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Why Blockchain Needs to be on the Radar of Every Board

by: Christopher Kinsler
Category: News & Announcements
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Apr
03

DISCLAIMER: The information in this article is not meant to provide any legal, tax/accounting or investment advice. Please consult with your own investment, tax, and legal advisor.

Introduction

"Blockchain: The Next Frontier for Boards"

Blockchain technology is rapidly gaining traction beyond cryptocurrencies, offering immutable audit trails and smart contracts. Companies must prepare by building knowledge, assessing opportunities, and understanding risks. Key themes include organizational preparedness, use cases & regulatory landscape assessment, balance sheet & security implications, and syncing strategic roadmaps. Are you ready to discuss Blockchain in your board meeting?

Background

Within the emerging technology space besides cloud and artificial intelligence one of the major buzzwords these days is blockchain. Especially since the Bitcoin halving event the introduction of Bitcoin and Ethereum ETFs in 2024, and the establishment of the President’s Working Group on Digital Asset Markets, the interest in the crypto and blockchain field has soared. But crypto is a lot more than just cryptocurrencies, it's broader. It’s about blockchain networks, immutable audit trails, and smart contracts.
So why should Blockchain matter to the board of a company?
Many people often compare the emergence of blockchain to the introduction of the Internet. If we go back in time and think of adopting the Internet, we find some similarities. In hindsight, we know the opportunities and risks and the vast changes the Internet has brought along over the past 30 years. Broadly speaking it's about a) are we prepared? b) what are the opportunities? c) what are the risks?
A) Preparing the organization for blockchain: Getting involved early in blockchain means building the knowledge that an organization needs to better understand how it can use blockchain to its advantage. It also means building the necessary ties to industry experts and suppliers who can supplement the organization’s knowledge.  It helps to secure talent that might be a lot more difficult (or expensive) to recruit later once blockchain has gained more traction and is further along the adoption curve. Preparing the organization for blockchain means a commitment to resources and budget. Hence, it's vital for the board to understand the implications of blockchain, and to review and approve those initiatives as it might draw resources away from other change or run the business programs in the enterprise. Being prepared for blockchain is the prerequisite for the next two reasons assessing the opportunities and the risks.
B) Assessing opportunities: the board should task its executive leadership team to assess viable use cases in employing blockchain that could be beneficial for the company now or in the foreseeable future. Ideally, the executive leadership team comes up with a strategic roadmap that covers the next 5 to 10 year horizon and is closely aligned to the existing technology roadmap of the organization. It's vital for the board to prompt the executives to benchmark their blockchain roadmap versus the competition and industry best practices.
C) Assessing risks: where you have opportunities you need to consider risks as well. Especially with emerging technologies risk review needs to be a substantial part of the process. The earlier on the adoption curve the company gets involved the greater the unknowns and the risks. It's critical for the board to be informed and comfortable with potential risks and their mitigation.

 

Key Themes for the Board

There are a couple of key themes that a board should inquire about with the executive leadership team when it comes to blockchain. These topics include preparedness, use cases, regulatory landscape, balance sheet, security, and finally the roadmap/timeline.

1. Preparedness: As already briefly touched upon in the previous section, preparedness is the prerequisite for any involvement in blockchain. The board must inquire from the executive leadership team to what extent knowledge exists in the organization related to blockchain and its use of it.
    1. Is there a dedicated team in technology? Or are the experts scattered throughout the organization?
    2. Is there only one single person subject matter expert (and potential key person risk)?
    3. Should the organization use any externals such as consultants or suppliers to collaborate?

It depends on the type of business to what extent blockchain knowledge is needed inhouse, but the fundamentals of blockchain knowledge should be organically grown in the organization. Blockchain fundamentals include expertise in how blockchain generally works, what kind of platforms exist, and what kind of general use cases are discussed in the respective industry. While procuring knowledge via external consultants or suppliers might be a short-term solution, organizations should be cautious about getting too dependent on consultants. Consultants or service suppliers might offer deep discounts because they themselves may still be on the learning curve and need project references. However, too much dependency on consultants without building internal knowledge will get more expensive over time, once consultants have built their expertise and charge full rates. Usually, it is the CTO of an organization to respond to the board as to the readiness from a knowledge perspective.

2. Use Cases: The most important foundation is the review of use cases. It determines if an engagement in the blockchain space makes commercial sense or not. The prerequisite for reviewing use cases is that the organization has acquired adequate expertise. For instance, as a start, the company could encourage interested employees who have some background knowledge about blockchain to submit use cases. The advantage is that employees usually know best how to improve and enhance their daily work. Another alternative is to hire consultants but that may turn out to be more expensive. (Especially as the consultants may have knowledge on blockchain but not necessarily know the intimate details about the production processes in the organization and hence need to be brought up to speed on internal processes.) Ideally, the technology department should build up some knowledge to drive the process of use case review with all stakeholders. It is important to benchmark those use cases against competition and industry best practices. Use cases can be categorized into three major areas:
    1. External use cases (e.g. supply chain, payments),
    2. Product use cases (e.g. revenue producing)
    3. Internal use cases (e.g. audit trails)

Depending on the use case areas, the CTO, COO, and Head of Product Development are the ones who should aggregate the proposals and report them to the board. The board should approve these use cases before any work starts because they might require a significant amount of time and resource investments.

