It’s widely acknowledged that 401k advisors are far from technology wizards, with some still relying on outdated Excel spreadsheets for complex planning and administrative tasks.
A discussion of blockchain at the Kohler 2018 Conference, an annual retirement plan study group held each summer in rural Wisconsin, was therefore a decidedly uphill battle. Yet its possibilities piqued attendee interest.
Lisa Kottler, a FinTech and blockchain enthusiast and former senior vice president with NFP, noted that blockchain is the latest example of digital transformation.
“If the initial development of the Internet was 1.0, and companies like Amazon and Google represent 2.0, then blockchain is Internet 3.0,” she explained. “Will it deliver? It’s too early to tell, but it’s fascinating to watch.”
The concept hinges on a discussion of centralized versus decentralized sources of information and interactions; the former offers protection and efficiency, but also one point of entry and authority.
Kottler pointed to a now-famous whitepaper released in October 2008 by “Satoshi Nakamoto,” an anonymous person or persons credited with first identifying blockchain’s potential.
“It described a process to allow people to truly interact digitally. We interact on the Internet all the time, but any information and items passed along are copies of the original. It was a particular challenge with monetary interactions and the so-called ‘double spend’ issue, which was one reason digital currency like bitcoin was developed.”
As October 2008 was also the height of the financial crisis, the concept further fueled a push for decentralization away from big banks, Kottler added, “and now the same infrastructure that built bitcoin can be applied to so many other areas.”
So what exactly is blockchain? While no one definition exists, it’s described as a decentralized network that relies upon cryptography (called “proof of work”) instead of a trusted third-party to confirm transactions between network participants.
“In plain English, think of blockchain as a digital ledger of transactions, with a copy stored on every single user’s computer. Every time a new transaction takes place, a new record is added to the ledger, and an update is beamed out to the rest of the network in a peer-to-peer fashion.”
Kottler went on to describe some examples of its application:
- Supply chain—WalMart is employing blockchain technology with mango farmers. It allows the farmers to track a particular piece of fruit from harvest to consumption. A recent outbreak of bacteria involving romaine lettuce took weeks to identify and isolate, which negatively impacted everyone from growers to consumers. With blockchain, Kottler argued, the source of a similar contamination outbreak could be identified almost immediately.
- Healthcare—the patient has more control over records and items like prescriptions, as well as who can access them and how much.
- Government—Dubai is pushing to have all of its public documents and interactions involve blockchain by the year 2020.
“How do we use this with retirement plans?” she then asked attendees. “And should we use it with retirement plans?”
Plan-to-plan transfers was one suggestion, specifically involving the issue of qualified versus non-qualified money, and how to know which is which. It’s currently difficult to track, leading to an increased risk of inadvertently triggering a taxable event for participants, and corresponding legal exposure for sponsors and advisors.
Blockchain could therefore be used to “source those contribution dollars to eliminate the issue.”