HSBC announced last month that it has used blockchain technology to conduct commercially viable trade finance for the first time. Transactions usually take about a week using paper-based processing mediums. Blockchain is the technology that powers cryptocurrencies like bitcoin. HSBC added it to enhance efficiency in the multi-trillion dollar funding of international trade.
HSBC issued a letter of credit for the U.S food and agriculture firm Cargill. The trade finance transaction was comprised of a bulk shipment of soybeans from Argentina to Malaysia. The letter of credit was issued by HSBC to Dutch bank ING. There have been other trade finance deals using blockchain that concur with other technologies. However, this would be first deal using a single, shared digital application instead of multiple systems.
The application of blockchain technology in banking is supposed to reduce the risk of fraud in letters of credit (LoC), and reduce the number of steps used to complete a transaction.
“The reason why letters of credit have persisted is because of two real challenges — the absence of digital infrastructure and the challenge of coordinating multiple parties,” Vivek Ramachandran, Global Head of Innovation and Growth at HSBC’s commercial banking unit told Reuters.
“This platform helps us overcome the first and I think the technology and everyone focused on it gives us the impetus to go after the second now with hopefully much better results than we have seen in the past.”
Normally a letter of credit is issued by one bank to another as a pledge that payments will be received under a set of conditions, guaranteeing more than $2 trillion worth of transactions. A normal transaction takes time, paper records, and a lot of correspondence between the parties involved.
HSBC confirmed that the transaction was performed on a platform called Corda, developed by R3, a popular New York blockchain consortium with more than 100 banks as members and trade associations.
Blockchain enhances efficiency and transparency, and reduces the paper trails attached to these kinds of transactions. Supporters of blockchain claim that it has the capability to turn over various industries. Sectors such as trade finance, health care, and insurance can be likely targets in usage of blockchain, as they depend on long paper trails.
