Lisa Niemeier, a family wealth consultant specializing in family governance and managing member at graymatter Strategies, explains what exactly blockchain is and how it is likely to revolutionize the family wealth space.

Family businesses and family offices tend to take a “wait and see” approach to new technologies, both to determine the extent their businesses will be impacted and to the manner in which they will assimilate them into their processes. With blockchain, they may not have that luxury.

Blockchain. A single word that connotes the biggest, most imminent upheaval in the way we function since the advent of the World Wide Web in 1990. It’s the harbinger of the future for businesses large and small, beyond the realm of financial institutions. Like the internet itself, blockchain is out to change almost every aspect of life as we know it. Big firms are just beginning to grapple with what it might mean for them; what, if anything, will it mean for family businesses? And further, for family offices?  

Families who keep a close eye on developments in technology are scrambling to grasp the implications. They already know that time is of the essence.  

“What is most dramatic to me is the speed at which the adaptation of blockchain technology is accelerating across all sectors. The private trust company that my family helped create is definitely feeling the growing pains of this disruptive technology,” said Martha Fruehauf a principal at Sentinel Trust Company.  

What do these “growing pains” consist of? What new risks could a “wait and see” approach introduce? What opportunities could families be missing?

Blockchain in plain English

First, we have to translate into plain English what blockchain really is. Imagine a chessboard. It has a standard number and arrangement of blocks and a standard set of play pieces that occupy those blocks in a commonly recognized and agreed-upon order. Any number of strategies can be deployed using those pieces within the agreed-upon protocol and individual capabilities; the various sequences of positions they may take within that standard structure are completely in the hands of the people making use of them.  

One could say the chessboard is the internet, the structural “place holder” for the pieces. The World Wide Web was the first overlay consisting of “playing pieces” called web addresses. Adoption of the internet and the Web became prolific, yet everything was still conducted in a centralized fashion. Banks may have moved the majority of their transaction capabilities online, but even now they are the ones who control access to the money. They are an intermediary to any transaction conducted, online or otherwise.  

The centralized oversight of the banks is like the arbiter of a chess competition: they ensure the integrity of the transaction—or in the case of the arbiter, the integrity of the play. What if there was no need for an arbiter? What if each set of moves were digitally recorded as they were made—all in full view of an audience—and a token assigned to serve as a locator for verification that a) the play actually did take place and b) the rules of play were indeed followed?

That is how blockchain functions. But its adoption will happen even faster than the Web—with lightning speed. Direct verification occurs mutually between the two players because the transaction resides on the blockchain with an identifier, eliminating the need for an arbiter. Complete trust is ensured because play was recorded as it happened and the manner of play was witnessed (verified) by members of a community of interest. Each set of moves is followed by another set of moves, creating a “chain” of plays in which each previous play with its own identifying token is included until the entire game is chronicled. Or the entire tournament. Or a single player’s career. Or a team of players for as long as they agree to play together.  

Blockchain applied to business

It may seem like blockchain is the latest, greatest, new kid on the technological block. But the development of decentralized technologies began some 30 years ago. Thor Olavsrud, a senior writer for CIO.com, likens its importance to the advent of double-entry accounting at the outset of the Italian Renaissance, the first system that enabled business people to verify the integrity of the transactions recorded in their financial ledgers. Blockchain developed slowly and had little notoriety until Bitcoin hit the scene in response to the 2008 financial crisis. With so little trust in any aspect of the financial system, Bitcoin brought the cryptologic aspects of blockchain out in the open, causing it to go mainstream.  

So much so that case use for the technology expanded outside the realm of cryptology and a decentralized ledger. Blockchain has become what William Mougayar describes in his recent book on how blockchain will impact business as the “trust layer,” the second major overlay of the internet. According to Mougayer, “…blockchains are greater than the sum of their parts.” As a set of chess moves encompasses the philosophy, culture, and ideologies of the game, blockchains in like fashion encompass philosophical, cultural, and ideological underpinnings of the businesses involved, not only the transactions they conduct.  

Much as the digital recording of plays in our chess game offer an alternative to the arbiter, blockchains form an alternative to the Web. They are more efficient, do not require trust in a malleable third party, and equalize the playing field. They can offer small businesses access to services formerly held predominantly within a large business domain.  

Blockchains have protocols that set forth the rules of engagement; cryptology and a wide network of verifiers ensure the integrity of the data; trust is the DNA of the platform. The resulting “Trust Protocol” is a consensus-driven ledger of accounts, database, notary, sentry, and clearing house, according to Olavsrud.  

Private versus public blockchains

Rather than view blockchain as a construct of a large institution, we must pay attention to what are called various use cases and the creation of private blockchains. Blockchain stands ready to upend much more than financial behemoths. It promises to change the way supply chains function; how contracts are created, signed, and fulfilled; and our entire definition of trust—aspects of business that we all deal with every day.  

In his book, Mougayar states: “The blockchain is a force much like the internet was: it will change the face of business…it will replace legacy businesses that cannot loosen their grips on heavy-handed centrally focused trust functions.” This is why family businesses have to pay attention now or they will be left behind.  

The trust layer “infuses a human element to a technology that will change the way we do everything.” Blockchain’s DNA ensures the security we want in a way that guarantees those functions will remain uncompromised “even if the actors involved are corrupt.”  

Large businesses were not the only ones to adopt the internet. Everyone adopted the internet—businesses, most certainly, but the internet through the World Wide Web also gave rise to new forms of communication and interaction called social media, around which even more new business models were built. Businesses took the Web inside to form intranets that support their cultures and foster better communication and interaction among employees.  

This holds huge implications for families. As has been noted previously, the possibility of creating a private blockchain within a family with 50 to 100 members or more could change the entire landscape of family governance, trust creation, and investment, expanding blockchain creation from the landscape of large firms to family businesses and internally to bolster trust within the family. This type of use may seem far into the future, yet it may be closer than we think.

Companies and organizations are already forming to enable the creation of private blockchains. This opens the door to unlimited opportunity for family businesses. It’s a new generation of business functioning. If you are a family business reading this article, quickly think of your most inefficient process. Now consider what it would mean for your business to cut out the intermediaries and go directly to the source or supplier at the end of that process. Think of the benefits you could offer your customers or clients as a result—benefits you may only dream of—or ideas next generations of your family have brought forth but the possibility for which conditions currently seem either impossible or unfeasible.  

Blockchains for family offices

The family office is another entity a private blockchain could transform. Firms already exist that offer super secure online services for families such as document storage, permissioned access by advisors or select family members to online vaults, and private interfaces between family members. It doesn’t seem much of a stretch to think such companies could organize a consortium of family offices and create a private blockchain to serve their needs on a “members only” basis.  

Family peer-to-peer groups have grown in popularity over the last decade or so in which families share such private information as their portfolios or estate plans in an effort to get feedback and advice. Families also decide to trust other families they may not know but have vetted for the purpose of doing deals together. Why shouldn’t they form a group to create their own blockchain? Security, privacy, efficiency. That’s what blockchain promises. That will be the new world of doing business.