HSBC has just completed the first live end-to-end trade finance transaction on a scalable application for the issuance of a fully digitised letter of credit, using Distributed Ledger Technology, more commonly known as blockchain. The application was built using R3’s Corda blockchain.
While the flow mirrors the existing letter of credit process (involving agreeing terms of a letter of credit, the application, the issuance, the advising, the amendment request and its approval, the document presentation, the discrepancy resolution, and the bill settlement instructions), a single blockchain network was used for all participants, instead of relying on multiple systems.
Agricultural conglomerate Cargill was on both sides of the transaction as applicant and beneficiary of the letter of credit – sending a cargo of soybeans from Argentina to Malaysia – with HSBC Singapore acting as the issuing bank and ING Geneva acting as the nominated bank under the digitised letter of credit.
While there are digital solutions for documentary trade, their siloed nature leads to what the International Chamber of Commerce calls ‘digital islands.’ This is because such digital solutions still need to be bridged using paper.
New technology holds the promise of improved speed and processes and completely eliminating paper. However, realising these advantages requires a decentralised network, mirroring the decentralised nature of global trade.
This is where blockchain comes in.
R3’s Corda uses blockchain to track, and trace information as it moves between parties. The Corda technology keeps all players in sync, reducing the need for reconciliation and speeding up your transactions, whilst providing you with end-to-end visibility. In the above transaction, this technology helped reduce the time taken for exchanging and checking documents, from the typical 5-10 days to less than 24 hours.
We believe that blockchain has the potential to create a new market infrastructure for global trade, but replacing the current ‘digital islands’ and paper trails connecting buyers and sellers will need collaboration across the trade ecosystem.
The above transaction is part of our collaboration with R3, a consortium of over 100 financial institutions. Twelve banks were directly involved in supporting this letter of credit application, which HSBC developed further to enable live transactions. HSBC is also involved in developing innovations in other areas of trade. We are actively involved in regulator-led and consortium based blockchain projects such as we trade and are actively exploring other applications for open account trade.
Developing a network to support the deployment of blockchain-based applications will be one of the critical next steps.
We will continue to work with R3 to expand the number of partner financial institutions and increase adoption by others in the trade ecosystem. We will continue to develop and refine the application with each new transaction and facilitate the inter-operability between partners.
We anticipate HSBC and other banks will conduct more live transactions this year, while the system is readied for a full commercial launch within a year and it could take another 3-5 years of collaborative work to gain critical mass. In the interim, clients are embracing existing digital offerings like electronic Bills of Lading, Mobile & Desktop Trade Applications, SWIFT for Corporate for Trade, etc., that would prepare them to embrace blockchain in due course.
We remain focused on working with other global and local financial institutions and governments, to ensure that we empower businesses like yours, by revolutionising trade finance.
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