Major questions the board should ask:

    • Why Blockchain and not any other solution? There may be many existing solutions already that could cover scenarios other than blockchain. It's vital that the use cases show how blockchain can be the unique solution and not just use blockchain for the sake of using something new that is trendy.
    • What is the value proposition / ROI? As with any initiative, the return on investment and benefit to the organization is key to being laid out to the board of directors. The executive leadership team should follow its existing process for initiative reviews. This ensures fairness and comparability with other contending initiatives. Usually, there should be a sponsor for each use case who will then lay out the business case and value add to the senior leadership team for presentation to the board for approval.
    • Which platform will be utilized? Blockchain can be implemented on a public or private network; it can be permissioned or permissionless. Many of the bigger organizations have opted to adopt permissioned private blockchain networks to better control access permissions and data.  The fundamental question to ask is what platform the organization intends to use. The platform choice will especially drive security measures, privacy, and data requirements.
3. Regulatory: The regulatory landscape in blockchain is still evolving, especially in the US, hence, it’s not as straightforward. Generally, moving forward, it is expected that regulation will probably be more favorable towards crypto and blockchain. More guidance is expected for the US in the crypto and blockchain field, which should give enterprises a better way to plan. Different regulatory schemes exist globally by country but even within the US, the regulation differs state by state. And the same applies to tax regulation. Hence, it is critically important that the organization’s legal, regulatory, and tax councils are involved in any blockchain initiative. These control functions should work closely with the initiatives. However, they should still report independently their view to the board on how the legal and regulatory landscape (and any changes in that landscape) may impact upcoming and current blockchain initiatives.

Important questions the board should ask of counsel:

    1. Are tax, regulatory, and legal counsel sufficiently involved in the projects? Do they have the required knowledge or does any specific subject matter expertise need to be procured from external sources?
    2. Were the regulatory environment and potential new regulations adequately assessed and are they being monitored for upcoming changes? Are there key dependencies on regulation that impact the execution of the blockchain initiative?
    3. Considering that blockchain transactions are immutable, which means they cannot be reversed, and any information written on the blockchain stands forever, data privacy takes a central point. The board should inquire if the data privacy officer is supportive of the blockchain initiative and has been involved throughout the process.
4. Balance Sheet: There's a vital distinction between just taking on a blockchain project which means building a platform, coding etc., as opposed to investing in cryptocurrencies and recording it on the balance sheet. The board should inquire about the following:
    1. What type of crypto investment is intended for the organization? A direct investment or an investment via an ETF (Exchange Traded Fund)? Does the organization's charter allow this type of exposure, and would it require board approval? The board should clarify with legal counsel to what extent it needs to review and approve such an investment/exposure or if it has already been approved previously in one of the board sessions.
    2. Purpose: Another question that needs to be clarified is strategically what is the purpose of having crypto on the balance sheet?
i. Is it to use the cryptocurrency for the treasury, e.g. as an inflation hedge or for diversification purposes?
ii. Is it to pay suppliers or to facilitate payments to legal entities in other jurisdictions?
iii. Is it part of a business process that the organization accepts payments in cryptocurrencies from clients?
iv. Does the organization need crypto currencies to run smart contracts?

For any of the above scenarios, the follow-up question is what kind of cryptocurrencies would the organization accept or use to pay? Also, note that any of the above will require in-depth legal scrutiny as to what is feasible depending on the jurisdiction involved. As to clients and suppliers, the question should also be answered whether they are even willing to pay or to accept cryptocurrencies.

c. Risk: The board should inquire from executive management how the organization intends to manage the associated market, operational, and credit/counterparty risk. Any of these three areas are critically important:
i. Market Risk needs to be managed due to the inherent high volatility of cryptocurrencies
ii. Operational Risk needs to be considered to ensure smooth processes, especially from a security perspective
iii. Credit and Counterparty Risk come into play if third parties are involved, for instance, custodians for exchanges, DeFi (Decentralized Finance) partners.

