On Monday, HSBC Holdings announced that they had successfully conducted the world’s first trade finance transaction via distributed ledger technology (DLT) or the well-known Blockchain. HSBC and ING acted on behalf of US agribusiness conglomerate Cargill.
The perception over the use of DLT is the minimization of fraud risks in letters of credit and the reduction of the number of steps during the process. In international trade, the payment method of letters of credit is the most popular. Also referred to as documentary credit, letters of credit represent a written liability in which a bank, on behalf of a buyer, confirms a seller that the payment will be executed according to the agreement in place. The entire process could last up to 10 days, a lot of time consumed for all involved parties. Now, Blockchain can achieve automatization of several procedures, saving money and time.
Vivek Ramachandran, head of innovation and growth at HSBC’s commercial banking division, commented the following adding that the technology was ready for commercial use:
“At the moment, buyers and suppliers use a letter of credit, typically concluded by physically transferring paper documents, to underpin transactions. What this means for businesses is that trade finance transactions have been made simpler, faster, more transparent and more secure.”
According to a bank tweet, they collaborated with ING and used the Corda Blockchain of DLT developer R3. The two banks used the technology for the finance of trade of soya beans shipped from Argentina to Malaysia.
HSBC stated that converting all of Asia Pacific’s trade paper documents to digital format could reduce the required time for exporting goods by 44% and costs by about 31%. They cited a UN study to support the argument.
Last year, HSBC and other 21 multinational banks collaborated with R3 to develop a Blockchain-based international payments system.