This article, originally published at 4:09 p.m. on Thursday, Sept. 1, has been updated with market data and analyst commentary.
Visa (V - Get Report) CEO Charles Scharf is getting ready to find out how well blockchain technology, which he has described as both an opportunity and a risk for financiers, can deliver on its potential.
The company's European innovation lab said Thursday that it's actively seeking banks in the region for a pilot with Canada-based BTL Group, which specializes in blockchain, that will test the system's use in bank settlements. That's one of the areas where the technology, which reduces the need for intermediaries by giving multiple parties secure assess to a joint ledger, has the potential to streamline the finance industry, according to an analysts by Moody's Investor Service.
"Through the use of smart contracts and blockchains, I believe we can create a fast, compliant and low-cost interbank payment and settlement service, with embedded regional compliance," Hendrik Kleinsmiede, co-founder of Visa Europe innovation hub Collab, wrote in a blog Thursday.
Visa's program with BTL "is a very real experiment, a very real pilot and it's going to start to put blockchain technology to the test in a way that's never been done before," BTL Group CEO Guy Halford-Thompson said in a phone interview. Blockchain, born with the cryptocurrency Bitcoin and also referred to as distributed ledger technology, lets each party in a transaction retain control over their components since no one can modify data entered by someone else.
The pilot will use BTL Group's cross-border settlement platform, called Interbit, which the company says can help banks in "reducing cost, settlement time, credit risk" and can utilize "smart contracts" to automate many of the steps required for regulatory compliance.
Interbit addresses two challenges that blockchain companies face when dealing with the financial industry: privacy and scalability, he noted.
"Theoretically, there's no limit to the number of transactions per second that Interbit can handle," Halford-Thompson said in phone interview. "We still get that distributed ledger of trust, but we also ensure that privacy is maintained and that banks' data isn't actually shared among all of the participants in the network, it's only shared among the relevant participants."
San Francisco-based Visa is joining banks like JPMorgan Chase (JPM - Get Report) , Goldman Sachs (GS - Get Report) and Citigroup (C - Get Report) , who are creating their own blockchain technology internally or investing heavily in startup companies that specialize in it.
Deutsche Bank (DB - Get Report) , Banco Santander (SAN) and Bank of New York Mellon (BK - Get Report) , for instance, recently announced a partnership with broker ICAP, technology company Clearmatics and UBS Investment Bank to create a "utility settlement coin" that can be used in cross-border payments and easily converted to central-bank currencies from the U.S. dollar to the euro.
Visa's initiative, along with the others, "is an example of how blockchain technology can be used to record and carry out bank transactions of many different kinds," Jason Oxman, head of the Electronic Transactions Association -- which represents more than 500 companies offering electronic payment services -- said in an email. "This is the next phase of digital currency innovation."
Since full implementation remains "some time away," Moody's analyst Nick Caes said in a telephone interview, a focus in the proof-of-concept programs under way now is that "they really can ensure that the benefits of blockchain are still intact when applied in such a way."
While Visa's Scharf said he doesn't see the technology as an immediate disruption to Visa's payment network, it could become one in the "medium to long-term" outlook.
"The fact is it's really not that much cheaper when you actually go through it -- it's not quicker," Scharf said at a conference. "There are lot of things that stand in the way of it in the short-term being a meaningful disruptor to what we do."
Still, he noted, "there are places in the payments universe which are highly inefficient, which are complicated, which are expensive, and it can provide great benefit."
Visa has climbed 5.7% this year to $81.93, trailing a 6.2% gain by the broader S&P 500.