Do Blockchains and Consortia go Together like PB & J?

April 1, 2019

Susan Joseph (JD/MBA) is experienced in all aspects of blockchain, smart contracts & value transfer relating to consortia, finance, tokens, insurance, supply chain, RE, identity & n-f-p. This article looks at consortia as the wave of the future to drive adoption of blockchain technology.

Over the past few years, there have been many high profile consortia formed to address blockchain technology. Deloitte estimates there are more than 40 consortia globally. Many are significantly funded by participants within or across industry verticals, VCs or a combination. What is it about the technology that creates such a favorable environment for consortia formation and participation?

First, the technology itself demands collaboration. Blockchain architecture provides an internet communications layer that can securely transfer value between non-trusting parties across a decentralized network(s). These networks are secured by cryptography. They incorporate both governance and incentives to keep the networks running, growing, and free from systemic risk. As networks grow, there are more users and transactions, and network effects occur which render both the network and the underlying technology powering it more valuable.

Next, this technology is in its early days. Much learning, and many trials, debates and discussions are occurring globally as it is being developed. The advantages of joining a consortium abound. A consortium naturally provides the mechanism around which a community can explore and coalesce. In the early stages of a networked system, community building and engagement are a large part of what needs to occur. A consortium provides the platform for partners to be guided by experts, engage in innovative practices, explore different ways of thinking and applications, share skills, experience and expertise, and access additional competencies. It also is a vehicle for everyone together to bear the risk and cost of cutting edge research and experimentation.

Organizations are well served to band together and collaborate in a consortium to become current as blockchain technology has an initial steep learning curve. Consortium members then have a ready-made platform to stay current, can together look to the future as the technology evolves, create strategies to defend against threats, and begin to prepare to implement or create platforms, frameworks, and solutions. The developing ecosystem can invite additional players ranging from startups to well-established entities to participate. Blockchain is a team sport. A consortium is the preferred organizational structure to join because it serves all of these concerns well. Additionally, a consortium provides a platform for a coordinated and augmented voice.

Further, if a few of the leading players across industries or a majority of your industry join consortia, there can be substantial market FOMO. This is not a case of “fools rush in”, but rather the place where smart money goes. Smaller players can benefit from working with the larger players as everyone will participate in the costs of research and learning. As the technology gathers wider support and momentum, standards will evolve that help facilitate transactions, and consortia members are well placed to develop and help bring those standards to life to encourage adoption. Any stragglers may have a hard time catching up and suffer real losses as a consequence as a network and network effects take off.

There are also concerns with consortia. After all, you may be collaborating with some of your direct competitors. Relationships must be carefully navigated to avoid antitrust violations. If time is an issue, understand that consortia and communities take time to cultivate and grow. Patience and a well-financed runway allow for this. Legal advice will be necessary to ensure the consortium structure and governance fits its purpose. Finally, consortia have to be managed, and the time and resources necessary should be available to support them.

As blockchain technology moves from embryo to mainstream, I believe we will see consortia emerge as a standard form of doing business. However, the consortia of today will not be the consortia of tomorrow because business needs of networked systems will evolve over time. While an individual consortium often stays within its lanes, we are beginning to see consortia increasingly explore working together which can further augment individual members and the group’s voice.

Consortia of Today:

What do blockchain consortia look like today? If we take a step back, we are familiar with the general business model of consortia. Many non-blockchain consortia exist already. We know them as trade organizations, standards boards, self-regulatory organizations (SROs), and other business entities. They have all formed around the belief that collaboration is the best solution for a group of participants.

In the blockchain world, while there are consortia focused on technology and consortia focused on business, consortia are increasingly becoming more hybrid in nature and dually focus on both building and operating platforms and the reusable technology standards to do so. However, it is worth pointing out as with any emerging technology, the pure technology focused consortia are very necessary, and are hotbeds of activity driving technological innovation.

