HSBC, Bank of America Merrill Lynch and Singapore’s Infocomm Development Authority (IDA) have teamed up to trial a new blockchain prototype to execute import-export deals automatically using smart contract technology.
The prototype, which utilizes the Linux Foundation’s open-source Hyperledger Project blockchain technology, replicates a letter of credit, a document typically from a bank assuring that a seller will receive payment up to the amount of the letter of credit as long as certain documentary delivery conditions have been met.
The blockchain-based solution allows to digitalize a highly paper-based process that typically involves many copies of the same documents being manually shared between all of the parties involved in the deal.
According to Vivek Ramachandran, global head of product and propositions for global trade and receivables finance at HSBC, “over US$2 trillion of trade today depends on the physical exchange of documents.”
“What we’ve shown is blockchain has the potential to take away paper, which could be completely revolutionary if commercialized. [Blockchain] makes the system much more efficient,” Ramachandran told CNBC. “It’s expensive to adopt it, but the upside is huge.”
The solution allows for all relevant information and steps of the trade finance deal, as well as the letter of credit, to be shared by the counterparties and their banks on a private distributed ledger. The prototype also uses smart contracts to automate the negotiation and enforcement of the agreement.
The new solution demonstrates that, when used in trade finance, blockchain technology allows to streamline processes, provides greater security, reduces errors and helps prevent fraud.
“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,” said Ather Williams, head of global transactions services at Bank of America Merrill Lynch. “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.”
The partners intend to conduct further testing with selected collaborators such as corporates and shippers.
Singapore and Blockchain Tech
In 2014, Singapore announced plans to become the world’s first Smart Nation and “a Smart Financial Center.”
Having made fintech one of its top priorities, the Monetary Authority of Singapore, the city state’s central bank and financial regulator, has launched a number of initiatives to foster the domestic fintech ecosystem.
Through its Financial Sector Technology and Innovation (FSTI) scheme, MAS is committing SG$225 million (US$167 million) over the next five years to support fintech innovation.
Among the projects that are being backed by MAS, there is a “decentralized record-keeping system based on blockchain technology” aimed at preventing duplicate invoicing in trade finance, MAS’ managing director Ravi Menon unveiled in June 2015.
Singapore, one of the most open and supportive jurisdictions towards fintech, collaborated in the launch of the first IBM Center for Blockchain Innovation last month.
IBM Research said it will work with government, industries and academies to develop applications and solutions on enterprise blockchain, cyber-security, and cognitive computing technologies.
The first projects for the Center will focus on trade solutions using blockchain to improve efficiency of multi-party trade finance processes and transactions.
IBM is also working with PSA Singapore Terminals, the world’s largest container transshipment port, and others to create a trade ecosystem that would connect emerging financial technologies with the physical world of global trade and logistics.