In this video, we'll highlight how blockchain transparency can be a strategic asset. Lots of people see transparency as a state of complete openness and clarity. But what does transparency mean in the business world? Experts like Denise Parris, a professor of entrepreneurship, defines transparency as, the extent to which a stakeholder perceives an organization is providing learning opportunities about itself. The advent of the Internet or electronic documents and big data has vastly increased the flow of information. Now, anyone, from investors and consumers to trading partners and regulators, can find the answers they're seeking. Whether it's about other firms or governments, organizations or people. Over time, lots of these entities have learned to embrace this transparency and have used it in their favor. With blockchain technology, firms benefit from transparency both directly and indirectly. So, let's begin with the indirect effects of transparency. Indirect benefits help foster relationships growing in value over time. Establishing and publishing a code of ethics is a great first step to achieving this. It will inform employees and customers of what to expect from business dealings. There are five specific elements for a firm to achieve success through transparency. One, is creating true value that withstands scrutiny. Two, is understanding customers and building relationship capital. Three, is of course protecting consumer privacy. Four, is acting with integrity. Five is being candid about shortcomings. In lots of business dealings, the parties must trust that the knowledge gained about them will not be exploited by other parties. Sharing relevant information with partners and supply chain members quickly improves trust and can generally lift a firm's brand and reputation. These principles apply in a world where financial transactions and contracts are visible on a blockchain. As we discussed in the introduction, smart contracts are special-purpose pieces of programming code that are designed to mimic the terms of a business agreement. This means that the information is verifiable and irreversible. A radical case of transparency was the Decentralized Autonomous Organization, also known as The DAO. We discussed The DAO in another course. So, The DAO was set up originally as a sort of venture funds where all DAO investments and really the entire governance were made transparent by design. The underlying code was open source and was visible really to everyone. In theory, owners of DAO tokens were to vote on whether to fund proposed projects. Now, unfortunately, there turned out to be a more serious flaw in The DAO code which would ultimately lead to its demise. However, it did provide some valuable lessons and transparency in blockchain governance. One example of how the hard information stored in a blockchain can help some entities is with government corruption. In the current world, it's nearly impossible to reveal all of the governments transactions and business dealings with any credibility or efficiency. But with all transactions and contracts recorded on a blockchain, nothing remains hidden. Money and contract terms can be traced. So, that lends to the credibility of the government in question. Recording transactions and holdings on a blockchain also has lots of direct procedural advantages in market interactions. As we called out in previous sessions, it's sometimes difficult to know who exactly traded certain assets like corporate bonds, or who holds the securities when they're arranged offline by dealers in offline transactions. Greater transparency in this market could increase liquidity, could improve price discovery and ultimately reduce origination costs for new issuers which would be a boon towards entrepreneurship. But of course this is not just for finance. In many countries today, land ownership titles can be forged, stolen, or even recorded incorrectly. Corporate income statements can be manipulated. Option grants can be backed dated. None of these data can be manipulated in such a way when recorded on a public blockchain. Transparency can bring about corporate governance by preventing empty voting, insider trading, or even reduced counterparty risk. Let's look at one of these phenomenons, empty voting. It's when an entity gets to vote on economically meaningful decisions without having a monetary stake in the firm. You might assume voting rights require some kind of monetary stake, but derivative contracts don't make this so. Ownership attribution through blockchain not only shows who owns the stock, but also ensures voting rights are justified. Although insiders must announce trades and holdings, the delays in reporting give dealers and active traders an edge. Trades recorded on a blockchain will show all their transactions that transparency would remove the costly reporting and increase public trust. Now, traditionally, a centralized intermediary acts as a go-between to clear trades and absorbed some risks. This is a bit of a double-edged sword. The intermediary, let's say clearinghouse, can go belly up if not properly monitored, if not well capitalized, and if not well regulated and can cause a chain reaction through the entire financial system. Blockchain on the other hand, enables a market-based solution when all financial obligations are visible. Often the failure of one single company or marketplace can create systemic risks. Remember, Enron, Long-Term Capital Management, Lehman Brothers, how would the marketing have reacted if those firms were more transparent? Altogether there is a solid business case in favor of transparency enabled by blockchain. These advantages go beyond addressing concerns arising from the front-page scandals. Privacy of corporate entities is already limited especially compared to that of individuals. According to a recent IBM study of C-Suite executives, the vast majority of executives who adopted blockchain believed that technology will create more trust. Traceable audit trails of past transactions can now serve as building blocks for company's reputation going forward.
