Blockchain finally penetrated the mainstream consciousness in 2016, moving away from its reputation simply as the technology behind Bitcoin and cementing itself as its own, incredibly disruptive, entity.
Blockchain has the potential to transform industry operating models. However, while noise around the distributed ledger technology grew steadily throughout the year, the majority of companies are still stuck in the exploration phase, beguiled by its beauty but unable to translate this fascination into practical applications.
Its primary applications still reside in banking. In an IBM study released this year, 15% of banks said they have plans to put blockchain into commercial production by 2017, and 91% of banks are investing in blockchain for deposit-taking. The World Economic Forum, meanwhile, estimates that some 80% of banks are actively working on blockchain projects.
However, it is not only finance that blockchain is set to disrupt. According to PwC expert Seamus Cushley, the last nine months has seen $1.4bn invested globally in blockchain startups across numerous sectors, and the technology is advancing quickly. We’ve looked at what the year ahead holds.
Investors Look For More Use Cases…
Venture funding for blockchain continues to grow, remaining one of the main fintech targets worldwide.
According to the latest edition of KPMG and CB Insights report ‘Pulse of Fintech Q3’16’, blockchain and bitcoin investment activity in fintech fell to $87 million in the third quarter of 2016, down from $119 million in the second quarter and $153 million in the first. While the total is still expected to exceed 2015’s total, the fall indicates that investors are beginning to grow concerned that exploration is not translating into action. The excitement remains, but this has been somewhat tempered, as the KPMG report notes:
‘To-date, however, the ability to move blockchain from proof-of-concept to adoption and production has been minimal. While the market is still giving blockchain companies plenty of room to prove themselves, investors are also becoming more concerned about results’, the report said. ‘Over the next year, investors will make more rationale assessments of where the main use cases associated with fintech are and how long it will be before they are implementable.’
…But There’s Room For Growth In Asia
Blockchain technology has received the most VC investor attention in North America, where large financial institutions have invested in blockchain related projects, but funding is falling. In China, however, it is on the up, with this year record-breaking for fintech investment, posting increases for each of the past four quarters. There is still significant room for growth in Asia in 2017, though. KPMG China's fintech and innovation partner, Raymond Chang, said investors remain interested, just not in massive rounds, noting ‘VC investors are putting a lot of money into small blockchain technology companies in Asia. Some very new companies are already into their second or third round of funding.’ This steady trickle of smaller projects is already starting to lead to larger investments, with Chinese investors recently taking part in a funding round worth $1.7 million for Taiwanese startup Bitmark, a trend that should continue into the next year.
More Use Cases Arise Outside Finance
While companies like Uber and Airbnb have disrupted industries across the board by linking consumers with things they need, they are still middle men, and they still take a cut. Blockchain has the capabilities to remove such middle men entirely, meaning whoever has what someone needs takes their full dues. Arcade City, for example, is a new ride-sharing app that connects drivers with customers peer-to-peer using the Ethereum blockchain. Arcade City’s founder, Christopher David, a former Uber driver, argues that, ‘The Achilles’ heel of Uber and Lyft is their centralized management of pricing. By decentralizing that decision to the level of the driver and rider, Arcade City frees the driver to be an entrepreneur, and empowers the rider with control over their entire experience. Both drivers and riders are loving it so far.’ In May of this year, Arcade City came first in the blockchain startup category at the GTEC Awards in Berlin.
There is similar potential for blockchain to disrupt the music industry. Streaming services like Spotify and Apple Music have grown quickly, but they still act as middlemen. With a decentralized database like blockchain, the artist has the power, retaining control over all uploading, marketing, and selling of any work they create. Edith Suarez of CNN explained that blockchain could change how they are paid too, an issue that has particularly impacted platforms such as Spotify because of the lack of transparency and drawn criticism from major artists such as Radiohead and Taylor Swift. Suarez noted that: ‘Music is placed in the decentralized server, then each song is embedded with a piece of code (meta information) […] [When people download] a track with a cryptocurrency, a payment is automatically sent to anyone involved, be it the writer, the producer, the singer, as well as many others.’
Governments Get In On The Party
In an age of low trust in government and the establishment, information must be held in a transparent and accountable fashion where anyone can verify both the ledger and any copies of the data stored on non-government computers.
Countries around the world are already looking at how they could mint their own digital currencies and put money on the blockchain, and they are expanding exploration into other areas of government. In Delaware, for example, Governor Jack Markell announced two Blockchain initiatives earlier this year. One moves state archival records to an open distributed ledger, while the other allows a private company that incorporates in that state to keep track of all the equity issued and the different shareholder rights on the blockchain. Estonia, meanwhile, has used Blockchain to develop an e-residency program, whereby anyone in the world can apply to become an e-resident of Estonia, and the UK government has tested Blockchain on a small scale to see how it can be utilized to help pay people’s welfare.
These initiatives are just the start, and it with governments looking to save money at every turn, it is clear are now really ready to get behind the technology.
Regulatory Environment Takes Shape
2016 saw the first shoots of a regulatory regime for blockchain, with Japan’s legislature passing a recent bill to regulate bitcoin exchanges in the country. Next year, as the technology grows in terms of adoption and popularity, we will see a growing focus on security and other risk issues, which will bring regulators to the frontlines. At such a nascent stage, regulators are still trying to balance allowing the technology to grow while not letting it run unfettered, and they are already collaborating with startups to tread this line.
In South Korea, for example, financial regulators have launched a digital currency task force focused on regulatory and licensing parameters for bitcoin exchanges with the aim of introducing regulations in 2017, while the UK’s Financial Conduct Authority (FCA) is also in the process of developing an approval process for blockchain projects.
In the US, a number of states are already preparing to introduce regulation of Bitcoin exchanges. They are likely follow the State of New York’s BitLicense regime, but the fragmented approach we have seen in the US around FinTech regulation will needs to be re-examined. It has caused significant confusion as to how firms are subjected to regulatory oversight, with 50 state regulation and multiple federal regulators adding complication, and this could greatly stymie blockchain innovations.
Education And Collaboration Will Increase
Blockchain is still in an extremely new technology, and education remains the biggest challenge. There are issues around security, as we saw earlier this year when Ether was hacked, and there will likely be a steep learning curve ahead in 2017. Companies must not get put off by a few bumps in the road though, and they must not panic if proof of concepts do not reveal themselves immediately. They are going to have to continue to improve their understanding and work with other companies and form new strategic partnerships. Early adopters are always going to be the ones that truly benefit from a technology, and organizations need to get to grips with how they can use blockchain as soon as possible if they are to realize its massive potential for disruption.