For years the global financial industry has wrestled with blockchain technology, plumbing the depths to determine whether it poses an opportunity or a threat, and how it might shape the future of commerce and banking. HSBC and Bank of America Merrill Lynch, along with the R3 banking consortium, recently announced that they have created ways of using blockchain technology to simplify trade finance processes.
Blockchain technology, best known as the technology underpinning the digital currency bitcoin, has its advocates and its detractors; however its potential applications are a source of great interest worldwide. Financial services companies have been pouring effort into developing the technology in hopes of making all manner of financial transactions cheaper and faster.
The terms “blockchain” and “distributed ledger” are often used interchangeably, as the field is still evolving. Both are shared digital ledgers which allow participants to trace every transaction. The two differ with regards to how records are stored and maintained.
In partnership with the Infocomm Development Authority of Singapore, HSBC and Bank of America Merrill Lynch have used blockchain technology to emulate a letter of credit (LOC) transaction, Reuters reports. LOCs are widely used to mitigate risk between importers and exporters, helping to guarantee trillions in transactions; however the process is time-consuming and leaves a long paper trail.
Vivek Ramachandran, Global Head of Product for HSBC’s Trade Finance Business, said discussions are underway with other banks, corporate clients and shipping companies to develop the technology further.
R3, a New York-based consortium of 45 financial companies, said that in addition to applying blockchain technology to LOC transactions, more than 15 of its member banks have developed self-executing transaction agreements or “smart contracts”. These use R3’s distributed ledger platform to process accounts receivable transactions. Both importer and exporter, along with their respective banks, can see the transaction data in real time, which greatly enhances efficiency.