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Major banks trade cotton using blockchain in a move that could transform a major industry

Wells Fargo and the Commonwealth Bank of Australia (CBA) have used blockchain – the technology that drives bitcoin – to process and execute a shipment of cotton from the U.S. to China, in a move that could provide a big breakthrough for the future of international trade.

Blockchain works like a huge, decentralized ledger for the digital currency bitcoin, recording every transaction and storing this information on a global network so it cannot be tampered with. It's this technology that banks feel can be used in areas from remittances to securities exchanges in order to slash costs and create a fraud-proof record of transactions without the need for third-party authorization.

Australia's Brighann Cotton Marketing bought the shipment, which was going from Texas to Qingdao, China.

Typically this process would require large amounts of paper work, back-and-forth communication between all parties via email or fax, and the need to ensure everybody's records are up-to-date and the same.


Tim Graham | Getty Images

Blockchain and so-called "smart contracts" can remove the need for all of this. When the bales of cotton arrive at the port and are scanned, this automatically triggers the smart contract to execute the terms, which would involve transferring the ownership of goods and authorizing payment. This happens because there is a single document agreed on by all parties and that is only completed once a certain action has taken place.

This process is designed to be combat fraud by being encrypted and tamper-proof. Though it sounds simple, the blockchain technology underlying this is complicated, but attractive for organizations across the world.

"Existing trade finance processes are ripe for disruption and this proof of concept demonstrates how companies around the world could benefit from these emerging technologies," Michael Eidel, executive general manager of CBA's cash-flow and transaction services, said in a press release.

Banks are testing all sorts of blockchain uses. Earlier this year, Barclays trialed the use of smart contracts to trade derivatives, while a number of other major lenders have tested the use of blockchain technology to carry out cross-border payments.