Blockchain needs to be more than a headline

“A good comparison would be an early Nokia phone, in 1995 or 1996. Compared to today’s smartphones these things were primitive”, she said. The comparison served Martha Bennett, a Forrester analyst with over 30 years’ experience in the technology industry, to draw a line between devices that allowed you to make calls – and “if you had the patience” send messages– and blockchain, the distributed ledger technology destined to revolutionize the financial sector and many others.

It is precisely the speed at which the “revolutionary” capacity of blockchain in different sectors is being heralded as that is a source of concern for the analyst. “The comparison tells us where we are in terms of potential. We are still at a stage where we can already do some things with blockchain technology, but the real potential lies in the future”, Bennett insisted.

A solution for everything?

There are many challenges ahead, both technical and others, before the technology goes through the development process needed for reality to meet expectations, the analyst says. “We have something here with huge potential but it is being somewhat overhyped today.” According to the analyst we are going through a phase in which the headlines make the technology appear “much further advanced than it is” and making blockchain seem that it “can solve certain problems that no technology can solve”, she adds.

Rather than viewing it as a cure-all, Bennett advocates the use of the technology in cases and areas where it has proven its usefulness; that is, with a specific goal and demarcated field of implementation where blockchain really can make an improvement. The analyst pointed to areas such as international trade, cross-borders payments and corporate loans, three areas in which BBVA has already set up pilot schemes and proofs of concept with positive results, the most recent with Indra in which blockchain was used for the first time in the negotiations on and signing of a corporate loan.

The challenge of fragmentation

Among the technical challenges facing the technology is the problem of fragmentation. According to Bennett, more examples of convergence among the different types of blockchain networks (private, public etc) will emerge, but as of today “there’s no such thing as ‘the blockchain’”. And that, she says, is one of the differences between this technology and the internet in its early stages; the absence of a standard for blockchain protocols.

Currently, there is a hodgepodge of DLT platforms and different initiatives on creating standards that for the moment are going in different directions. “With the early internet we at least had HTTP, which allowed us to start building applications. We can build applications now, but not on a standardized environment”, she adds.

The big challenge for Bennett is scalability. This problem has led some financial institutions to the conclusion that these platforms are not suitable for managing payments where scalability is essential. Alipay can handle 250,000 transactions a second, compared with only seven for Bitcoin, she points out. However, the technology has shown its versatility. While it cannot solve all problems, it has demonstrated its usefulness in specific cases such as in cross-border payments, where DLT platforms have shown themselves capable of effectively resolving inefficiencies in the sector.

Cases where its use really makes a difference

What uses of blockchain then are worthwhile? According to Bennett, given the current limitations of the technology, in order not to waste resources you get more out of it in cases with real room for improvement. She points to some cases where that “transition” to real life has already been made. These are mostly on a small scale - something Bennett views as positive – as in cases of proofs of concept in international trade and loans. “If we get too ambitious, the risks are greater as well. These projects are comparatively small but they are for real”, she says.

The first of these Bennett points to has been undertaken by Depositary Trust and Clearing Corporation (DTCC), a clearing house for derivatives in the US that handles trillions of transactions using a server. DTCC is working on a project to transfer this system to a blockchain, a move that could pave the way for it to manage its infrastructure in a completely different way in the future. “They are thinking big. They are looking at the day after tomorrow and they are building for the future”, Bennett says.

The second case Bennett pointed to is Northern Trust, a US private equity firm that has used the Hyperledger blockchain to manage the documentation involved in the acquisition of private funds. “It’s a good use because you have a small number of transactions, of high value, where accurate documentation is needed”, she explains. It also brought the regulator on board from the start of the initiative, which always increases the chances of success.

“They have reduced the documentation process from three weeks to three days. And that clearly is worth it. When they say they ‘transform the private equity sector’, that claim is real”, Bennett concludes.