From JPMorgan Chase, IBM to Walmart, blockchain is no longer exclusive to Bitcoin

Blockchain — the shared record-keeping technology behind Bitcoin — is connecting more industries, potentially upending entire sectors of the economy by eliminating the middlemen who broker money, products, services and information that now thrive.

Banks are racing to adopt the technology — one estimate says investment managers could realize up to $16 billion in cost savings over the next five years. But the technology could change everything from buying a home to buying groceries. Backers even see people using blockchain to book rides and accommodations directly, rather than through Uber, Lyft or Airbnb.

IBM's blockchain technology is being tested for tracking high-end goods, such as diamonds and art, to address theft and counterfeiting. Walmart is using blockchain to track food, potentially allowing the retail giant to respond more quickly to food safety issues as they arise.

Analysts believe that the potential of blockchain technology lies in its speed and transparency. In theory, this technology can help companies significantly reduce or eliminate the need to monitor transactions, transportation and supply chains. By working on the same shared ledger, everyone can see the same ledger content.

Analyst James Wester said:

“Essentially, this means there is only one version of the truth. Because everyone is watching, no one can change the contents of the ledger without being discovered by others.”

Still, analysts warn that blockchain is immature and largely untested, while a determined group of lawyers, middlemen and regulators are seeking to fight back against blockchain’s infiltration into everyday transactions.

What is blockchain and how does it work?

Blockchain author William Mougayar says that rather than passing a document from one person to another or using a database that only allows one person to edit it at a time, blockchain is more like Google Docs.

Transactions are recorded on a shared ledger that is visible to all participants and sealed in the form of blocks of coded transactions. Blocks are linked one after another like a chain. The information stored in these blocks cannot be changed.

Today, when you use a credit card to buy groceries at a store, your purchase request is sent from the store to a payment processor, which checks with the bank that issued the card to make sure you can make the purchase. While blockchain can’t dislodge the ubiquitous Visa and MasterCard, it can remove this check.

The Bitcoin white paper published by Satoshi Nakamoto in 2008 is often seen as the basis for Bitcoin's idea of ​​not relying on a third party for online payments, instead proposing a 'trustless' system.

Lex Sokolin, global head of financial technology strategy at Autonomous Research, said,

“Digital goods are theoretically infinite. You can copy and paste them all the time. How do you keep track of the existence of something? Blockchain is a solution.”

Bitcoin ensures honest transactions by giving every participant using the blockchain network access to a common ledger of records.

From cypherpunks to JPMorgan

But blockchain networks don’t have to be so public, and while Bitcoin is fundamentally about decentralization, the financial industry has realized that they don’t have to use it.

A blockchain network can also be developed for just a few companies, or open to a single company. Various startups — Consensys, Chain and Google-backed Ripple — have developed their own blockchain-based technologies to facilitate cross-border payments, accounting, asset tracking and trade.

Banks, whether seeing a huge threat or opportunity, want to join the development of such blockchain networks. JPMorgan Chase has expressed plans to develop blockchain technology, while Bank of America announced in September that it would work with Microsoft to develop and test such a network. More than 50 of the world's largest financial institutions have formed a blockchain alliance, the R3 Blockchain Alliance, to jointly research and develop potential blockchain technologies.

Visa is also testing blockchain technology to make cross-border money transfers easier. Deutsche Bank, UBS and other banks are creating a blockchain-based digital currency to speed up the settlement of securities transactions. The central banks of the United Kingdom and China have considered using a shared ledger to transfer digital currencies.

The financial industry is eager to get into blockchain development, and high-frequency trading firms are looking to improve transaction processing to seconds. But currently, there is still a delay of one to three days between the start of a trade and the settlement of the transaction, which is to confirm that the transaction has been carried out as all participants hoped.

Grainne McNamara, Capital Markets Principal at PwC, said:

"In the existing banking system, there is a lot of mediation, a lot of confusion. There are a lot of problems with record keeping between the various banks."

All of these issues require a lot of back-office work, heavy manual labor and costs. Autonomous Research estimates that by 2021, investment management companies can save $16 billion in costs through blockchain.

Beyond banking, there is more potential

The foundation that blockchain lays for transaction settlement is not only applicable to trade, but also to all transactions that require a third party to clear. Potential use cases such as the following may be developed:

1. Blockchain can eliminate the need for escrow companies that require fees to verify the details of a home purchase, saving buyers money and speeding up the process.

2. Blockchain technology can track media files and also reduce piracy.

3. The U.S. Department of Defense’s DARPA agency is investigating whether blockchain can help identify data breaches more easily.

4. Blockchain can be used for 'smart contracts', which are contracts that are triggered instantly and automatically execute their terms when certain conditions are met.

However, Gartner analyst Ray Valdes believes that the opportunity for blockchain in supply chain management will ultimately be greater than in finance.

He said:

“In today’s world, there are many real problems, in some cases life or death, involving counterfeit pharmaceuticals, food products like baby formula, fake auto parts like brake components, counterfeit industrial parts. In these areas, blockchain has the opportunity to serve as a shared verified record, a distributed ledger, that can unify not only payments, but also transportation.”

These applications can attract new investment to developing countries or countries mired in corruption.

“You need to have a track record that can be followed so that foreign investors have confidence in you. There are many countries in the world that have failed to do that and don’t have a strong judicial system, so corruption is rampant.”

Inflated Expectations Peak

Consumers and investors may have to wait several years before blockchain makes their lives more convenient and less expensive. In the meantime, blockchain critics will point out loopholes in the technology, which will face legal restrictions.

As the broader financial technology industry comes under greater regulatory scrutiny, Wester said the development of smart contracts could run into resistance from intermediaries, such as lawyers, who are currently engaged in interpreting agreements.

“There are a lot of things where third parties are involved — the third party in a contract might be a lawyer or a court. What they should be doing is not just insuring against the risk, but actually providing information about how best to do things, like what is illegal or unethical or risky in the contract.”

A graph in Gartner’s ‘Hype Cycle for Emerging Technologies 2016’ report depicts blockchain approaching what the firm calls ‘peak inflated expectations’.

Gartner estimates that it will take another five to 10 years before the technology becomes mainstream, which means it will take several years for blockchain to replace the technologies that are still working well today—even though some CEOs of companies that appreciate blockchain are eager to use it.