While much attention has been paid in recent months to digital currencies like Bitcoin, with prices soaring due to fervent speculation, the underlying blockchain technology is slowly gaining steam in the technology industry. International Business Machines (NYSE: IBM) has invested in blockchain, looking to use the technology to remove inefficiencies and reduce costs for its customers.
A blockchain is a distributed, decentralized database that can be used to record transactions in a way that can't be altered. Any process that requires multiple parties to maintain records and verify those records against those of the other parties can benefit from blockchain technology. IBM CEO Virginia Rometty put forth the example of buying a house in an op-ed for The Wall Street Journal, a process that involves various parties like banks and tax agencies, and typically takes about 50 days to complete.
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While the range of potential applications for blockchain is broad, finance is an industry well-suited for this type of technology. IBM is already deeply embedded in the industry, with 97% of the world's largest banks using IBM products, according to the company's annual report. It makes sense, then, that a consortium of seven major European banks have chosen IBM to build and host a new trade finance platform based on blockchain technology.
A blockchain win
After a competitive bidding process, IBM was chosen by the Digital Trade Chain Consortium to build a trade finance platform that will run on IBM's cloud. The consortium consists of Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societe Generale, and Unicredit, seven of the largest banks in Europe.
Small and medium enterprises are the target of the platform, which aims to simplify trade finance processes and expand access to financing by lowering costs. The World Bank estimates that 50% of small and medium enterprises lack access to formal credit, leading to a global credit gap as high as $2.6 trillion.
I've argued before that IBM's existing customer base is a major advantage for the company. That's true for cloud computing, and it's true for blockchain as well. Rudi Peeters, CIO of KBC, said this about choosing IBM for the project: "To make the Digital Trade Chain network a reality and enable it to serve potentially thousands of the consortium's banking clients, we turned to IBM in enterprise blockchain to help us quickly bring this highly scalable system into production. Their blockchain and banking industry expertise will help us create a new platform for small and medium businesses in Europe that can enable them for faster, easier and cheaper trade transactions."
IBM's platform is expected to go into production before the end of this year, and the consortium expects to add additional members, including banks from other countries and trading partners like shippers, freight forwarders, and credit agencies. No financial details of the deal were disclosed, but this looks like the highest-profile blockchain win for IBM so far.
IBM is far from the only major company investing in blockchain. Microsoft and Accenture are building a digital ID network using blockchain, for example, and Microsoft offers blockchain as a service through its Azure cloud platform. But big deals like this trade finance platform are right in IBM's wheelhouse.
IBM has worked with more than 400 clients implementing blockchain solutions so far, in areas including financial services, supply chains, internet of things, risk management, digital rights management, and healthcare. It remains to be seen whether blockchain lives up to its full potential. If it does, IBM will be one of the driving forces.
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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Timothy Green owns shares of IBM. The Motley Fool recommends Accenture. The Motley Fool has a disclosure policy.