estate investors by examining the risks and rewards of CFRE. Their findings posit that CFRE is an evolutionary process while it is currently transformative and disruptive.

Sheth and Subramanian (2019) model blockchain-based smart contracts specifically for the insurance industry. They develop the concept of smart contracts and discuss the implementation of a decentralized insurance marketplace, using smart contracts on the Ethereum Blockchain platform. Using economic theory, they demonstrate how the equilibrium shifts in this marketplace by reducing transaction costs for both the retailer and the insurance seller. They further develop the model using the principal–agent relationship between the insurance provider and the agents in this marketplace.

Gonzalez (2019) examines the role of blockchain in P2P lending. The gradual implementation of blockchain technology in P2P lending platforms facilitates safer, transparent and quick access to funds without having to deal with the complex, slower and more costly loan processes of banks. This study is a behavioral experiment to examine heuristics when lenders compare standard bidding information. The implications of behavioral theory in blockchain applications are analyzed. Overall, the investors who have experienced financial trauma appear more susceptible to trust-enhancing heuristics. This study concludes that blockchain can arguably support much needed financial inclusion in P2P lending, by using technology not only to facilitate transactions but also to assist in monitoring and bad loan recovery.

Smith and Dhillon (2019) exemplify the importance of understanding how organizations in the financial sector can address concerns by exploring blockchain implementation for financial transactions in the context of cybersecurity. While blockchain holds promise as a potential solution to the problem of cybersecurity, difficulty exists for both the industry and organizations in assessing this potential solution. They utilize the Multi-Objective Decision Analytics technique to demonstrate how organizations can assess a blockchain solution's value to maximize value-add within financial institutions. This paper engages both the academic literature, as well as an expert panel, to develop an assessment model for blockchain technology related to financial transactions, by providing a useful method for structuring the decision-making process of organizations.

Gaur (2019), Director of IBM Blockchain states that while blockchain technologies are viewed as a disruptive force for the existing financial systems and market infrastructure and could fundamentally change the way the financial services operate day-to-day business, the challenges of enterprise adoption still needs to be addressed as well. Even though the financial services industry is experimenting with blockchain technology in an effort to understand its disruptive forces, for these experiments to be adopted into full-blown production systems where enterprise can exploit the benefits and realize the promise of blockchain, the industry has to address the enterprise challenges around transaction audibility, visibility and integration into existing business functions. Without this, the blockchain revolution may never see the light of day in the enterprise world. Blockchain technology has the power to provide a platform to remove middlemen, regardless of the industry and real business models emerging that are backed by this technology. Those business models, based on such concepts as cyber trust, cyber equity, interledger and cyber identity, all reflect the aim to establish networking that is trustless yet secure.

Blockchain will play an increasingly significant role in many sectors of the economy including governments, education and trade, supply chains, healthcare, IT, transportation in addition to finance and bring beneficial disruption and new efficiencies to every stakeholder in the ecosystem. It is vitally important that finance managers and organizations understand and explore blockchain technology at present to ensure they are ready for the changes that are on the horizon. Where does the approach work and where does it not? From these efforts, the best ideas will emerge and gaps in specifications, technology and governance will be identified. The result will be a new generation of powerful, blockchain-based applications that will shape the next era of business and organizations.

Two challenges that need to be addressed for blockchain to fulfill its potential are that it must be based on open technology standards to assure the compatibility and interoperability of systems. Additionally, following the process model the Capability Maturity Model Integration, organization should do to promote behaviors and invest in the education and retraining of the workforce that lead to integrated systems and improved performance. Addressing and resolving these two challenges will ensure that the effects of blockchain in the workforce and organizations will be truly transformational and provide a paradigm shift in efficiency globally.