The blockchain revolution is here.
The technology long associated with Bitcoin is now being used to make businesses as varied as trade finance, videogaming, travel insurance, and diamond mining more efficient and more secure.
The blockchain revolution is also far, far down the road. If it ever comes.
Partnerships and initiatives featuring blockchain seem to be trumpeted every day. Projects that actually solve real-world problems are much rarer. The research firm Gartner surveyed 3,160 chief information officers this year and found that only 1% had put blockchain to work.
Take the Australian mining giant BHP Billiton (ticker: BHP), which announced in 2016 that it would use blockchain to track its supply chain, including the movement of rock and fluid samples. But after the company tested it in a pilot project, a BHP executive said this month that the technology “hasn’t reached the point of maturity where we think it applies to us.”
As the technology reaches what Gartner calls the “peak of inflated expectations,” executives and investors need to learn to assess the hype versus the real potential.
Businesses that aren’t already considering how to use blockchain to restructure their operations, particularly in finance and logistics, risk their software—and even their business models—becoming outdated.
“We really see this as transformative in the same way that the internet changed communication,” says Marie Wieck, general manager for blockchain at IBM (IBM), which has more than 1,500 staff members working on the technology.
Still, it’s a bit like trying to pick future winners and losers of the internet back in the early 1990s. Tomorrow’s Facebook—and its Pets.com—are not yet visible on the horizon.
What is this technology that has its proponents so excited? A blockchain is a database run by software that bundles information, protects it using cryptography, and stores it on the computers of participants. Akin to a ledger, it lets its participants interact with one another without using a central intermediary. As a result, transactions can be done faster and more cheaply.
It’s the absence of a middleman that’s the key to blockchain’s potential, contends Brian Behlendorf, the executive director of Hyperledger, an arm of the nonprofit Linux Foundation that has become a central player in blockchain development.
“Blockchain is not a technological solution to a technological problem,” he says. “It’s a technological solution to a political problem. A political problem within business. You don’t want a PayPal or an eBay or an Uber or a Facebook at the center of a lot of markets, because that gives a tremendous amount of power to those entities, greater than arguably even AT&T had when it was at the center of the phone market.”
The lack of central authority can also be an obstacle, however. Blockchains used by businesses tend to be permissioned—participants must prove who they are, and their access to information is limited based on their specific needs. Getting competitors to agree on terms can be challenging.
Today, the technology is growing largely through consortiums that allow companies to share the cost of developing software and make sure they’re building systems that will be compatible with one another. Those efforts have shown how blockchain can standardize business processes that are still largely paper-based or are using outdated technology, and how it can bridge gaps in industries where trust is a problem.
Blythe Masters, a former top JPMorgan Chase executive who is now CEO of Digital Asset Holdings, sees the inefficiencies in transactions and record-keeping as a rich opportunity for blockchain.
“Fifteen years ago, if someone had said to you we’re going to see the advent of the self-driving car on the streets before we see T+2 settlements [trades getting settled two days after they take place] and before you can walk from one doctor’s office to the next and have your health-care records precede you there, you would have been declared crazy, right?” Masters says.
“It is those kind of delays and extraordinary inefficiencies that have plagued financial services and big enterprises in other industries like health care. You’ve seen extraordinary speed of revolution in the Big Tech sector, and you haven’t seen it elsewhere in enterprise. That’s where this is going, and so what’s fascinating about this is the sheer scale of the potential for applications.”
Blockchain will generate $5 billion worth of business value in 2018, Gartner estimates. The value will grow, but it’s likely to stay modest for years, before ramping up more impressively about a decade from now, exceeding $3.1 trillion in 2030, the firm says. That’s more than Britain’s entire annual economic output today.
Some blockchain executives chuckle nervously when presented with that number. One fell silent, then joked that she was going to put it in her investor pitch deck.
Others are more willing to embrace the number.
The $3 trillion figure “does not seem crazy to me,” Masters says. Her firm won a contract to re-engineer the clearing and settlement process at the Australian Securities Exchange using blockchain. “When you think about the potential addressable market here, it doesn’t seem crazy at all.”
For investors, there are few ways to invest directly in blockchain. Some exchange-traded funds have been introduced, including Amplify Transformational Data Sharing (BLOK), Reality Shares Nasdaq NexGen Economy (BLCN), and Innovation Shares NextGen Protocol (KOIN), but they offer minimal real revenue exposure to the technology, which is currently generating little revenue.
Big companies—particularly IBM and Microsoft (MSFT)—have invested heavily in developing blockchain. Neither company breaks out its blockchain-based revenue in public financial documents, and they didn’t share the data with Barron’s. WinterGreen Research, a Massachusetts company that tracks technology trends, estimates that IBM and Microsoft together control 51% of the blockchain market, which overall generated $706 million in revenue last year.
“I believe we are furthest along,” says Wieck of IBM, which has worked with more than 500 clients.
