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Soid Ahmad
Soid Ahmad
Articles (195)  | Author's Website |

IBM Blockchain Payments Aren’t an Upbeat Signal for Cryptocurrencies

IBM is focusing on permissioned blockchain while Mastercard isn’t interested in blockchain with native currency, which isn’t a good sign for mainstream cryptocurrencies

IBM Corp. (NYSE:IBM) recently announced cross-border payments using blockchain technology. Mastercard Inc. (NYSE:MA) followed with its own cross-border blockchain payment solution.

IBM, in collaboration with several other banks, is enabling cross-border payments powered by Stellar’s cryptocurrency, Lumens. Payments will be sent in near real-time using IBM’s blockchain technology. The payment system is expected to process around 60% of all cross-border payments in the South Pacific’s retail forex markets.

Mastercard, on the other hand, is making available its blockchain technology as an alternative to credit card based money-transfers for business-to-business payments. Consumer payments based on blockchain are not being introduced yet. Note that Mastercard isn’t using any cryptocurrency; its only using the blockchain technology. “We are not using a cryptocurrency, and we are not introducing a new cryptocurrency, because that introduces other challenges—regulatory, legal challenges,” says Justin Pinkham, an SVP at Mastercard.

Although IBM is using a cryptocurrency to process cross-border payments now, the company doesn’t see the use of this cryptocurrency becoming an industry standard in financial services. According to Jesse Lund, VP of Blockchain at IBM, “the banks’ use of Stellar’s digital currency is likely to be temporary.” He further thinks that, in the next year, central banks will begin issuing digital currencies of their own, and that these will become an essential element of blockchain-based money transfers.

For those of you new to blockchain technology, it’s a shared digital ledger to facilitate and verify business transactions. It has been widely used to record digital currency transaction like Bitcoin. But blockchain also has other uses for businesses.

Moreover, blockchain is a technology. It’s not owned by any specific company. Bitcoin was built on blockchain, which serves as Bitcoin’s shared ledger. The point to note is Bitcoin and blockchain are not the same. Blockchain has many use cases; Bitcoin is just one of them.

Blockchain doesn’t need Bitcoin, or any other cryptocurrency for that matter.

The blockchain technology can be used to build transaction systems without using cryptocurrency. Blockchain can add reliance and efficiency in all transactions, not only financial transactions. Currency related implementation like Bitcoin and Ethereum are just couple of use cases of the blockchain technology. All business transaction can be made efficient and secure using the blockchain.

A picture depicting how blockchain is changing business transactions

The point is that adoption of blockchain doesn’t directly imply bullish sentiment for digital currencies like Bitcoin, or networks like Ethereum. That’s why the launch of blockchain based payment systems from IBM and Mastercard aren’t an upbeat signal for cryptocurrencies. Both the companies are using the benefits of blockchain to reduce the time between transaction and settlement in cross-border payments. This makes money transfers cost effective and fast. Note that both these companies aren’t interested in cryptocurrencies; they are rather making use of the blockchain technology.

As companies are primarily interested in blockchain, it’s a good idea to analyze enterprise-grade blockchain and the main players.

Let’s talk about enterprise-grade blockchain

Source: IBM, The comparison depicts key differences in several protocols.

Bitcoin has no use case other than as a store of value. Transactions are recorded and verified as they happen. Ethereum, on the other hand, is a platform on which blockchain applications can be created. Ethereum network can be used to create cryptocurrencies, other digital assets and permissioned blockchain. In simple words, a group of companies can have their own ledger on Ethereum network to record, analyze and track transactions by setting permissions for every stakeholder on the blockchain. That’s why the use of term 'permissioned'.

For instance, a ledger with specific permissions can be created on Ethereum that can provide access to all the intermediaries of a money transfer transaction. The transactions can be recorded on the blockchain, which can be viewed by all stakeholders simultaneously, leading to a quick money transfer.

But, all the blockchain transactions on the Ethereum network are backed by Ether, the cryptocurrency of Ethereum. That’s where the rival protocol, Hyperledger Fabric, is interesting. It doesn’t require a cryptocurrency. It also supports collective defined membership and access rights in the business environment.

