Unchaining Blockchain Security Part 2: How Private Blockchains are Used in Enterprises

By Dr. Marco Balduzzi

Enterprises have been steadily adopting private blockchains, placing this technology in different areas of their operations. When deployed as private permissioned networks, Ethereum-based blockchains and other similar decentralized ledger technologies are beneficial for enterprises. The advantages of integrating private blockchains into organizational processes can be substantial and multifaceted.

In this second article of our blockchain series, we summarize the benefits to provide a clearer understanding of their impact and highlight certain use cases. The main advantages to enterprises are listed below:

• Efficiency: Streamlining of processes. Private blockchains offer a significant enhancement in operational efficiency. By creating a unified system through which information can be securely and swiftly shared, organizations can eliminate many of the bottlenecks associated with traditional transaction and record-keeping systems. This streamlining effect leads to faster transaction processing times, quicker reconciliation among different departments, and a more agile response to market changes.
• Automation: Encoded in smart contracts. The use of smart contracts is one of the most innovative aspects of modern blockchain technologies. These self-executing contracts, with the terms of the agreement directly written into code, can automate complex business processes, ensuring that transactions and workflows are executed precisely as intended without the need for intermediaries. This not only speeds up operations but also reduces the potential for human error and enhances compliance with predefined rules and regulations.
• Cost Reduction: Reduced manual efforts. By automating routine tasks and reducing the need for intermediaries, private blockchains can significantly cut down on manual efforts, which can lead to substantial cost savings. This includes reducing the costs associated with auditing, compliance, reporting, and transaction processing. The streamlined and automated nature of blockchain reduces the need for extensive manual labor, especially in areas like data entry and verification.
• Immutability: Stored records cannot be changed. One of the foundational features of blockchain technology is its immutability. Once a transaction has been recorded on a blockchain, it cannot be altered or deleted. This provides a strong level of traceability for enterprise data, ensuring that each historical record is preserved in time. This characteristic is particularly valuable for maintaining the integrity of critical records and providing a tamper-proof audit trail, especially for supply-chain applications.
• Transparency: Shared, distributed ledger. Despite being an exclusive network, a private blockchain still offers a high degree of transparency within the organization or amongst authorized participants. Since the ledger is distributed, all parties with the requisite permissions have access to the same information in real time. This shared visibility fosters trust among stakeholders, simplifies the verification process, and ensures that all parties are working with the same accurate data.

Given all these benefits, numerous organizations worldwide have recently adopted this technology to enhance and support their business operations. Some of the most well-known and practical applications of private and hybrid blockchains include:

• • Supply chain management. Private blockchains revolutionize supply chain management by increasing traceability and transparency. They enable companies to record the production, shipment, and receipt of products in a tamper-proof ledger. This can significantly improve inventory management, reduce losses from counterfeit and gray market trading, ensure compliance with regulations, and provide a clear provenance of goods to consumers.
  • Parts search and verification. In industries such as manufacturing and aviation, where specific parts need to be sourced reliably and quickly, private blockchains can be used to create a secure database of parts. This allows for efficient searching, verification of authenticity, and tracking of parts throughout their lifecycle. It also helps reduce the incidence of using counterfeit parts, which can be a significant issue in many industries.
  • Accounting and financial services. Blockchain technology is poised to transform accounting practices by providing a secure and immutable ledger for recording financial transactions. This reduces the potential for fraud and errors, simplifies the audit process, and improves the overall efficiency of financial reporting. In intercompany business, it can streamline processes such as settlements and clearing, and enable more secure and efficient transactions.
  • Identity management. Blockchains offer a robust solution to identity management challenges, giving users control over their own identity data. Instead of relying on a central authority to store and manage personal information, individuals can store their identity data on a blockchain. This approach empowers users to share their information selectively and with consent, ensuring that they maintain ownership and control over their personal data.
  • Federated networks. In scenarios where multiple organizations need to collaborate and share data without a central authority, private and hybrid blockchains can facilitate the creation of federated networks. These networks maintain the confidentiality and integrity of shared data while allowing participants to retain control over their own information. This is particularly useful in research collaborations, business consortia, and cross-industry partnerships.

Service delivery. Private blockchains can enhance service delivery in various sectors by ensuring secure and uninterrupted access to critical services. This includes everything from energy distribution in smart grids to streaming services where blockchain can be used to manage subscriptions, usage rights, and content distribution securely and transparently.

The following image from MarketsAndMarkets does a good job of mapping these applications to the different business segments.

Figure 7. Blockchain market application segmentation
Source: marketsandmarkets.com

Use cases

In this section, we delve into a few concrete applications of blockchain technology within large, well-established organizations. We explore in more detail the business motivations that have led these enterprises to integrate or replace legacy systems with modern blockchain solutions, often driven by the necessity of cost reductions and improved process management. We examine these implementations closely and provide concrete references for further exploration.

The work presented here is based on exhaustive research that we conducted over the past months, utilizing publicly available information such as marketing materials published on the websites of the organizations.

Intercompany accounting

Our first use case is General Electric, a large multinational conglomerate and Fortune 500 member, boasting billions in revenue and employing a vast workforce. The corporation is composed of numerous legal entities, each conducting intercompany transactions.

This organizational structure is common for multinational conglomerates, which consist of several business entities that operate across multiple sectors but are unified under one corporate group. In General Electric's case, these entities span sectors including aviation, healthcare, renewable energy, and power supply.

