by Clint Boulton

Blockchain’s hype exceeds its grasp – for now

Jun 07, 2016
Financial Services IndustryInnovationIT Strategy

Broad adoption of blockchain technology is likely years away as companies struggle to understand how to apply the digital ledger technology to practical scenarios amid regulatory, governance and standards obstacles.

Blockchain graphic
Credit: Thinkstock

Blockchain has been touted by venture capitalists, technophiles and pundits as the Next Big Thing in computer science. The reality, however, is that the digital ledger software at the heart of Bitcoin and other cryptocurrencies has a long way to go before it gains mainstream adoption.

That was a key takeaway from a blockchain panel at last month’s MIT Sloan CIO Symposium. Noting that blockchain enables parties to ferry financial transactions, contracts and other digital records over the Internet, MIT professor Christian Catalini asked the panel about potential enterprise applications for the technology.

“Frankly, there’s not many right now,” said Anders Brownworth, principal engineer of Circle, which relies on blockchain for secure person-to-person payments. “The blockchain has been pitched as this thing that solves all of the problems in the world and frankly it just doesn’t do that.”

[ Related: What is blockchain and how does it work? ]

Such candor about blockchain may come as a surprise if what you know about the technology is culled from the media, which has accorded the technology with cult status. You can thank some of the world’s largest banks, such as Barclays, Bank of New York Mellon and UBS, which have anointed the software as the future of custody settlements. “Blockchain, as the digital ledger, will heavily impact the way we do business in the financial services industry,” then UBS CIO Oliver Bussmann told last September. You can hardly blame them, with the World Economic Forum estimating that 10 percent of the GDP will be stored on blockchains by 2025. 

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From last month’s MIT Sloan CIO Symposium are, from left to right, Anders Brownworth, principal engineer at Circle; consultant Peter Nichol; Intel architect  Simon Peffers; Matthew Utterback, co-founder of Rex Mercury. (Click for larger image.)

But the banks are outliers. Brownworth is right; there aren’t enough viable applications yet, according to experts.

Blockchain’s big hype, big challenges

PA Consulting Group principal Peter Nichol, who also participated in the MIT panel, told that people are also interested in using blockchain to establish chain of custody in supply chains — proving the provenance of goods. A blockchain-enabled mobile application might enable shoppers to scan barcodes of products at Whole Foods to determine the origin of products, down to the region, specific farm and perhaps even cows that contributed to a gallon of organic milk.

[ Related: 5 things you should know about the blockchain ]

But Nichol said that outside of high-worth goods, such as diamonds, most consumers don’t care enough about the provenance of most goods to warrant building such an app. With too few merchants or consumers using blockchain, adoption raises more questions than answers – especially in a corporate scenario where CIOs are called upon to show return on investment for emerging technology implementations.

Blockchain faces challenges beyond basic business practicality. The lack of universal standards and regulatory governance, a shortage of engineers schooled in working with the software, and questions about blockchain’s scalability dampen the technology’s adoption. For now, Nichol and other experts says blockchain is caughtin a hype cycle where it’s long on promise, short on practical implementations.

“There’s a long way to go before any of the solutions that have been in the headlines in the past 18 months will be ready for enterprise deployment,” says Martha Bennett, a Forrester Research analyst who advises clients on blockchain. “Anything that requires a large number of industry players to agree on a common set of processes is likely to be even further into the future; and that’s before we bring regulatory aspects into it.”

[ Related: CIO says blockchain ‘will heavily impact’ financial services ]

Bennett also tells that there hasn’t been enough rigorous thinking about end-to-end processes. Take provenance as an example: It’s one thing to track digital goods, but another to look at the physical world. For example, if you’re tracking something from manufacture to end customer, how can you make sure it’s not been tampered with?

You can’t, at least not yet. But Blockchain is hardly the first emerging technology for which hype has exceeded its maturity. Indeed, every disruptive technology platform with the potential for significant adoption or network effects, has had its trial by fire.

Consider Hadoop, the data processing technology developed at Yahoo a decade ago. Initially the plaything of hobbyists, a few startups commercialized the open source software and it suddenly became the go-to tool for crunching big data. Then companies realized they needed to hire people who could work with the software and that its strength was actually pre-processing data, not magically spitting out business insights. They needed data scientists to derive value from the software. Although it is now heavily adopted by many companies, Hadoop isn’t the be-all and end-all for big data.

Blockchain’s comparison to Hadoop in the hype context is fair, says David Schatsky, senior manager at Deloitte, who analyzes emerging technologies at Deloitte. Both technologies made things possible that weren’t possible before. He says financial services firms view blockchain as a way to conceive “know your customer” solutions, while travel and hospitality outfits see a potential avenue for loyalty programs in blockchain.

“It does have the potential of wringing massive amounts of inefficiency out of legacy business processes,” Schatsky says. “But there’s fundamental questions about different models – permissioned or permissionless blockchains, the governance of permissioned blockchains, and about scalability.”

How should a CIO tackle blockchain?

Nichol says CIOs looking to adopt blockchain must consider these question: How do CIOs sell blockchain to a CFO when the best they can promise is that top-line growth is a year or more out? How many practical use cases will come to fruition and with the business appetite to commit dollars to blockchain projects? “Until we get some use cases that are narrowed down a bit it’s going to be tough to do that,” he says.

Bennett says she advises CIOs mulling adopting blockchain to ask themselves whether they have a use case that calls for a cryptographically secured, distributed and replicated store of records. CIOs should then talk to companies that have actual solutions and review the ecosystem of blockchain start-ups, industry initiatives, consortia and consulting.

If CIOs are still interested they should allocate resources from their R&D departments to build proof-of-concepts. “Take into account the end-to-end process – having a few fragments of a solution doesn’t help,” Bennet says. “And think about the interface between the physical world and the blockchain.”