Let’s compare IBM and Microsoft to analyze how Hyperledger is more suitable for enterprise blockchain.

Microsoft Corp (NASDAQ:MSFT) is using Ethereum network for its enterprise blockchain solutions while IBM is using the Hyperledger. The benefit for IBM is that Hyperledger’s codebase is governed by a steering committee, which includes IBM. However, Microsoft has no control over Ethereum foundation. The foundation can change the code without Microsoft’s consent, which can create problems for Microsoft’s blockchain app development.

Overall, as enterprises are more interested in the blockchain rather than cryptocurrencies, Hyperledger Fabric is an ideal protocol for enterprise blockchain. This begs the question:

Is Hyperledger a threat for cryptocurrencies?

Enterprise-grade implementation of blockchain using Hyperledger is a threat to current cryptocurrency leaders. A blockchain can be built without tying a digital currency to it. This gives financial services businesses the option to stick to fiat currencies. Moreover, if central banks decide to issue their own cryptocurrencies, it will be challenging for companies like Ripple to keep their digital currency alive. Note that Ripple is promising in the field of payment services. The company has 75 more than 75 bank customers. Anyhow, central banks would need cryptocurrency that isn't interdependent on other cryptocurrencies; they won’t probably use any platform like Ethereum and Ripple that support native currencies.

Moreover, corporations have incentive to use the blockchain technology to reduce time and costs of transactions. But, there is little incentive to use native currencies attached to networks like Ethereum. Therefore, it is of utter importance to look for quality blockchain network and blockchain ledgers and enterprise-grade blockchain applications, rather than searching for cryptocurrencies.

Overall, blockchain protocols will become more significant than underlying crypto-currencies. This means blockchain networks that don’t have native cryptocurrency will gain more traction in the enterprise arena. This puts protocols like Hyperledger and Chain in a better position. Like Hyperledger, that’s backed by IBM, Chain is enterprise-grade blockchain network for financial services. It offers permissioned-blockchain infrastructure, without a native cryptocurrency.

Anyhow, it looks like cryptocurrencies are of minimal use in enterprise blockchain implementations. Therefore, it’s better to gain exposure through companies that are working with blockchain, rather than speculating on cryptocurrencies.

Who is the leader in enterprise-focused blockchain?

IBM is one of the leading plays in the enterprise blockchain solutions. The company is striving to become the leading enterprise blockchain solution provider. The company was early to create blockchain development protocols, and is successfully improving business transactions in terms of privacy, cost efficiency and verifiability.

IBM deployed its blockchain technology to solve disputes in its global financing program, and according to IDC, IBM estimates it will decrease the amount in dispute from $100 million a year to $30 million and reduce average dispute resolution time from 44 to 10 days.

IBM is also providing blockchain based trade finance platform to seven large European banks including Deutsche Bank (NYSE:DB), HSBC Holdings Plc (NYSE:HSBC), KBC, Natixis, Rabobank, Societe Generale and Unicredit.

Juniper Research also thinks that IBM is better positioned than competitor Microsoft in blockchain services. 40% of the respondents named IBM a leader in the survey carried out by Juniper. Only 20% considered Microsoft a leader. The reason might be IBM’s use of Hyperledger, which doesn’t have a native currency.

All in all, IBM is improving its blockchain services. It looks like IBM will emerge as an enterprise leader in the development and implementation of blockchain based services for businesses.

Final thoughts

Recent cross-border blockchain payment launches by IBM and Mastercard validate the viability of blockchain technology going forward. However, both the companies don’t see cryptocurrency as a necessity for blockchain payment services. Therefore, increasing adoption of blockchain technology shouldn’t be read as a bullish indicator for famous crypto-currencies.

Blockchain protocols, without native currencies, seem well positioned to gain traction in the enterprise space. As IBM is utilizing the protocol without a native currency, it looks better positioned to capitalize on the blockchain opportunity.

Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.

About the author:

Soid Ahmad
Soid Ahmad is affiliated with the Association of Chartered Certified Accountants. He graduated from Oxford Brookes University. He also holds a Master's degree in Economics and Finance from HSRW Germany. He has been working as a technology analyst for several years and has an eye for mispriced technology stocks. He is also affiliated with Focus Equity, an independent equity research firm.

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