Some of the early blockchain success stories weren’t created by tech giants, however.
AXA (CS.France), the French insurance company, is using blockchain technology to transform the flight-insurance industry. Its product, called Fizzy, allows fliers to buy insurance that immediately pays out if their flight is delayed by more than two hours, for any reason.
“Blockchain is useful because it allows me to say to the customer that you don’t have to trust the insurer on the data we are using,” Laurent Benichou, Fizzy’s founder, tells Barron’s. “Your policy is on the blockchain. AXA publicly commits to indemnify you if you are eligible. Because a smart contract is triggering the indemnity, the customer can know that we are honest with the data that we use. Potentially, for a paranoid customer who assumes we cheat, we say it’s not AXA anymore that’s a party to the transaction that will decide whether you get indemnified.”
The project, which has recorded about 11,000 transactions so far, won’t do much to change the near-term financial prospects for AXA, which reported 98.6 billion euros ($112.5 billion) in revenue last year. But Benichou expects airlines to begin offering this kind of service more widely to customers in the years ahead, and “when they do, it will be a huge market.”
What’s more, he thinks it can be used more broadly to insure against different kinds of events.
“We could do a Fizzy for weather forecasts; we could do a Fizzy for pollution. Each time we have an open data set, we are able to do a variation of Fizzy.”
Blockchain technology has also proved useful in other transactions where trust issues previously hampered the market.
In India, small businesses have been seeking a way to get their outstanding invoices from other businesses paid faster. Lenders have previously been wary of financing these transactions, in part because of the risk of double invoicing—that the businesses would receive financing from multiple banks for the same transaction.
But a company in New York, MonetaGo, designed blockchain software that records the invoices and keeps track of transactions that have already been financed. The blockchain records the transactions without revealing details about them that would erode the competitive positioning of the companies involved. The project has been live since March, and activity has steadily grown, says Jesse Chenard, MonetaGo’s CEO. He expects that MonetaGo can make about $20 million annually on the service in India.
The system has been embraced by major industry players in India.
“We’ve introduced a capability for financiers to securely share data that they would never have shared before,” Chenard says. “In order to share it before, they would have had to share the details of those invoices, and nobody would have trusted each other to not look at the competitor’s information.” Hiring a third party to oversee invoices for all financiers would have been “cost-prohibitive,” he adds.
“When we started in India, we said, ‘We’re a blockchain company, we can do anything with blockchain,’ ” he says. “The worst part about going in and saying, ‘Hey, I’m a blockchain company’ is that they send you to the innovation team. And as much as people like IT, it’s a cost center.”
Now “our pitch is completely different. We ask to talk to the person in charge of trade finance and say, ‘Would you like to reduce fraud on receivables financing?’ The answer is almost always yes.”
Cost has stalled the adoption of blockchain. Some of the existing players within industries may have to accept lower returns in the future if blockchain is adopted—a prospect that makes blockchain a threat as much as an opportunity.
“This technology threatens profit margins across the board,” Behlendorf of Hyperledger contends.
International Data Corporation estimates that companies will spend $1.5 billion on blockchain this year, double last year’s amount. But even corporations that believe in the technology are loath to spend too much on it, because they have no guarantee of returns.
“Blockchain challenges what you do rather than amplifying what you do,” said Rajesh Kandaswamy of Gartner. “Technologies like mobile amplify what you do. Mobile was additive for banks. Blockchain as an underlying technology makes you rethink your business processes or even your business model. That will take years for people to pass.”
The companies spending most heavily on blockchain projects are often central players in the industries where they operate—some of them could be considered the middlemen that blockchain had promised to dislodge.
Broadridge Financial Solutions, a major player in the proxy-voting industry, has spent about $150 million on blockchain, and ran proxy voting for Banco Santander’s annual meeting on the software, according to CEO Rich Daly. Nasdaq has used it to allow private company stock transfers, among other applications.
The Australian Securities Exchange’s decision late last year to rebuild its equity clearance system using blockchain technology could lead to other exchanges moving to similar software. ASX says its system could allow trades to be settled faster than the current two days when it goes live in 2020 or 2021.
In the U.S., another central intermediary is similarly upgrading its software to a blockchain platform, and expects to go live even sooner than ASX. The Depository Trust & Clearing Corp., or DTCC, a holding company that settles and clears the vast majority of financial trades in the U.S., is building a blockchain-based system to record the 15 million credit derivatives transactions it processes on an annual basis. The system, now conducted on a more costly mainframe run by DTCC, is projected to go live with its first phase of the blockchain project in the first half of next year.
“The industry saw the value in distributed ledger in terms of its auditability, and the sharing of data between participants on a near real-time synchronized basis,” says Jennifer Peve, the co-head of DTCC’s office of financial-technology strategy. Blockchain will also eventually give participants a “single source of truth on the network” that will make it easier to reconcile trades.
