A new prototype developed by Bank of America Merrill Lynch (BofAML), HSBC and the Infocomm Development Authority of Singapore (IDA) brings the paper-intensive letter of credit (LC) transactions onto the blockchain.
The application enables exporters, importers and their respective banks to share information on a private distributed ledger (see the seven steps below). The trade deal can then be executed automatically through a series of digital smart contracts – contracts written in computer code that can be executed automatically once certain conditions are satisfied. The parties involved in the transaction can visualise data in real time on their devices and see the next actions to be performed.
Smart contracts running on distributed ledger technology, which provides a single, immutable record of a trade verified by all parties, are seen as a key innovation in the trade finance space, with an increasing number of banks looking into real-world applications.
Over 15 banks in the R3 consortium recently also announced the trial of a platform dedicated to invoicing and LC transactions. Participants include Barclays, BBVA, BNP Paribas, Commonwealth Bank of Australia, Danske Bank, ING Bank, Intesa Sanpaolo, Natixis, Nordea, Scotiabank, UBS, UniCredit, US Bank and Wells Fargo. The banks designed and utilised smart contracts on R3’s Corda distributed ledger platform to process accounts receivable purchase transactions and LC transactions.
Using blockchain technology to execute LCs can help streamline the manual processing of import/export documentation, improve security by reducing errors, make companies’ working capital more predictable and increase convenience for all parties through mobile interaction.
“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 digitising trade transactions, potentially resulting in considerable benefits to the supply chain process,” says Ather Williams, head of global transaction services at BofAML.
According to a joint statement from HSBC, BofAML and IDA, the next steps involve further testing the concept’s commercial application with selected partners, such as corporates and shippers. “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,” adds Vivek Ramachandran, global head of product for HSBC’s trade finance business.
The Asian consortium used the Linux Foundation open source Hyperledger Project blockchain fabric whose development was supported by IBM Global Business Services and IBM Research, which recently opened a blockchain research lab in Singapore.
Singapore confirms its status as a hotspot for blockchain innovation in trade finance. In December, DBS, Standard Chartered and IDA developed a proof of concept to track invoices and help fighting fraud.
“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,” says Khoong Hock Yun, assistant chief executive of IDA Singapore’s Development Group.
The seven steps to a blockchain-based LC transaction:
1: The importer creates an LC application for the importer bank to review and stores it on the blockchain.
2: The importer bank receives notification to review the LC and can approve or reject it based on the data provided. Once checked and approved, access is then provided to the exporter bank automatically for approval.
3: The exporter bank approves or rejects the LC. If approved, the exporter is able to view the LC requirements and is prompted to view through the application.
4: The exporter completes the shipment, adds invoice and export application data and attaches a photo image of any other required documents. Once validated, these documents are stored on the blockchain.
5: The documents are viewed by the exporter bank, which approves or rejects the application.
6: The importer bank reviews the data and images against the LC requirements, marking any discrepancies for review by the importer. When approved, the LC goes straight to completed status or is sent to the importer for settlement.
7: If required due to a discrepancy, the importer can review the export documents and approve or reject them.