Securing a Letter of Credit (LC) is the old and established way for financing international trade. A LC is basically a guarantee provided by a bank that an exporter will receive payment from an importer from another country once certain conditions are met; for example once the goods are shipped. The process is usually very time and labour intensive, as the banks need to run multiple checks on the two sides, exactly they type of bottleneck service that blockchain technology will be best placed to disrupt and replace.
Today, Bank of America Merrill Lynch, HSBC and the Infocomm Development Authority of Singapore (IDA) announced that they have developed a Blockchain prototype, utilizing the Hyperledger Project, that mirrors an LC transaction by sharing information between exporters, importers and banks on a private distributed ledger. This enables them to execute a trade deal automatically through a series of digital smart contracts.
The consortium says that its proof-of-concept shows potential to improve security by reducing errors, and make companies’ working capital more predictable. They plan to conduct further testing for commercial applications with partners such as shippers.
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Ather Williams, Head of Global Transaction Services, Bank of America Merrill Lynch, said: “We are continuously looking for ways to simplify and improve transaction processing for our clients. Blockchain has reshaped our thinking on how to make transaction processes more efficient and transparent for all parties. The success of this proof of concept is a significant development towards digitizing trade transactions, potentially resulting in considerable benefits to the supply chain process.”
“Many people are talking about the theory of Blockchain, but for the first time we can start to see how this technology might be used to solve the real world challenges our customers face,” said Vive Ramachandran, Global Head of Product for HSBC’s trade finance business. “It’s really exciting to have a valid proof of concept. Letters of Credit are an important part of the trade system, but they are based on 20th century technology, not 21st. Our challenge is to take this from concept to commercial use; making it quicker and easier for businesses to connect with new suppliers and customers at home and abroad.”
“A letter of credit or LC conducted on Blockchain enables greater efficiencies and visibility in trade finance processes, benefitting multiple parties across its value chain. With participation of more members, greater impactful benefits will be realised by the trade ecosystem. As part of the Smart Nation journey, partnerships and the adoption of such innovations can help transform the banking and finance sector,” said Khoong Hock Yun, Assistant Chief Executive of IDA Singapore’s Development Group.