Barclays has conducted the world’s first live trade transaction using blockchain technology, a landmark in the race for distributed ledger innovation.
The transaction, covering the export of butter and cheese from dairy co-operative Ornua in Ireland to the Seychelles, involved the cryptographic signing of digital documents using a platform developed by Wave – one of the beneficiaries of the Barclays Accelerator programme. Though relatively small in amount (under US$100,000), it is part of a regular flow of letters of credit between the two parties, and has the potential to be replicated in the near future.
According to Barclays, it took just less than four hours to create digital-only documents (including certificates of origin, certificates of insurance, commercial invoice, bill of lading created by the carrier and endorsed to Barclays UK); send them to the bank’s back office in India for checking and screening; send all cryptographically-signed documents to Barclays Seychelles; and for the latter to issue the LC itself before transferring everything to the importer, food retailer the Seychelles Trading Company.
Baihas Baghdadi, global head of trade and working capital at Barclays, tells GTR: “An export LC generally takes seven to 10 days to execute, between the issuance day and the final acceptance of documentations. Shortening that to less than four hours is a revolution in the way documentary trade has been operated for centuries.
“Just imagine the real value of it when you take it from LC to documentary collection, and then to the open account space, and you just eliminate the need for any documentation travelling around the world and shipping documents being lost in translation.”
On top of the time saving, Barclays has identified direct cost savings that can be made on courier costs alone using the Wave system. “What you are solving with this is four problems: speeding up the trade transactions; reducing delay-related costs for companies; optimising the internal processes for banks; and reducing the risk of documentary fraud, which is a really relevant aspect, because that will open up more liquidity in the market,” Baghdadi adds.
A lot of innovative thinking is going into ways to make payments on the blockchain using smart contracts but in this case, the LC itself was still issued through the Swift system, and funds were released in a traditional manner. Barclays head of innovation for trade, Shona Tatchell, explains the rationale behind this decision: “There is something absolutely wrong with lots of paper travelling around the world in an inefficient manner, but there is nothing wrong with the Swift system. That’s already digital and efficient. What we’ve done is address a real problem in the trade world.
“Turning a Swift-issued letter of credit into a smart contract is nice to have, but it’s not a fundamental necessity, and the same goes for payments. Yes, eventually, payments will be taking place across the blockchain, but at the moment, [the current system] is not that inefficient. I don’t see that as a huge problem that needs solving.”
The distributed ledger was used for the transfer of value and the cryptographic signing and referencing of the documents. Tatchell insists on the fact that the documents themselves did not go into the ledger, so there is no public access to them. “They remain inside the Wave system. They are completely secure and commercially protected,” she says.
Wave was one of 11 companies to go through the Barclays Accelerator programme in New York last summer. Since then it has been working with Barclays’ trade and blockchain team in the UK and South Africa to explore the various use cases of its technology.
“If you had asked me last year how long it would take to get this concept to life, knowing how we operate in the industry, I would have said three to five years, and we got it done and tested in less than a year,” Baghdadi says.
Now that it has an operational platform, Barclays will focus on on-boarding other banks and financial institutions to facilitate broader adoption. The bank received its first request to “join the party” from a large European bank today after the announcement was made, and plans to use networking opportunities at the upcoming Sibos event to continue to spread the word.
Whether banks will agree to leave their own blockchain experimentations behind to adopt a platform strongly associated with a competitor remains to be seen. So far distributed ledger innovation has oscillated between broad partnerships – such as the R3 consortium – and individual proof of concept announcements.
“Adoption could happen really quickly if we got that partnership approach instead of a competing approach,” Baghdadi points out.