General Electric, along with similar large-scale organizations, faces common problems dictated by the following considerations:

• The organization's accounting relies on many financial enterprise resource planning (ERP) systems, for example, due to legacy deployments or acquisitions. Consequently, reconciling and closing financial statements such as quarterly reports become too complex. This often leads to disputes over invoices and unreconciled items that require manual resolution, incurring costs and delays that affect revenue recognition.
• Production activities dispersed across different countries constitute a “global value chain.” The varying national tax laws and regulations in these countries necessitate intricate accounting practices, which demand increased attention from auditors and regulatory bodies.
• Maintaining bank accounts in multiple nations, each with its currency, results in a significant number of foreign transactions and, by extension, considerable banking fees.

In response to these challenges, the organization has adopted a novel approach by integrating a private blockchain-based intercompany accounting ledger. This ledger serves as a unified and immutable source of truth, facilitating real-time transaction processing among the various international business units. Seamlessly interfacing with the existing ERPs and financial systems, the ledger incorporates business rules, such as those governing cash flows, into smart contracts. This integration ensures more reliable accounting practices, mitigating a broad array of potential issues, thus reducing costs and enhancing automation. Furthermore, the process for managing disputes is significantly more transparent and auditable, even by external parties such as auditors.

By implementing this blockchain solution, General Electric has taken a strategic step towards streamlining its complex financial operations, demonstrating the potential of emerging technologies to resolve longstanding corporate challenges.

Supply chain

Blockchain could be particularly useful when employed in supply chains. This is because the technology has unique features that address challenges inherent in traditional supply chains. Some key benefits inherited by the mathematical foundation of blockchains are:

• Immutability. Once recorded on a blockchain, the data cannot be changed, which helps prevent fraud and ensures that records are accurate and consistent across the supply chain.
• Transparency. The distributed ledger technology allows all parties in the supply chain to access the same information, which can significantly increase transparency and trust among stakeholders.
• Traceability. Products can be tracked from their origin through every stop they make on their journey to the consumer. This level of traceability is beneficial for verifying the authenticity of products, ensuring compliance with regulations, and enabling the recall of products in the event of issues like contamination.

To demonstrate, let us the use case of Walmart Canada. This retail giant employs approximately 90,000 people and operates a comprehensive transportation network across Canada, leveraging the services of over 70 third-party freight carriers. Collectively, this network resembles an intercompany structure (as previously discussed) with the inherent challenge of integrating multiple ERP systems between Walmart Canada and its carriers to ensure seamless communication. Consequently, tracking delivered goods particularly within the food supply chain becomes complicated. In the event of a food-borne disease outbreak, it could take days, or even weeks, to identify the source. Enhanced traceability is crucial — it could save lives by enabling swifter action as well as protect farmers by limiting the disposal of produce from the affected areas only.

To address this challenge, Walmart Canada launched a pilot program in January 2019 aimed at creating a blockchain network between itself and its carrier partners to enhance traceability. The program, known as IBM Food Trust, was fully rolled out in March 2021 and now enables the tracking of food deliveries from production to the end consumer in seconds — a substantial improvement over the previous average of seven days with manual tracking methods.

Other corporations that transitioned from traditional supply chain systems to blockchain include the FDA and DHL for pharmaceutical tracking, De Beers for diamond tracking, and Honeywell for aerospace part tracking. Honeywell, in particular, offers its customers an exceptional marketplace for searching for refurbished hardware with the assurance of accurate historical information, all underpinned by the reliability of blockchain technology operating behind the scenes.

Figure 8. Image of the GoDirect Trade screen and storefronts

Identity management

Blockchain technology revolutionizes identity management by shifting the focus from reliance on a single authoritative entity to empowering users with control over their own identity credentials. This decentralized model reduces the vulnerability inherent in systems where one authority holds all the data, instead allowing for secure, direct authentication methods. Users gain the ability to responsibly manage and share their identity information on a need-to-know basis, enhancing privacy and giving individuals true ownership of their personal details. This not only strengthens security but also simplifies the authentication process, enabling more rapid validation mechanisms and less associated costs.

Numerous organizations, including government bodies, have already transitioned to digital identities. In the forefront of this shift is NationWide, a major British insurance company, which spearheaded the formation of the RiskStream Consortium. This consortium has brought together 30 insurance companies to participate in a blockchain network dedicated to sharing documentation and policy data in real time, thereby guaranteeing instantaneous proof of insurance for their customers.

In practical terms, the primary advantage of this blockchain-based system is that customers involved in an accident can resolve disputes effortlessly and without the delays inherent in traditional methods. Historically, a victim of an accident would be required to contact their insurance company to report the incident. They would then need to provide all necessary information before the company could reach out to the other party involved to resolve the dispute — a process that could take days. Moreover, there's always the potential for misinformation or fraud in the details provided by either party.

The innovative blockchain system allows customers to address the dispute in real-time, directly with the other party involved, bypassing the need to go through the insurance company. This not only accelerates the resolution process but also offers the added assurance of verifiable proof of the other party's insurance validity and the specific benefits of their insurance contract. Such immediate and verified resolution significantly simplifies and expedites the traditionally complex and time-consuming process of settling disputes following an accident.

Governments, including Thailand’s, are pioneering the use of digital identities to expedite the validation process for citizen identification, such as during passport control at borders or police checks on roads. With a single digital identity, multiple records — like a driving license or passport — can be securely stored and accessed, making verification processes effortless. This consolidation streamlines various bureaucratic procedures, enhancing efficiency and user experience. As this technology gains traction, we can expect to see a surge in its application across different domains, including digital and remote voting systems in the near future.

As blockchain technology continues to be widely adopted by enterprises for its numerous benefits, it has inevitably attracted the attention of malicious actors. Breaches of blockchain networks can lead to significant financial losses, the exposure of sensitive personal or proprietary information, and disruptions in service. In the third and last part of this series, we will explore the security threats associated with deploying blockchain networks in business organizations and provide recommendations to address these concerns.