In an announcement on Wednesday, the partners shared that the blockchain solution digitises the sharing of information among exporters, importers and their respective banks; this renders trading transactions more efficient, secure and transparent.
Blockchain is a decentralised public ledger that enable triple-entry bookkeeping and was developed to track Bitcoin transactions in real-time, enabling what is called momentum accounting.
Speaking on the development, Ather Williams, Bank of America Merrill Lynch head of Global Transaction Services, said, “The success of this proof of concept is a significant development towards digitising trade transactions, potentially resulting in considerable benefits to the supply-chain process”.
Operating in a manner similar to the peer-to-peer file sharing network BitTorrent, this digital public ledger is distributed across the network and requires a consensus across the group of nodes maintaining the blockchain to make changes. This presents a secure method that permits trading without a centralised authority to approve transactions.
The prototype developed by the consortium reflects the traditional Letter of Credit (LC) transaction methodology used for sharing information among exporters, importers and their banks but shifts it to a private distributed ledger. This shift enables the automated execution of trade deals through a series of digital smart contracts.
Traditionally, trade finance processes are both time and labour-intensive, due to the requirement for due diligence and documentation. A LC or Documentary Credit is essentially a bank guarantee that a specific seller will receive payment from a buyer upon the fulfilment of specific conditions.
IDA’s assistant chief executive Khoon Hock Yun noted that an LC conducted on blockchain enables greater efficiencies and visibility in trade-finance processes, benefiting multiple parties across its value chain.
Further testing on its commercial application with selected corporate partners and shippers will aid in refining and validating it further, given its potential to resolve practical challenges faced by commercial customers of banks.
HSBC’s Vivek Ramachandran, Global Head of Product for HSBC’s trade finance business, shared: “The work we have done in Singapore has the potential to make trade easier. LCs are vital to mitigating risk for companies and last year, supported US$2.2 trillion of trade. This work could lead to the conversion of a paper-based financial instrument to a digital one, with all the resulting benefits.”