Bane or boon – The growing use of blockchain in telecommunications

7 April 2020 |  David James, Practice Leader, Wholesale Telecoms, Omdia

Transforming from hype to real use cases

Blockchain is a technology that is based on a type of distributed ledger. A blockchain consists of a network of nodes that maintain a copy of the ledger which is updated with each transaction. Data from each transaction is encrypted and broadcast over the blockchain network. Each node of the blockchain network updates and stores the broadcast information in a sequential order to form blocks, and each block is interchained to the subsequent block. 
The transactions once stored in a blockchain network are immutable, hence the information is secure and trustworthy.

Blockchain has existed for over a decade. Despite all the popular hype around its use in cryptocurrencies, many companies and industry bodies are now exploring potential business applications for the technology. There are blockchain trials in areas such as payments, processing and settlement, microtransactions, asset management, identity and access management, and automated compliance.

The benefits of using blockchain in these areas include cost reduction (through the removal of central agencies and intermediaries), new business model generation, and tokenization (replacement of traditional fiat currencies with those of blockchain investors and founders). Many of the most developed use cases involve financial transactions. However, due to the inherent security attributes of decentralized, redundant ledgers, hashing/encryption, and other privacy-preserving techniques used by blockchains, security-related applications are also significant.

Carriers look to blockchain to reduce fraud and streamline settlement

Telecoms fraud is big business. The Communications Fraud Control Association (CFCA) estimates that telecoms fraud totaled over $28bn in 2019, much of which is related to international traffic. This is an area of particular concern to the ITW Global Leaders' Forum's (GLF's), which is made up of leaders of the world's largest international carriers. The GLF was created to provide a forum for the discussion of strategic issues and to facilitate industry collaboration to assist growth of the international telecoms industry. An important recent GLF initiative in this area was the agreement of a code of conduct against fraud. 
Fraudulent activity adds to the complexity of accounting for, and settlement of, payments between carriers for international traffic.
Inter-carrier settlement can be a particularly complex and time-consuming process, especially when it involves currency exchange, multiple parties, disputes, and potential fraud. In an attempt to mitigate many of the operational challenges experienced by international carriers, the Global Settlement Carrier (GSC) Forum meets twice a year, focusing on those challenges related to fraud prevention and mitigation, credit risk reduction, and the efficiency and accuracy of inter-carrier settlement. 
The GLF, GSC, MEF, and other industry bodies have encouraged trials and proofs of concept (POC) blockchain use cases. Some of these POCs aim to reduce fraud by quickly preventing or identifying illicit activity. Others use APIs and blockchain to automate and accelerate carrier interconnection and settlement for on-demand services. Although there is generally poor understanding of the strengths and limitations of blockchain, these trials have demonstrated the benefits that can accrue to carriers willing to take those first steps toward investigating how blockchain can help their businesses into the future.

Opportunities to apply blockchain in IoT scenarios

Omdia sees strong potential for the use of blockchain for security, identification/authentication, verification, and record-keeping. Early use cases are likely to include IoT applications in transport and logistics, and agriculture. We have also seen interest in using blockchain to enable 'smart contracts' (also known as self-executing contracts) created between machines as IoT-enabled machine-to-machine transactions take place. Smart contracts are a series of if-then statements defining a set of conditions that must be met to authorize payment for a transaction. This contract is written into the blockchain, and when the conditions are met – verified by the blockchain itself – payment is issued automatically.
While adding blockchain can assist identification and secure recordkeeping in IoT transactions, it is not an appropriate solution for all IoT transactions.

The question is whether the value of eliminating the friction point for a particular workflow in IoT is worth the investment in implementing a new technology and in dealing with new complexities. For more widespread adoption of blockchain as part of IoT deployments, the technology needs to overcome two main technical challenges; scalability and interoperability. The longer a specific blockchain is in use, the longer its chain gets and the cost of sustaining the blockchain can rapidly escalate, both in terms of storage required and compute time.

Although there are some technical and business standards for specific use cases such as international trade transactions and smart contracts, at present different versions or variants of blockchain are fundamentally incompatible with each other. Barring regulatory intervention or concerted industry pressure, there is little likelihood that different blockchain consortiums will make their technologies work with one another.

Collaboration and cooperation are key to benefitting from blockchain 

Although there is a lot of interest among leading telecoms wholesalers in the use of blockchain in smart contracts and inter-carrier settlement, there is also a healthy degree of skepticism. The proponents of blockchain technologies promise greater transparency, traceability, and security, through the use of distributed and immutable transaction ledgers that create a "shared source of truth among parties." However, questions remain about the technology's ability to scale and provide the necessary "telco-grade" resilience. Furthermore, the lack of standards and regulation, particularly for interworking between different blockchain implementations, and between blockchains and existing systems and processes (such as SWIFT), raises serious concerns among carriers.

Blockchain certainly has potential as a tool in carriers' digital transformation as they seek to reduce costs, delays, and fraud. However, many issues still need to be resolved before we can expect to see widespread adoption of the technology in inter-carrier contracts and settlement. More industry collaboration is required to help shape the development and adoption of blockchain in international telecoms.

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