Widespread use of blockchain technology could happen in three to five years — but not before a series of critical issues are sorted out.

That’s the view of McKinsey partner Brant Carson and his colleagues, who just compiled a list of four barriers preventing the technology from taking off. (Scroll down to find out what they are).

At the moment, 75 per cent of spending on blockchain projects is wasted money, Mr Carson estimates.

Blockchain is a much-hyped Internet technology used to secure transactions and publicly available data. It’s best known as the basis of cryptocurrencies such as bitcoin but is increasingly used in other applications such as verifying supply chain data and digital contracts.

McKinsey calls bitcoin “the first and most infamous application of blockchain”. But it’s only the first application that has captured the attention of government and industry, says Mr Carson in a new research report.

In the short term three sectors stand to benefit most from deploying blockchain: financial services (for verifying and transferring financial information), government (record-keeping and secure sharing of public data) and healthcare (secure exchange of patient data sets).

But investors considering ASX-listed blockchain stocks — there are about 35 or so — should be “really clear on where the money is”, Mr Carson says.

That means understanding what benefit the project will deliver, whether it’s a cost saving or new revenue, and why blockchain technology is needed in the first place.

“I think we’re at the stage where basically about 75 per cent of the money spent on blockchain and blockchain-oriented projects is wasted.

“It’s focused on experimentation and that kind of thing. How clear are the practical use cases and applications?” 

Blockchain investors should ask: “Is there a true business case at the end of the day?”. 

Here are McKinsey’s four key factors that need to be figured out before blockchain goes mainstream:

1. Common standards

A lack of common standards and clear regulations is a major limitation on blockchain applications’ ability to scale,” says McKinsey.

Progress is being made though. The report points to the R3 consortium of more than 70 global banks that collaborated to develop a financial-grade blockchain platform called Corda.

“Such platforms could establish the common standards needed for blockchain systems,” McKinsey says.

2. Technology improvements

“The relative immaturity of blockchain technology is a limitation to its current viability,” the report says.

Speed, security and storage must be improved make most use cases commercially viable.

Major technology players are strongly positioning themselves to address this gap with their own blockchain as a service (BaaS) offerings in a model similar to cloud-based storage.

3. Assets must be digitised

Blockchain technology is only as good as its ability to connect assets — especially physical assets such as ethically produced resources — into the network.

That may be easier said than done.

Under a Congo pilot scheme, vetted artisanal cobalt miners are asked to seal each bag of cobalt with a digital tag which is entered on blockchain using a mobile phone, along with details of the weight, date, time and a photo, Reuters reported earlier this year.

Connecting and securing physical goods to a blockchain requires enabling technologies like IoT and biometrics which can be “a vulnerability in the security of a blockchain ledger”.

In the meantime it may be easier to work with digital products such as equities  “which are digitally recorded and transacted, can be simply managed end-to-end on a blockchain system or integrated through application programming interfaces (APIs) with existing systems”.

4. Competitors need to co-operate

As McKinsey describes it, the “coopetition paradox” must be resolved among blockchain competitors.

Blockchain’s major advantage is the network effect, but while the potential benefits increase with the size of the network, so does the coordination complexity.

For example, a blockchain solution for digital media, licences, and royalty payments would require a massive amount of coordination across the various producers and consumers of digital content, the report points out.

“Natural competitors need to cooperate, and it is resolving this coopetition paradox that is proving the hardest element to solve in the path to adoption at scale.”

In the meantime…

It will take time for these factors to sort themselves out.

In the meantime, investors considering blockchain ventures should look for players focused on two areas: cost and private networks.

Cost benefits

Blockchain might have the disruptive potential to be the basis of new operating models, but its initial impact will be to drive operational efficiencies, says McKinsey.

“Cost can be taken out of existing processes by removing intermediaries or the administrative effort of record keeping and transaction reconciliation. ”

McKinsey estimates 70 per cent of blockchain’s short-term lies in cost reduction, followed by revenue generation.

Private use

And while blockchain has the potential to drive open, public transactions, its best use in the short-term meantime may be in limited, private networks.

McKinsey points to the example of the ASX using a blockchain system for equities clearing to reduce back-office work for brokers within a limited network.

McKinsey calls this “permissioned blockchain” operating with controlled access.

“Private, ‘permissioned’ blockchain allows businesses both large and small to start extracting commercial value from blockchain implementations… Participants can get the value of securely sharing data while automating control of what is shared, with whom, and when.”