- Blockchain is taking off but is still hampered by bad PR and regulatory foot-dragging.
- 2020 may see the introduction of a global digital currency.
- The first jurisdiction to embrace blockchain and develop a regulatory model will reap the rewards in jobs and economic growth.
In 2019 the blockchain revolution ground to a halt. At least that’s the word from those who should know.
A recent Gartner Group report called it “blockchain fatigue.” Other pundits echoed the view that pilots have fizzled out, few implementations have gone into production, and blockchain is likely to be a marginal technology.
Empirically, this view is incorrect. Our research shows hundreds of production systems underway across a dozen industries. Most of these are based on Ethereum, Hyperledger, or Corda but other platforms are emerging.
Blockchain is booming
Global trade finance is moving to blockchain. TradeLens – IBM and Maersk’s joint blockchain initiative in shipping – welcomed its first round of new shipping giants this year. Everledger has expanded its efforts to eliminate conflict diamonds into China via a WeChat app. Token offerings that raised upwards of $US10 billion in the last year alone have disrupted venture capital.
Mind-boggling initiatives are also underway related to digital currency and economic inclusion. India’s Reliance Industries, for one, announced that its mobile subsidiary Jio will turn its 300 million users into the world’s largest blockchain network; Facebook proposed Libra, the crypto asset that could turn the social media giant into the world’s largest retail bank overnight. Then the People's Bank of China revealed that it was “almost ready” to launch a sovereign digital yuan for international use. President Xi Jinping urged the rest of China to “seize the opportunity” provided by blockchain to accelerate the nation’s innovation.
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This all sounds like “full steam ahead,” not “blockchain burnout.” So, what’s going on here? And how can we harness the potential of this technology in 2020?
1. Blockchain has a PR problem
The words blockchain or crypto still conjure up images of bad actors, criminals, and get-rich-quick hucksters using a new technology to commit age-old frauds – and there has been plenty of that. Meanwhile, parochial infighting and juvenile squabbling has reflected poorly on the ecosystem as a whole.
But we are witnessing some exciting collaborations. For example, the Enterprise Ethereum Alliance has piloted the Token Taxonomy Initiative that is platform neutral. Many industries such as the Blockchain in Transport Alliance have begun intense collaboration to bring about wider change. This sort of interdependence will be the key to moving forward.
Also, institutions such as the Chamber of Digital Commerce are proving themselves crucial allies for governments hoping to strike the right regulatory balance. We’re doing our part at The Blockchain Research Institute by highlighting use-cases and the need for governance and cooperation and change at the societal level. Extraordinary leaders like SEC Commissioner Hester Piece, the outgoing Bank of England’s Mark Carney, and nominee for Democratic presidential candidate Andrew Yang have emerged as advocates. Momentum is building.
2. Blockchain is running head-on into the system of laws, regulations, and structures that govern society
Freedom of speech and information is protected by the US Constitution to be open. But when it comes to assets, all our systems of laws and governments are designed to keep these closed, proprietary, and owned by the powerful. It’s no wonder blockchain and crypto is taking a long time. It’s confronting many fundamentals of how our economy and society work.
As the Commodity Futures Trading Commission’s former chair Chris Giancarlo said to me recently:
“The late 20th Century digitisation of information through the Internet took place in a regulatory “light” zone due to the US Constitution's protection of speech from Federal government interference. Conversely, the early 21st-century digitisation of value is taking place in a regulatory “heavy” zone because of the long-established authority of US state and federal governments to protect property rights, including those of consumers of financial services (banks, trust companies and other financial service providers have been subject to both state and federal regulation for decades). As a result, the practices that guided the digitisation of information (i.e. “Don’t ask permission, ask forgiveness”) when used for the digitisation of property rights are particularly provocative to the established legal and regulatory order, as we have seen with initial coin offerings.”
Regulation represents by far the most significant hurdle for blockchain innovators, according to a survey of hundreds of executives and entrepreneurs, co-conducted by the Chamber of Digital Commerce Canada and the Blockchain Research Institute. Existing regulations favor incumbents over disruptors. Blockchain presents new challenges to regulators looking to protect consumers and markets, but the rigidity with which regulators in the world’s major economies have approached blockchain has served to stifle innovation and growth.
The regulatory stonewall for blockchain innovators is the norm across major economies. The consequence for Canada and countries like it will be a continued “company drain” to friendlier jurisdictions. So the first large jurisdiction to embrace this new technology meaningfully and develop a regulatory model that encourages innovation while protecting consumers will reap the rewards in jobs and economic growth.
3. The technology is still immature
To borrow from the late Roy Amara of the Institute for the Future, we tend to overestimate the impact of a new technology in the short run, but we underestimate it in the long run. Blockchain faces implementation challenges beyond regulation and the inertia of incumbents.
- Interoperability. Like the early days of the Internet when private Intranets dominated the scene, blockchain is balkanised in silos. Efforts such as those by Cosmos or the partnership between Ethereum and Hyperledger may enable an interoperable Internet of blockchains in the first half of 2020.
- Scalability. While some platforms like Ripple claim they’re ready for Visa-level volume, most platforms have much to do to scale their solutions. Ethereum, a dominant platform for smart contracts and application development, can still process only 15 transactions per second, and its Istanbul upgrade faced numerous delays. Interoperability may alleviate this problem as users marshal multiple blockchains to achieve scale.
- Usability. Buying or selling crypto is still difficult. Participation in the cryptocurrency ecosystem requires a level of validation that most users find unappealing. Complex security processes have become barriers to adoption. Creating more user-friendly processes for buying and storing cryptocurrency securely is still a crucial challenge for the industry.
- Security. Blockchains are more secure than traditional computer systems, as comedian John Oliver pointed out using my chicken nugget analogy. But hackers can still breach apps, systems, and businesses built on blockchains. In 2019, $US250 million went down the drain on one exchange alone—QuadrigaCX—with its deadly centralised business model.
- Data rights. Users of all things digital create the new asset class of the digital age – data – but the digital landlords capture all its value. The solution is not just government protection of privacy (EU General Data Protection Regulation) or even charitable landlords offering users access to some of their data. We believe that self-sovereign identities on blockchain will enable us to capture and control our own data. While there are good identity initiatives underway (Sovrin), we’re a long way from a radically new identity framework.
The consequences of inaction by business and government leaders have never been so stark. Consider the epic showdown shaping up for 2020 to create a global digital currency. First are traditional crypto networks like Bitcoin. Second are corporations like Facebook (can other digital conglomerates be far behind?) Next up are nation-states, with China implementing its digital currency in 2020 as a step toward replacing the US dollar as the currency of record. This will no doubt stimulate the US Federal Reserve to push ahead with the digital dollar. As other countries join in, we’ll see most other sophisticated countries support Mark Carney’s vision of a “synthetic hegemonic currency”, which would grow from a basket of other fiat currencies to dominate money globally.
In the coming year, central bankers, policy-makers, and business leaders – all of us – will decide what the future of the digital economy will look like. Western economies have an opportunity to embrace decentralisation and the Internet of Value and, in doing so, maintain their leadership positions in the global economy. However, leaders will need a level of flexibility and openness that we have not yet seen.
As with everything bold, the future is not something to be predicted, but achieved. Now more than ever, the question of who will build that future should be top of mind in 2020.