Is IBM About to Make Banks Obsolete?

By Markets Fool.com

IBM could be on the verge of upending thousands of years of financial convention. We are talking about a game changer that could disrupt banking, payment processors, and even central banks.

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It could make dinosaurs out of the systems for money wires, clearinghouses, and financial markets as we know them today. It could make the financial system faster, more efficient, and more secure. It could fundamentally change the way the world transacts commerce.

That's a ridiculous opportunity, even for IBM -- a company with a $169 billion market cap and nearly $93 billion in annual revenue.Let's break it down.

Bitcoin for the real world
The core of this potential new business for IBM is the technology that drives the popular digital currency Bitcoin. We'll start there for some context, and then move to exactly how IBM plans to use the technology to change the financial world as we know it.

Bitcoin operates using a ledger system called blockchain technology. Instead of relying on a centralized record to manager the ledger, blockchain allows the ledger to exist across an entire network. This means no single bank, government, or other entity controls the process. It brings the accounting out from behind the curtain and makes it available for all to see.

Users can transact securely, anonymously, and instantly, and every transaction is recorded and verified by the network.

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Experts recognized quickly that this decentralized ledger is the real breakthrough of the bitcoin phenomena, with applications ranging from voting systems to powering the "Internet of Things," to, you guessed it, managing financial transactions with real, fiat currencies.

How does IBM plan to do that? A source close to the project told Rueters to think of the planned project as "a bitcoin, but without the bitcoin."

The source said, "When somebody wants to transact in the system, instead of you trying to acquire a bitcoin, you simply say, here are some U.S. dollars."

In other words, IBM, along with central banks around the world, are talking about completely replacing some of the most core systems the world uses to conduct finance.

Bypassing the banks and saving consumers money
Here's how IBM's potential blockchain network would work in more practical terms.

Consumers would use a digital wallet to link their actual bank account to the blockchain-based financial network. The consumer would use the digital wallet to transact in the real world, buying goods or services with their fiat cash from their linked bank account -- think the dollars, euros, and yen managed by central banks around the world. Transactions would then be verified and recorded using the open, blockchain ledger.

No longer would the system rely on banks or today's payment processors to settle accounts and verify transactions. The open blockchain ledger would handle that function. By bypassing these intermediaries (and their associated fees), costs for consumers would decline.

The proposed system currently under consideration at IBM would be monitored by central banks in their respective currencies. For example, the U.S. Federal Reserve would monitor the dollar-denominated network in the U.S., while the European Central Bank would monitor the euro-denominated network in Europe.

Blockchain ledger systems has Black Swan potential
For IBM and, for that matter, the world, this development has the potential to be a Black Swan. It would make existing payment networks obsolete, and it would revolutionize the way central banks manage real, fiat currencies across the globe. Outdated banking systems and processes would be replaced with a faster and cheaper alternative.

It is still early in the race to develop and deploy this technology, but the potential is too huge to ignore. As it stands today, IBM appears to be the lead horse moving blockchain technology out of its infancy and onto the global stage.

The article Is IBM About to Make Banks Obsolete? originally appeared on Fool.com.

Jay Jenkins has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.