For the market risk, the board should inquire whether any stress testing has been done as to impact, if any cryptocurrency would degrade in price by certain percentage points. What would be the implications for the organization's cash flow? The question is to the CFO of the organization whether he/she is comfortable with the high volatility of the cryptocurrency. The CFO needs to determine whether the organization is still able to meet its payment obligations given fluctuations in the currency price. If the organization already handles foreign currency, then potentially some of the same playbook for managing foreign currency risk could be applied.

d. Conversion: An important aspect is the so-called ramp on and ramp off into crypto referring to the process of converting fiat currency (e.g. USD, EUR) into crypto and back. Various institutions such as exchanges offer to convert crypto into fiat and vice versa. However, the process and the implications of sending money from a bank account to a crypto exchange need to be fully examined and explained by the CFO as this will require counterparty analysis, may trigger reporting requirements, and some banks may be reluctant to provide these solutions.
e. Accounting: What are the accounting implications? Where on the balance sheet would the crypto assets be shown? Which accounting standard will be used? How will the movements of crypto assets be tracked? How will realized and unrealized gains/losses be accounted for? These are questions to the CFO / CPA of the organization. Since crypto transactions are recorded on the public blockchain the transactions will be visible to market observers. Anyone who knows the crypto address of an entity will be able to follow these payment transactions. Is the company comfortable with that?
5. Security If a company engages in the blockchain space, security will be an essential pillar of these initiatives. It's usually best practice that a CISO of a company reports regularly to a board about the company’s cyber security posture. If the company is involved in blockchain then blockchain security risks and landscape needs to be a part of the CISO’s regular update to the board. The CISO needs to explain the key security aspects of the blockchain initiatives.

Some of the key aspects the board should ask the CISO to explain are the following:

1) Storage: If an organization is holding crypto, where is the crypto stored? Is it stored on an exchange, at a custodian, or in cold storage? Each of these choices comes with pros and cons. The storage of crypto is a vital question that should be reviewed and approved by the board.
2) Access: How are the organization’s crypto assets secured? In other words, who has access to the organization’s crypto assets, and is any multifactor authentication used? Where are the private keys stored? How does the organization ensure continued access and not losing or exposing the private keys?
3) Transactions: What are the safeguards of moving crypto? Who has access to the keys? Is there sufficient segregation of duties and is there any key person risk accessing digital assets?
4) Guidelines: Are procedures and guidelines in place for crypto storage and transactions?
5) Platform Security: Hopefully the organization has already implemented processes to assess cybersecurity risks. The same process would need to be applied to a platform that is using or facilitating blockchain. However, there may be additional security assessments required on top specifically related to blockchain such as comprehensively auditing smart contracts, reviewing the consensus mechanism etc. The CISO should explain to the board which security assessments will be performed for the blockchain initiatives.
 
6. Roadmap/Timeline: All the points that we have discussed so far above pose a strong dependency on the timeline and road map of implementation. For each of the use cases, the question of time to market will need to be evaluated: By when will each of the use cases be implemented? Broadly, three major dimensions need to be considered:
    1. Adoption curve: Like every technology, blockchain runs through a cycle where you have early adopters to late adopters. This curve differs by use case. Ideally, the time to market lines up with the adoption curve of a particular use case. The board must be comfortable about being either a front-runner with all the risks and opportunities or a late adopter (usually coming with lower growth rates) at a time when risks and regulations may be better understood and manageable.
    2. Crypto cycle: If an organization plans to adopt crypto for the balance sheet or payment it may want to ensure that it aligns its planning against the crypto cycle. The crypto cycle roughly runs from one Bitcoin halving to the next Bitcoin halving (about four years). However, with broader adoption of crypto this cycle may change. Timing thelaunch to the crypto cycle needs to be discussed with respective crypto marketing experts and investment advisors.
    3. Dependencies: the road map presented to the board needs to include dependencies, which may trigger a pause or hold of an initiative. Such dependencies could include regulatory uncertainty clarity that is needed or certain technological developments. The board needs to understand if there is any interdependency with existing or other new emerging technologies such as AI (Artificial Intelligence), RPA (Robotics Process Automation), Quantum Computing, or IoT (Internet of Things). For instance, IoT can provide data feed into smart contracts so there could be a dependency for these ingestions to be available.

All the above should be presented as a road map to the board and in line with existing initiatives to ensure a holistic and fair view of the entire technology stack. 

Conclusion

Blockchain will bring impactful transformation that will reshape entire industries, supply chains, and organizational relationships with stakeholders. An organization must get ahead of the game by understanding blockchain, its implications, its use cases, and its risks. Involvement of control functions (e.g. CFO, CRO, CISO) and of subject matter experts such as legal, tax, and investment advisors are critical. As part of its governance and oversight, the board plays an important role by inquiring with the executive leadership team that the right stakeholders are involved and the organization’s capabilities are well understood to harvest the benefits, while managing the risks of blockchain.

 

 

ABOUT THE AUTHOR

HOLGER KLIESCH

Holger Kliesch serves as the Chief Executive Officer of Voonoogoo LLC, bringing more than 25 years of expertise in technology, project management, finance, and risk. As the founder of Voonoogoo LLC, he provides consulting and project management services to startups, financial firms, cybersecurity companies, IT and manufacturing businesses.

Holger’s extensive career includes positions such as Change and Program Manager in the financial industry, along with advisory and mentoring roles for startups. Holger is a certified Financial Risk Manager, a Certified Information Systems Security Professional, and holds various certificates in the Blockchain and emerging technology space.

Feel free to connect with Holger on LinkedIn at Holger Kliesch on LinkedIn.

 

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