LONDON – A few years ago, blockchain was the topic of the financial services industry. Several large banks tested the technology, lured by promises to improve some of the sector's oldest processes.
This year, investors could be forgiven for wondering where blockchain has gone to. After much hype in 2017, when the value of cryptocurrencies like Bitcoin soared, lenders weren't as vocal about new blockchain pilots as they were back then. But that doesn't mean they stopped investing in the technology.
Blockchain was originally created as a digital ledger for Bitcoin transactions and is essentially another form of database that is maintained on multiple computers. So far, banks have mainly chosen to adopt some of the principles of blockchain and adapt the technology to crypto for different use cases.
In Italy, much of the country's banking sector is now using Spunta, a blockchain network based on technology from New York-based company R3, to balance the balance between them, founder and CEO David Rutter told CNBC's "Squawk Box Europe" .
"We've been talking about the promise of corporate blockchain for a while now, and it's great to finally see it in action and start working on a large scale," he said earlier this week.
Still, the Italian market only represents a fraction of the European – and of course the global – banking industry, while reconciliation of accounts is just one use case where experts say blockchain can be applied.
"It's a start," said Rutter. "We'd like to see it in other European countries and then worldwide. The existing infrastructure lays the groundwork for adopting other technologies that can really affect your bottom line."
One bitcoin on a European banknote.
Alain Pitton | NurPhoto via Getty Images
For some large banks, the focus has increasingly shifted to figuring out how to actually make some money using blockchain. JPMorgan Chase recently announced that JPM Coin went live for the first time with a major technology client.
According to Lex Sokolin, co-head of fintech at blockchain firm ConsenSys, the coronavirus pandemic could play a role in encouraging banks to bring commercially viable blockchain products to market.
"The fact that banks are being forced to adopt digital transformation as their primary way of working definitely helps them focus on digital payments," he told CNBC via email.
Sokolin added that banks and other financial institutions are also now less reluctant to experiment with digital currencies than they used to be. With cash usage declining in many developed countries – especially amid the pandemic – central banks are currently considering introducing their own virtual money, while brokers like Fidelity are now letting their customers invest in crypto.
The People's Bank of China is already testing a digital version of the yuan, while other central banks have set a framework for how such virtual currencies might work in practice. ConsenSys, led by Ethereum co-founder Joseph Lubin, is working on central bank digital currency projects in Hong Kong, Australia, France and Thailand.
"We assume that this roll-out and transformation will be gradual in most countries, but drastic in some individual regions," said Sokolin. "As a rule, payment systems do not replace each other completely, but are gradually building on the rails."
According to R3's Rutter, more commercial banks in Europe could turn to blockchain technology to improve their profitability.
"It is a difficult road to adopt blockchain technology because it is an industry-level computer," he said. "Once you have overcome this pain, you have a great foundation to introduce other uses much more easily."
He added that central banks are focusing more than ever on digital currencies. According to Accenture, cash consumption will fall sharply in some countries this year under Covid-19 – in the UK by as much as 28%. The Bank of England is one of the central banks evaluating the prospect of digital currency issuance.