Still, Peve says there are limits to the technology. The software isn’t ready to replace the DTCC’s equity clearing and settlement software, for instance, because it still can’t process the 100 million or so transactions that run through the system each day. “It’s going to take some time before it can support those volumes,” she says.
Major banks are exploring blockchain through other avenues, too, though it’s early days for most projects. A private company called R3 built a blockchain software program called Corda Enterprise that allows businesses to trade syndicated loans, among other capabilities.
JPMorgan Chase has developed its own software called Quorum, built on the public blockchain Ethereum, that’s designed to reduce paperwork and lag time in financial transactions. The software, downloadable on JPMorgan’s website, is somewhat unusual for the bank, whose chief executive, Jamie Dimon, has called Bitcoin a “fraud.” But Dimon has since conceded that “the blockchain is real” and is clearly carving out a niche for the bank.
How these many blockchain projects will work together remains a mystery. R.A. Farrokhnia, executive director of the Columbia Fintech Program, says that blockchain still “needs its Cisco,” referring to the company that built the internet’s modern-day switchboard. (Cisco Systems, as it happens, is working on blockchain, but is apparently not the “Cisco” of it.)
IBM wants to stand at the center of many of these partnerships. In banking, one of the most ambitious projects that IBM has worked on is a trade finance consortium in Europe called we.trade. Deutsche Bank, HSBC, and seven other banks are leading the project, which went live in June with seven trades in its first five days.
Trade finance—banks lending money to businesses trading across borders—is a paper-heavy process that can take a week or more for transactions to clear. With we.trade, trades can settle in real time once the conditions of the transactions are met. There’s no guarantee that any one platform will become dominant. HSBC has also executed trade finance deals on the Corda blockchain, and Barclays has completed trades working with another start-up.
Finance attracts most of the headlines in the blockchain world, but the biggest long-term opportunity may be in managing supply chains, which are now traced on pieces of paper, Excel spreadsheets, and incompatible computer systems. The Danish shipping giant A.P. Moller-Maersk is working with IBM on a project called TradeLens that will digitize and standardize shipping documents and place them in a blockchain database.
“The documentation now is all over the place,” says Peter Levesque, the CEO of Modern Terminals, which runs shipping terminals in Hong Kong and mainland China and has signed on to the Maersk project. Some shipping deals still depend on fax machines, he notes. TradeLens takes all of the data the company tracks in different formats and “puts it all in one place.”
Blockchain, he says, “won’t change our operations, but it will make our operations more efficient, because we’ll have better scheduling of ships and better berth planning just by having more data sooner.”
The food-supply chain is also a juicy target for blockchain entrepreneurs, because identifying the original source of a food product—tainted romaine, for instance—can take days.
Walmart, Nestlé, Dole Food, and other companies are building a platform with IBM called Food Trust that would put the whole food-supply chain—farm to supermarket —on a blockchain that presumably can track the entire chain in seconds. The software can now track about 50 products, far from the whole supermarket but enough to get a sense of the software’s viability.
That includes more than following a head of lettuce as it’s trucked across the country; the software has been tested on trickier tasks, like tracking all of the ingredients in a container of Gerber’s sweet potato-apple-pumpkin puree baby food.
IBM says it expects to start offering the software for sale to the public in the next few weeks. The product is being packaged as a cloud-based subscription service, priced based on the size of the enterprise. For small businesses with under $50 million in revenues, it goes for $100 a month; for larger ones, the price goes up to $10,000.
Despite the efforts by companies like IBM, it is probably a mistake to think that Big Tech alone will dominate blockchain technology. Blockchain may be separate from cryptocurrency, but the entrepreneurial spirit behind digital coins is also present in the field.
One of the most important consortiums developing blockchain’s technical standards, the nonprofit Enterprise Ethereum Alliance, wants more small players to get involved, says its executive director, Ron Resnick. As with any modern tech platform, blockchain’s value will eventually be determined by the usefulness of the apps that end users can access.
The little companies “are driving this,” Resnick says. “They can move faster than a bigger company.”
Big, risk-averse companies like Royal Dutch Shell are in the Ethereum Alliance, but the organization also has members from the world of cryptocurrencies. Big oil companies won’t be issuing digital coins anytime soon, but the alliance does connect them with developers focused on building public open-source products.
That world is likely to influence the development of blockchain, too. AXA is exploring whether cryptocurrencies could further speed its Fizzy product, and Peve of the DTCC is hoping the open-source community can fix blockchain’s scaling problem, for instance.
“Never underestimate some motivated kid,” says Amber Baldet, who ran JPMorgan’s blockchain division before leaving to co-found her own blockchain company called Clovyr earlier this year. “It’s not just requirements driven by institutions trying to transition their existing business model to a new technology. It’s working alongside some real disruptors and being able to benefit and take cues off of really new innovation.”
Baldet adds: “Some of the innovation is initial-coin-offering scams and some is throwaway work that’s bad ideas, but somewhere in there might also be completely revolutionary business models and brand new products.”