Data: Blockchain's course correction

August 29, 2018 11:23 AM

Blockchain technology is a hot topic, generating such frothy interest at one point that the soft drink company Long Island Iced Tea changed its mission and its name to become Long Blockchain Corp. to ride the wave. Due to the distributed ledger technology's roots in supporting bitcoin payments, the financial services industry leads many other sectors in blockchain experimentation.

However, recent studies indicate very few organizations have adopted blockchain technology for any meaningful day-to-day use.

A change could be afoot, with several banks and financial services providers announcing significant blockchain projects in the last few weeks leveraging distributed ledger technology and digital tokens. Here's a look at the current status of blockchain and the obstacles to adoption, from the perspective of executives at financial services companies and other organizations.

Banks initially thought blockchain would be most effective in cutting costs by eliminating redundant tasks, by using secure distributed ledger technology to replace paper and other manual processes required for cross-border and supplier payments.

Financial services organizations also envision new revenue streams from blockchain-driven services in securities, lending and loyalty. But use of blockchain technology has been slow to ignite. In its annual survey of global CIOs this year, Gartner found that across all industries, only 1% of companies are actively using blockchain, and many are still in the discovery phase. Gartner said blockchain projects in the banking sector actually declined this year over last year.

In a survey Deloitte conducted earlier this year, more than half of respondents cited the internet of Things as a top Blockchain use case, followed by digital identity at 50%, digital records at 44%, digital currency at 40% and payments at 30%. Deloitte surveyed 1,053 executives globally.

A fresh example came to light this week, with the announcement that Gazprom and Russia's S7 Airlines initiated their first blockchain-based smart contract for refueling a plane, in partnership with Russian banking partner Alfa Bank.

After recalibrating their expectations, executives still see the financial services industry as a future leader in blockchain development, according to Deloitte's survey.

The research firm asked financial services companies to plot their progress with blockchain technology, and about half said they were experimenting and creating proofs of concept, while 38% said they are building awareness and getting educated.

Eleven percent of financial services companies said they were actively deploying blockchain and using it in their businesses and 3% weren't sure. Deloitte surveyed 1,053 executives across seven top global markets.

The U.S. has attracted more attention than other global regions with its blockchain activity, but that's likely to change over the next five years, according a survey PwC released this week analyzing the state of blockchain technology.

About a third of executives surveyed say the U.S. is currently is one of the most advanced in blockchain development, but China will take over that spot by 2023.

Australia is somewhat more advanced than other global regions in terms of blockchain technology development, according to 7% of respondents to PwC's survey. The U.K. and India have similar levels of blockchain development expertise now, but India will surpass the U.K. within a few years, according to the survey. PwC surveyed 600 global executives in 15 global regions in April and May 2018.

Asia has many blockchain-development zones. Samsung this week announced a blockchain-based mobile certification platform for South Korean banks that would streamline customer verification through a single app.

Regulatory uncertainty is the top barrier for organizations contemplating blockchain projects, according to 48% of respondents in PwC's survey.

Regulators in many countries have begun to address cryptocurrency, and blockchain regulations are under discussion in many regions, particularly as they relate to financial services, according to PwC. But it's clear that before organizations can formulate their own plans, they must be confident of a supportive regulatory environment.

A glimmer of hope: The Reserve Bank of India has established an internal unit focusing on research and regulation of emerging technologies including blockchain, cryptocurrencies and artificial intelligence, according to a report this week in the Economic Times.

Trust and connectivity are the next most significant barriers for organizations working on blockchain technology, with 45% citing lack of trust and 44% mentioning the challenge of bringing networks together. About a third of survey respondents said the inability to achieve scale with a blockchain project was another major obstacle.

Apart from regulatory and technical issues, organizations face their own internal challenges to developing blockchain technology, according to PwC's survey. More than half, or 51%, of respondents said cost is the top reason blockchain ideas stall at their organizations, while lack of a clear benefit to users and resistance from corporate leaders also act as drags.

In financial services, blockchain has been pitched as a big-ticket solution to big problems, according to PwC's report, but cost must be balanced with benefits to the broader payments ecosystem.

"While the cost barrier is a significant hurdle for businesses, the survey results indicate that banks and other businesses are more concerned with regulatory uncertainty with relation to blockchain," said Alison Kutler, leader of strategic policy advising at PwC. "Regulators around the world want to support innovation, and they also want to prioritize consumer well-being and public trust. Businesses adopting blockchain technologies have to take into account this and other increasing regulatory expectations as they develop [and pitch] their products," she said.

IBM has taken a prominent role in blockchain early on, opening a blockchain innovation center in Singapore two years ago. Last month IBM unveiled details of a blockchain proof of concept in development, with Citi and Barclays among the participants.