Financial services still the main industry testing blockchains as technology promises to ease transactions and reduce errors.
Business spending on blockchain is rising as more enterprises to leverage the technology in automating and streamlining back-office processes. But its value as a technology investment remains unclear with enterprises in a “trough of disillusionment” according to one blockchain expert.
A survey done by consulting firm Greenwich Associates shows that annual spending by financial services firms on blockchain rose 70% this year to $1.7 billion.
“The technology is demonstrating value and gaining traction,” said Greenwich Associates vice president Richard Johnson, who presented the results at a blockchain conference sponsored by the CFA Society of New York.
But the spending levels vary widely. Most firms are spending less $500,000 on blockchain, but about 11% of the survey’s respondents were spending $10 million or more.
Blockchain, which is the underlying technology for cryptocurrencies such as Bitcoin and Ethereum, is being mostly taken up by the financial services industry, thanks to its promise of greater efficiency and reducing operating costs.
Johnson says blockchain, which is in effect a distributed ledger, “reduces errors and streamlines operations because everyone is looking at the same numbers.”
Likewise, blockchain promises to ease other financial services such syndicating banks loans, which Johnson says still uses fax machines.
In additional to global payments, trade finance tied for first place in potential blockchain uses, Johnson says. He cites the work of Maersk (Nasdaq OMX: MAERB) and IBM (NYSE: IBM) on the Tradelens blockchain platform, which aims to make container shipping more efficient, as one example of a blockchain’s use in easing trade.
“There’s a lot of complexity in facilitating global trade flows,’ Johnson said. “A manufacturer in one country may get a purchase order, then take that order to a bank to get a loan until the order is shipped. A lot of this document tracking can be done through blockchain.”
The increasing spending coincides with greater realization over the difficulties of using blockchain for many enterprises. Johnson says 57% of survey respondents found it more difficult than they originally thought to use blockchain in their business.
Despite the challenges, At least two-thirds of the survey respondents expect blockchain to deliver “meaningful change” in one area of their business within two years with nearly all seeing change coming in five years.
As with other technologies, blockchain “starts off slowly, ramps up with tons of press, then you come to the trough of disillusionment where things don’t move as quickly as possible,” Johnson said. “But after that usually comes a plateau where everything starts to click.”
Among business implementations of blockchain, JP Morgan (NYSE: JPM) is using the blockchain platform that underlies the Ethereum cryptocurrency. Johnson says Ethereum stands apart for its “smart contracts” feature which allows for greater automation than available in other blockchain platforms.
“Ethereum has one foot in the private enterprise space and one in the public network space,” Johnson said. “That can offer advantages when developing applications.”
Christine Moy, executive director of JP Morgan’s blockchain platform, says the problem facing many banks is that most blockchains, such as Bitcoin’s, were built to have all data shared among the users.
Public blockchains “don’t have the data privacy needed for banking transactions,” Moy said. “JP Morgan sought to solve the problem by taking the Ethereum blockchain and segregating our private data.”
In addition to blockchain’s use in back-office administration, cryptocurrencies are gaining more attention from businesses. Todd McDonald, a co-founder of enterprise blockchain firm R3, says cryptocurrencies offer “a new way for companies to raise money.”
He cites the example of online retailer Overstock’s (Nasdaq: OSTK) launch of coin offering, tZero, which raised money to develop a cryptocurrency trading exchange. Online storage company Filecoin also raised $25 million through offering a coin that it will use for payment of online storage services.”
“This is peer-to-peer capital formation,” McDonald said. “The distinction between public and private markets goes away.”