Last year we have seen increased blockchain activity across various industries worldwide. This was mirrored in an even greater number of trials, proofs-of-concept and prototypes, as well as the growth of financial consortiums. Financial firms are thereby leading the way.
Many banks and other financial institutions have entered the blockchain area for fear of missing out, investing heavily in research, proof of concepts, and pilots to gain blockchain know-how. Despite many successful trials, up till now they have not led to real-world use. We are still waiting for the first important blockchain application to make a real impact.
Notwithstanding Gartner noted that the path to broad blockchain adoption looks “strikingly well paved” with the company projecting the business value-add from the technology to grow to US$176 billion by 2025, why have we not yet seen commercial application of blockchain?
“Last year ended with a big bang for blockchain in banking, but now banks and their executives need to tread carefully when adopting the technology, as they enter the hype stage of a technology that is still maturing.” Forrester survey
Lack of commercial use cases
Blockchain technology lacks clear commercial use cases in finance. Financial services firms that arguably have the most to gain from blockchain in terms of cost savings, increased transaction speed, and simplified processing, are still staying behind expectations in real world acceptance.
Many projects are facing growing pains. Until now, and despite hefty investments from banks and other firms (banks have spent millions on blockchain technology), most of the trials from 2015-2017 have been cancelled or stalled. According to a recent research paper, only 8% of projects started still survive or are in the waiting room. That means that 92% of blockchain projects failed or were started just as an experiment.
This shows how hard it is to go from lab to production. Pain points include the difficulty of choosing the right problem to work on, the risk of operating in a regulatory uncertain area, but also the struggle to get senior management on the blockchain wagon as well as the required partners on board.
Important question is: at what stage is blockchain technology in the Gartner Hype cycle? The technology consulting firm recently published a number of interesting and insight-giving research papers that could give some clarity.
Gartner CIO survey
An interesting research to rely on is Gartner’s CIO Survey “Blockchain Status 2018: Market Adoption Reality” launched early April.
The report points out the value proposition for blockchain remains poorly articulated and not clearly visible to the business, especially when compared to existing similar technologies. The report also notes CIOs from telecommunications, insurance and financial services are more active in blockchain planning and experimentation than those from other industries.
According to the 2018 Gartner CIO Survey:
- Only 1 percent of respondents have any kind of blockchain adoption, with only 8 percent of respondents in short-term planning and executing pilot projects.
- Seventy-seven percent of respondents, meanwhile, say their enterprise has no interest in the technology or have no plans to investigate or develop it.
- The CIOs in the survey noted the shortage of blockchain skills as a major challenge. Eighteen percent say that blockchain skills are the hardest to find.
- Fourteen percent indicate blockchain requires the greatest change in the culture of the IT department, while 13 percent indicate that the structure of the IT department had to change in order to implement blockchain.
At some point in the next two years, Gartner says the regulatory landscape will start to influence the speed and depth of activity around blockchain.
In its Survey Gartner recommends CIOs “to prepare a single slide briefing note for the executive committe" that will make a case for development of use cases for blockchain, even though these will have short-term business value.”
“Blockchain may be immature but this does not absolve enterprises from the responsibility to identify how it will disrupt their industry in the future.” “The findings show enterprise executives need more help in understanding what blockchain is and how it can be applied in the business and technology context.”David Furlonger and Rajesh Kandaswamy, Gartner
Commercialisation efforts take time
There is no lack of initiatives and bright expectations about what blockchain could mean for banks and other financial firms. Banks could use blockchain technology for anything from recording and updating of customer identities, global payments, trade finance to post trade processing including clearing and settlement of securities.
According to Management Consultant Deloitte, commercialization efforts around blockchain take considerably more effort than merely “getting over the technology hurdles”. Particularly in financial services where the various players work in an ecosystem, rather than just by themselves, they need to sort out the governance issues, including knowing the different parties, creating a commercial model that allows pooling of data together, as well as giving the appropriate level of access to the data by the different member within the ecosystem.
