Technology

IBM and the future of blockchain

By Integer Investments

IBM is heavily investing in the blockchain technology to disrupt large industries. Here we provide a few examples of how IBM is leveraging its blockchain business and provide some estimates of the economics involved.

Most investors believe that blockchain and BitCoin (the digital currency) are synonims. However, what most people don’t know, is the fact that the blockchain is an “infrastructure” and BitCoin is one of many applications. IBM is heavily investing in the blockchain to disrupt some large industries.

Murray Stahl, Blockchain Wallet, Ultimate Hedge

Blockchain basics
Blockchain is a new technology that enables businesses to work together with trust and transparency. Blockchain is a distributed shared operating system where all parties involved in an exchange have open access to an unchangeable digital record of transactions. Each participant has always an exact copy of the transactions and therefore all parties can confidently rely on this data. In theory, the blockchain, guarantees accountability and transparency while streamlining business processes.

The blockchain industry
There aren’t definitive numbers on companies using use blockchain, but The IBM Institute for Business Value released some figures a few months ago:

  • 70% of early adopters are working with blockchain to create new business models and reach new customers;
  • 65% of banks expect to have blockchain solutions in production in the next three years;
  • 80% of banks identified trade finance, corporate lending and reference data as having the greatest potential to be disrupted by the blockchain technology.
  • 15% of banks intend to implement full-scale, commercial blockchain solutions in 2017;
  • Companies expect reference data (83%), retail payments (80%) and consumer lending (79%) to be the segments that will be impacted the most by blockchain.

Another recent study from Markets and Markets speculates that the blockchain industry will grow from $210M in 2016 to $2.3B by 2021, for CAGR of 61.5% during the forecast period. Therefore, the blockchain is in the early stages of development but seems to have great potential and medium term economic value.

Numbers about the market and the companies involved are limited but according to this article IBM and Microsoft are the market leaders. IBM provided examples of how they are implementing the blockchain. I will get in touch with Microsoft to see whether they would like to contribute.

Blockchain can disrupt industries

Food Safety 

Food safety is one of the sectors that is receiving attention. Authenticity has been a challenge in China, and Walmart is taking a proactive role in using new technologies to address it. By using blockchain, Walmart is able to build an ecosystem of supply chain partners that is based on trust.

Healthcare 

The need for private, secure, and reliable information flow in healthcare is clear as organizations balance information sharing needs with privacy, security and protecting against ongoing cyber-attacks. The application of blockchain technology can be applied to address a healthcare workflow and ecosystem from the beginning as it is introduced to this emerging digital industry.

FinTech

Banks and consumers are turning to fintech companies to disrupt the financial industry. FinTechs are moving quickly to create new approaches in payments, lending and new use cases for blockchain. IBM is helping FinTechs envision, build and monetize these new solutions by providing developer tools, technology, training and programs to share financial services expertise. IBM’s cloud and blockchain ecosystem is helping FinTechs, start-ups, developers and independent software vendors drive faster design and development. For example, Eigencat, a Singapore-based startup, is using IBM Bluemix, to deliver digital investment solutions for the financial market. The FinTech startup is also using IBM Cloud to develop new cognitive-based investment solutions using Watson APIs and broaden its reach within and outside Singapore. Working with the Singapore BlueMix Garage, start-up FreshTurf is creating an innovative blockchain-based network of storage lockers for shipping and parcel delivery throughout Singapore.
A few examples of IBM applications in the blockchain industry

  • SBI Securities – testing blockchain for a new bond trading platform and for improving securities operations.
  • Japan Stock Exchange – testing the potential of blockchain technology for use in trading in low transaction markets;
  • Bank of Tokyo Mitsubishi UFG – using blockchain to examine the design, management and execution of contracts among business partners;
  • London Stock Exchange Group – exploring blockchain to manage risk and bring additional transparency to global financial markets;
  • Kouvola Innovation – using blockchain to transform logistics value chains into a more seamless process that provides a trusted view of every piece of cargo;
  • Kenya – The government is utilizing blockchain to develop an immutable and transparent education management system. In order to reduce the issuance of fraudulent academic degrees and limit the market of illicit academic certificates, the Kenyan government is working with IBM to launch an academic certificate issuance platform on a blockchain network;
  • Credit Mutual Arkea – using blockchain to manage customer identity, KYC, and improve customer satisfaction;
  • BNY Mellon – designing and developing a unique application for securities lending, using a blockchain network to trade and transfer assets;
  • Mizuho Financial Group – testing blockchain for settlements using virtual currency;
  • Everledger – using blockchain to track diamonds and other valuable assets
  • CLS Group – collaborating with IBM so that its payment netting service using Hyperledger Fabric meets the requirements necessary for delivering a resilient, secure, and scalable service.

IBM investments in the blockchain

IBM recently announced a $200M investment in the new global headquarters for its Watson Internet of Things (IoT) business in Munich. IBM is developing a new capability that connects IoT data to Blockchain through the IBM Watson IoT Platform. In addition, IBM opened a Blockchain Innovation Center in Singapore to accelerate blockchain adoption for finance and trade in the first collaboration of its kind with the Singapore Economic Development Board (EDB) and the Monetary Authority of Singapore (MAS) and IBM Research.

IBM monetization and blockchain performance?

IBM is leveraging its Bluemix technology to implement blockchain solutions. IBM offers two price plans: the starter plan is free, but the more secure system costs $10,000/month. We contacted IBM to ask about some performance/financial data about its blockchain business but they replied that they “can’t provide any financial data related to IBM Blockchain at this time.” We assume that the main reason for this is that the business is in its early stages and therefore does not materially impact IBM revenues. Considering that the estimates are for a total global industry value $210M in 2016, at the moment this segment is of minor importance to IBM. We estimate that IBM has approximately 50 paying customers, therefore the revenues generated would be in the range of $6M a year, plus ancillary revenues in the range of $50M a year.

Disclaimer: We are long IBM. Integer Investments is an asset management company. We invest in solid businesses, priced attractively and that can offer robust risk-adjusted returns. For more information visit our website www.integerinvestments.com.