While not an exhaustive list, some well-known consortia are listed below:

· R3 (financial services and technology)

· Hyperledger (technology)

· Ethereum Enterprise Alliance (technology)

· B3i (insurance/reinsurance)

· RiskBlock (insurance)

· TradeLens (supply chain/trade finance)

· InsurWave (supply chain/marine hull insurance)

· Climate Change Coalition (climate and energy)

· MOBI (transportation, largely motor vehicle)

· BankChain (banking)

· China Ledger (China, banking)

· FISCO (China, financial)

· FundChain (funds industry)

· HashedHeath (healthcare)

· HUN (healthcare)

· Japan Exchange Group (Japan, banking/finance/capital markets)

· Marco Polo Network (trade finance)

· Post Trade Distributed Ledger (PTDL) (finance/markets and infrastructure)

· SAP consortia (High Tech Industry, Life Science and Pharmaceutical Industry, and Consumer Goods, Retail and Agribusiness

· CULedger (credit unions)

Some of these consortia are stand-alone for-profit, some are not for profit entities, and some are loosely formed initiatives that are not separately incorporated. There is no one right format for a consortium, just like there is no one right way to form a business. The format chosen should reflect the broader mission, empower what is to be accomplished, and encourage community and ecosystem development.

What Legal Concerns might a Blockchain Consortium face?

Consortia are often legal entities structured as joint ventures, though they can also be structured as not-for-profits or informally organized initiatives. All have legal concerns. Putting in the proper governance and leadership of the consortium is paramount to its success. Antitrust issues are an overriding concern for consortia regardless of the form of business chosen. Typical legal issues include managing liability and risk, organizational issues, IP ownership and licensing, governance, ease and cost of formation, funding mechanisms and structure, duration of existence, membership rules and policies, jurisdiction, and tax liability. Decentralized groups in particular must agree on philosophy and technology choices as they build out their platforms and applications.

In an unincorporated business model, legally binding documentation is required to address cross license agreements, governance, membership, operations, and ownership rights. As the organization becomes more mature and complicated, it will likely shift to a more independent legal structure.

One often neglected point is that consortia are startups with startup issues. They are acting in the face of competition and coopetition. Many have short term financing in place. But, blockchain is a long term proposition. Often consortia are made up of an ensemble of former or current large enterprise innovators and technologists, and it takes time and education for the organization to gel and create the nimble structure and culture needed to work with emerging technology. It is important to work through at the outset whether the members have compatible working cultures and/or similar business values, and set expectations from the start. While big recognizable branded names may be a part of the group and lend credibility by association, the consortium itself must develop its own market, brand, and reputation through the products and services it offers.

Blockchain Consortia of Tomorrow:

The blockchain consortia of today are formed in an emerging market with evolving technology. We are in the “big bang” of the universe of blockchains; a dynamic and often chaotic environment. The needs of consortia in this uncertain environment skew heavily toward organization, community building and education. As the technology becomes more settled and mature, consortia will evolve. They will focus more on ecosystems, platforms and products, but will always have to focus on community. We are already seeing this type of movement and growth.

Consortia are trying to address interoperability between different types of blockchains as this has not yet been worked out. They are also looking at the user experience, integration with legacy systems, and creating ecosystems. Consortia themselves are exploring working together. The recent joining of forces between two very public technical consortiums, Hyperledger and the Ethereum Enterprise Alliance, heralded this trend.

As consortia increasingly explore working together, members benefit by their voices being further elevated and augmented. New products may be imagined simply because the consortium enabled a forum for new relationships and a vehicle for collaboration. Already the insurance consortia have been speaking with the transportation and supply chain consortia, the health consortia have been speaking with the insurance consortia, the finance consortia have been speaking to the insurance and mobility consortia, etc. Blockchain consortia are now so recognized as a vital part of the blockchain landscape that they have created their own dedicated conference for trade and receivables finance; the first for the industry. We can expect this trend to continue. Consortia are essential players in the blockchain space enabling conversation, learning, networks, product and ecosystem creation, and adoption.

Summary

Technology evolves both slower and faster than you think. Blockchain technology follows this pattern. Consortia provide networks that are safe places to experiment, learn and develop applications. They help encourage network growth, work within governance frameworks, aid in development, and both create and smooth the path for technology adoption. Joining a consortium makes sense when you want to explore and manage the technical and financial risk of learning about and engaging with cutting edge technology, and share the cost of research and development with others. It offers the ability to lead on the latest in technology developments and applications, learn from others you would not individually have access to, cooperate to streamline and reduce friction, and aggregate your voice. Equally, it makes sense to join one as the technology evolves and matures, and networks drive the ecosystems. We will see many more blockchain consortia form and grow at a rapid pace as the technology picks up steam. Blockchain consortia are a preferred way to conduct business both today and as the wave of the future. Simply put; get to know them. They are here to stay.