A budding blockchain hub in Los Angeles is gaining traction as digital currencies such as bitcoin heat up amid a wave of speculation.

Bitcoin’s value has risen more than 300 percent from a year ago, buoyed by investors who see cryptocurrencies as a way to conduct monetary transactions that cut out third-party financial institutions.

Bitcoin closed at $2,629 on July 5 – up from $640 a year earlier.

The verdict is still very much out on whether bitcoin – or one of the many other cryptocurrencies that have sprung up recently – will see widespread adoption, but the underlying software, called blockchain, is moving rapidly into the mainstream in any case.

“There have been a lot of new developments in the last year,” said UCLA Anderson School of Business professor Bhagwan Chowdhry. “The promise of blockchain is there and it’s quite big. A number of industries are likely to be affected. Anything related to documentation or verification – these are easy targets.”

Companies such as Venice-based Gem are already in the process of developing applications to undercut established business practices using blockchain, which is essentially a ledger that allows the reconciliation of transactions between two or more parties without the need of a centralized system.

A traditional system would have one party wire a payment in dollars to a second party using a third party – typically a bank. A public blockchain system – such as bitcoin – processes the transaction on a decentralized network of computers running special software that authenticates the movement of currency between two parties with – so far at least – absolute certainty. The bank’s manual accounting of who owns what and who owes whom is replaced by an automated register of every transaction.

Gem founder and Chief Executive Micah Winkelspecht said financial institutions are leaders in blockchain adoption – though they’re currently focused on internal testing, with most still a long way from bringing actual products to market in the form of applications.

Industries ranging from health care to automotive to real estate are also looking at potential applications.

“Banks were the first to see the promise of blockchain because bitcoin was a digital currency,” Winkelspecht said. “But you can look at almost any system that has a central repository of information and apply blockchain to it.”

Toyota Research Institute – the research and development division of Toyota Motor Corp. – tapped Gem to help create a usage-based car insurance product in which a roster of metrics including speed, braking patterns and other driving inputs are automatically relayed to an insurer. Blockchain is used to coordinate that exchange of data and make certain the different inputs and parties involved are identified and associated correctly.

The ability to identify parties and sort complex data sets quickly and efficiently is the real promise of blockchain, according to Winkelspecht. The complex math that underpins blockchain turns a lot of people off, he added, but the solutions it provides are simple.

That makes it a lot like the internet, he said.

“The internet is just a protocol that allows computers to talk to each other in a specific way,” Winkelspecht said. “Most people don’t actually understand how email works, but they still use it every day. Blockchain is the same.”

But the nascent technology is still dealing with obstacles.

Chowdhry said one of the biggest potential issues is the belief that systems relying on blockchain are invulnerable.

“I have a suspicion that we’re not quite aware of (blockchain systems’) vulnerabilities yet,” Chowdhry said. “Cryptography is quite solid, but hacks don’t happen because the computer system itself is hacked, but because of human error – and blockchain applications still have human interaction.”

Others view those security issues as a business opportunity.

Canoga Park-based Netki Inc. (pronounced net-key) is working to solve blockchain security issues, particularly those that involve bitcoin or other cryptocurrency transactions. The company, co-founded by husband and wife duo Justin and Dawn Newton in 2014, has raised $3.6 million in seed funding. It is working to standardize digital identity certificates, which verify user identities offline from the blockchain, as a way to enhance privacy and boost consumer protection.

“Putting identities on the blockchain is a bad idea,” Dawn Newton said. “We’re pretty adamant about that.”

Local Scene

Both Netki and Gem are part of a growing blockchain scene in Los Angeles. Winkelspecht said when he became interested in bitcoin in 2010 there were meetups at the Arthur J. Will Memorial Fountain in downtown’s Grand Park that typically featured about 15 people. Now, similar cryptocurrency gatherings can top 1,000 attendees.

“L.A. was a bit slower to adopt blockchain (compared to New York and the Bay Area),” said Winkelspecht, who has a team of 20 employees at Gem. “There weren’t a lot of big blockchain companies here at first, but now we’re seeing a whole bunch of new companies popping up.”

Some of the longer-tenured players in the L.A. area include Blockchain Capital in Venice and Santa Monica-based digital currency platform GoCoin, both of which were founded in 2013.

Blockchain Capital, which is co-headquartered in San Francisco, raised a $10 million venture fund earlier this year through sales of its own cryptocurrency. The company has invested in around 50 bitcoin-related startups, including Gem. Expansion into the corporate world is also speeding up.

In addition to the Toyota car insurance project, Gem is working on health insurance blockchain applications with Amsterdam-based technology company Philips and has other partnerships with Fortune 500 companies that Winkelspecht said he could not disclose.

“When we started, we were essentially serving other startups in the bitcoin industry,” he said. “Now, we’re working with some of the biggest companies in the world.”

There are still significant headwinds for companies in the blockchain space that come with being tied to a new technology.

The challenge of delivering tangible results over a short period of time has meant delaying some of what Winkelspecht sees as the bedrock components of Gem’s business.

“There’s a lot of proof-of-concept work that had to happen,” he said. “You want to build the core product, the platform – we’re ultimately an operating system – but first you have to build some applications in order to show the consumer how to use it.”

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