Thirteen global banks have built a prototype trade finance application on R3’s Corda platform, described by the consortium as a “milestone” innovation.
The app, hosted on distributed ledger technology (DLT) will streamline the processing of sight letters of credit and is one of a number of trade finance apps R3 will be piloting on the platform this year.
Eleven of the banks involved have been named: Bangkok Bank, BBVA, BNP Paribas, HSBC, ING, Intesa Sanpaolo, Mizuho, RBS, Scotiabank, SEB and US Bank, however GTR understands that two further banks are active in the cross-border pilot, but did not wish to be named.
R3, which is a consortium dedicated to the Corda operating system for the financial system, is partnering with CGI – a tech firm – on the application development, but the banks have also been heavily involved in the development stage itself.
Chris Khan, R3’s project lead, tells GTR that they hope to have a pilot of Corda ready to go this year and be in full production mode in 2018. Until then, a number of bolt-ons and apps will be premiered and worked through.
“We’re very open publicly that Corda is not 100% production ready just yet. We made a lot of progress last year but we’re focused on building platforms and working with partners to build apps on top of this, so this works really well with our roadmap and our timeline for Corda. We want to have that first pilot happen at some point this year.”
Cutting trade times
R3 says that this app will reduce transaction times, which in trade finance can take a number of weeks. Removing the paper-based process is one thing, though, in trade there are international standards and arduous checking processes, which are also time-consuming.
In other areas in which blockchain and DLT is being explored, such as high-frequency trading, the technology is often the biggest barrier to latency, but Khan says this is not the case in trade finance.
“As you may imagine, standards and legal processes take time. We want to make it as quick as possible, we don’t think it will be down to T+1 second, but a low single-digit number of days. So there’s no holdup on the technology side, trade financiers aren’t looking at thousands of transactions per second like high frequency trading and equity markets and things like that. They’re looking at several transactions per minute or hour or day, not thousands per second: the technology can handle it, but it’s just about how we can work on standards,” he says.
In May this year, R3 completed the first two of three tranches in a fundraising round, raising US$107mn, which is the largest DLT investment to date. There are more than 40 investors from various parts of the world, most of them banks, and these will be expected to be among the first users of the platform, which Kahn says will eventually have interoperability with blockchain platforms such as Ethereum and Hyperledger.
GTR reported in March that R3 had already held discussions with Hyperledger about migrating to that particular blockchain platform, which has also been extremely active in trade finance.
Meanwhile, member banks of the R3 consortium have welcomed the development. Marguereite Burghardt, global head of the trade compliance centre at BNP Paribas, says: “While LCs have not progressed as much as the open account business in recent years, they remain a good way to finance trade and mitigate risks. If the industry manages to make the whole process fully digital, transparent and straight through processing, this could mean renewed development and wider access to this financing technique.”
Vivek Ramachandran, HSBC’s head of growth and innovation, adds: “The prototype integrates a standardised user interface that allows carriers and shipping companies to prepare and validate shipping details when they on-board goods and deliver them to the buyer – even if they are on a different technology platform. To further enhance the prototype, we’ll continue to work with established and emerging title registry providers to ensure this solution can provide a secure and legal title transfer of goods in a live environment, and anticipate piloting the app on the R3 network before the end of the year.”