IBM and Bank of Tokyo-Mitsubishi UFJ (BTMU) have signed an agreement to develop smart contracts and automate business transactions based on blockchain modeling, ZDNet reported.

The companies would design, manage, and establish contracts that potentially could be deployed among business partners. They plan to leverage blockchain technology to automate business transactions between both organisations.

According to the report, the first pilot project would be built on the open source blockchain platform, Hyperledger Project, and deployed for contract management on IBM's cloud infrastructure.

IBM and BTMU had developed a blockchain-based smart contract management prototype. The companies said that the objective was to improve the efficiency and accountability of service level agreements (SLAs) in multi-party business interactions. BTMU intends to use the tool to manage contracts within its business environment in fiscal year 2017, which would be extended to its business agreements with IBM by the end of fiscal 2017.

In order to monitor the delivery and usage of the equipment, sensors containing relevant information would be used within the blockchain, the companies said. This, in turn, would facilitate the automation of invoicing and payment processes between IBM and BTMU.

"Blockchain technology has the potential to change not only the financial world, but also other areas of the business world, leading to improved efficiency of the end-to-end business process," said Motoi Mitsuishi, BTMU's deputy CEO for Asia and Oceania and general manager of Singapore branch and corporate banking division for Asia and Oceania.

Bridget van Kralingen, IBM's senior vice president of industry platforms, said that the technology was able to reinvent complex multi-party and contract-based business models, particularly in the banking and financial services sector.

IBM believes that blockchain technology has the potential to establish trust, something that is often lacking within business networks, as it decentralises the system of governance and security. Through this, different parties could have equal influence of authority within the network since blockchain involves a ledger that is shared and replicated across the ecosystem.