NEW YORK (Reuters) - Two years ago Nasdaq Inc NDAQ.O and Citigroup Inc C.N announced a new blockchain system they said would make payments of private securities transactions more efficient. Nasdaq Chief Executive Adena Friedman called it "a milestone in the global financial sector."

A Wall St. street sign is seen near the New York Stock Exchange (NYSE) in New York City, U.S., March 7, 2019. REUTERS/Brendan McDermid

But the companies did not move forward with the project, a person familiar with it said, because while it worked in testing, the cost to fully adopt it outweighed the benefits.

Blockchain, the person added, “is a shiny mirage” and its wide-scale adoption may still “take a while.”

In a joint statement, the companies said the pilot was successful and they were “happy to partner” on other initiatives. Both companies are also working on other projects.

Companies, including banks, large retailers and technology vendors, are investing billions of dollars to find uses for blockchain, a digital ledger used by cryptocurrencies like bitcoin. Just last month, Facebook Inc FB.O revealed plans for a virtual currency and a blockchain-based payment system.

But a review of 33 projects involving large companies announced over the past four years and interviews with more than a dozen executives involved with them show the technology has yet to deliver on its promise.

At least a dozen of these projects, which involve major banks, exchanges and technology firms, have not gone beyond the testing phase, the review shows. Those that have made it past that stage are yet to see extensive usage.

Regulatory hurdles have often slowed down implementation, some executives said. Scrutiny is likely to only increase after Facebook’s plans drew global backlash from regulators and politicians. (For a sample of these projects, click on)

The euphoria that surrounded the early days of Wall Street’s interest in blockchain is giving way to pragmatism, as companies realize that it will likely take years before it takes off in a substantial way.

"This is a transformation of the market. It isn't a big bang," said Hyder Jaffrey, head of strategic investments for UBS AG's UBSG.S investment bank.

It could take three-to-seven years before major projects have significant impact, he said.

One UBS-backed project, a digital cash system for financial transactions called Utility Settlement Coin, is expected to be commercialized next year after more than five years of work, said Rhomaios Ram, head of a separate entity created for the project.

But Ram said that for the system to be transformational, it will require other market processes to move to blockchain-based systems as well.

“There is a recognition now that it is a journey, rather than something with a short time frame,” Ram said.

BLOCKCHAIN’S PROMISE

Blockchain was created about a decade ago as a way to keep track of bitcoin transactions. As cryptocurrencies became more mainstream following a 2013 rally and crash in bitcoin’s price, consultants, analysts and other proponents said their underlying technology could be transformational, especially for the financial industry.

It could help trades settle instantly, accelerate international payments and remove the need for costly intermediaries, potentially saving the industry tens of billions of dollars, they said.

Investment followed. Last year the capital markets and banking sectors allocated $1.7 billion on blockchain initiatives, up 70% from 2016, according to estimates by research and advisory firm Greenwich Associates.

By 2022, blockchain investment across industries is expected to reach $12.4 billion, according to research firm IDC.

Some big companies have rushed in. International Business Machines Corp IBM.N has around 1,500 people working on the new technology for use in several different sectors. In an ad released during the Academy Awards this year it called for the use of blockchain "to help reduce poverty".

A system IBM was developing along with the London Stock Exchange Group Plc LSE.L to issue private shares did not move beyond testing, the companies said. But a trade finance platform developed by numerous banks along with IBM has been commercialized.

“I certainly think there has been a share of hype associated with blockchain,” said Marie Wieck, a general manager at IBM.

BUSINESS BENEFITS

But Wieck and other industry executives said they remain bullish about the prospect of the technology and their companies continue to invest in it. “To me the business benefits of blockchain are clear,” Wieck said.

John Whelan, Banco Santander SA's SAN.MC head of digital investment banking, said blockchain projects need to work on three areas at the same time: technology, demand and compliance.

“Those of us who were involved in blockchain early on maybe did not appreciate the extent to which the three parts have to move together,” Whelan said. Santander is involved in numerous blockchain projects, including the Utility Settlement Coin.

Around the time the project with Citi was announced in 2017, Nasdaq also started testing a proxy voting system in Estonia that automates a manual and lengthy process.

Lars Ottersgard, Nasdaq’s head of market technology, said demand has been limited for the product.

“To be honest, the value differentiation using blockchain from using traditional technology has not been obvious,” he said.

A Nasdaq spokesman said the exchange operator has since developed the system further with South Africa’s central securities depository, which plans to launch it later this year.

(For a graphic on 'Blockchain in capital markets' click tmsnrt.rs/2JxuQgl)