“Exploiting blockchain technologies to the fullest extent will require enterprises to creatively deconstruct current business models.” Gartner report: “Predicts 2018: Top Predictions in Blockchain Business”
Challenges to overcome
Blockchain technology adoption has stalled for a variety of reasons. The first is that most bankers still don’t have a clear business case for using and commercialising it. There are also concerns about security, legal issues, and the immaturity of the technology itself.
Several key challenges remain as hurdles for the commercialization of blockchain. Next to the scarcity of blockchain skills, there is still a lack of standards around the technology. And much work has to be done towards understand how to integrate and coordinate multiple blockchains within a single value chain.
Emerging of blockchain ecosystems
Another complicating factor for commercialisation is the emerging of new ecosystems for blockchain in the coming years. While most of the action in the space so far was driven by large and progressive banks, in 2018 and further, leaders, early adopters and fast followers alike will participate in blockchain ecosystems making them more scalable and diverse.
These ecosystems will go beyond bank-and-bank partnerships to large networks comprising financial and non-financial entities, such as suppliers, regulators, trade associations, entities that are closely associated with banks, such as clearing and settlement houses and brokerages, and shipping and logistics companies.
“The technology itself is nascent, and nobody has yet developed the governance models that form the foundation for a functioning ecosystem. ”Jost Hoppermann and Martha Bennet“
“These decisions are often decided by the group and not the individual participants in the ecosystem.” Paul Sin, Consulting Partner, Deloitte
At what stage is blockchain in the Gartner Hype Cycle?
According to Gartner, blockchain is poised to create one of the most transformative and dramatic impacts in the next five to 10 years, but multiple business cases are yet to be proved.
The company says that we have gone through the first phase of blockchain use, the ‘irrational exuberance’ phase or in Gartner’s terms the stage of “peak of inflated expectations” where blockchain may not (yet) create sufficient value.” And now we are reaching the phase of “disillusionment”.
During the first phase of the blockchain hype cycle, heavy blockchain activity in the industry is seen with significant experimentation with blockchain across the financial industry around the world during 2017. Many bank executives have shown an oversized degree of enthusiasm that triggered high investments. Blockchain has proved to be a successful use case in some proof of concepts, but the technology is still not “enterprise ready”.
According to a Gartner survey, 66% of respondents believe blockchain is a business disruption and have set budgets accordingly; 5% of those surveyed said they will spend over $10 million on blockchain, however CIOs and IT leaders will need to evaluate where the investment makes the most sense for their organizations.
"Blockchain-Based Transformation: A Gartner Trend Insight Report"
Gartner recently published its second special report on blockchain, "Blockchain-Based Transformation: A Gartner Trend Insight Report".
In this report Gartner looks at both the long term potential and current market adoption realities, how blockchain can apply to industries, vendors and business functions, and look deeper into facets of blockchain’s technology evolution.
Gartner does not expect large returns on blockchain for financial institutions until 2025. For these corporates it means they will have to try different blockchain projects to determine if there is value for them in blockchain — that is, whether there will be new revenue possibilities, cost savings or improvements in their customers’ user experience.
However, obtaining that value may require organizations to wait until the technology is more robust, is more reliable or requires less custom development. As with other waves of technology-driven business transformation, blockchain disruption will likely come from small risk-taking ventures entering the market with real-world blockchain applications rather than from established, risk-averse companies, according to Gartner.
I am still a great blockchain believer. Being an optimist, I think that the wild thoughts about the potential of blockchain use cases will enter a stage of more realistic approaches. And that this will result in lesser but more viable projects.
According to Deloitte, we will see the following trends for the blockchain technology in the coming years. Blockchain development resources will be focused on use cases with a clear path to commercialization. Second, there will be a growing push for standardization in technology, business processes, and talent skillsets. And third, there will be intensified work to integrate and coordinate multiple blockchains within a value chain
I still believe that finance is one of the more compelling use cases for the blockchain technology. Trade finance and cross-border applications will thereby remain two main areas of focus, and we will almost certainly see solid progress in these applications over the next couple of years.
But I am also realistic and do not expect short term gains on a large scale. Blockchain could one day disrupt the finance world, but that will take at least another five to ten years.