Commonwealth Bank of Australia (CBA), Wells Fargo and Brighann Cotton are conducting the world’s first interbank trade transaction combining blockchain technology, smart contracts and the internet of things (IoT).
The transaction, which is taking place between Brighann Cotton US and Brighann Cotton Australia, and their respective banks Well Fargo and CBA, is taking a shipment of 88 bales of cotton from Texas in the US to Qingdao in China. It involves the paper-intensive letter of credit being executed through a digital smart contract stored on a private distributed ledger – using Skuchain’s Brackets system.
A smart contract is an agreement written in a computer code that allows the transaction to be automatically executed once the conditions of the contract are met. This is where the IoT comes into play. As GTR reported in its latest cover feature, the IoT refers to devices and sensors automatically communicating and sharing data, and which combined with smart contracts and blockchain technology is seen as a key innovation in the trade finance space.
The use of IoT in the Brighann Cotton trade involves a GPS device that tracks the geographic location of the goods in transit. Once the goods, which were shipped on September 14 and are still being transported at the time of writing this story, arrive at its final destination in Qingdao, the smart contract will automatically trigger the release of funds.
Speaking to GTR, Michael Eidel, CBA’s executive general manager of cashflow and transaction services, says the experiment marks the world’s first trade transaction between two independent banks in which all three emerging technologies are being combined: “We wanted to prove that the combination of blockchain, smart contract and the IoT works. From a client perspective, the combination of the three really leads to an exciting, very simple and straightforward experience.”
With these technologies, paperwork that used to take days with manual processes can now be accomplished in minutes, reducing costs and improving efficiency, according to CBA. Other benefits include the convenience and transparency for all involved parties, as data is updated in real time within one system, as well as the improvement of security and reduction of fraud risk because the ledger is immutable.
The transaction is, according to industry players, a landmark step in trade finance innovation. While many banks have been working on proof of concepts for trade transaction solutions involving blockchain and smart contracts, the recent move by CBA and Wells Fargo could be a “game-changer”, according to Gatecoin, a Hong Kong-based digital currency exchange.
“Although we cannot assess the technical details, this is a world premiere and a huge achievement considering the transaction involved actual physical goods being traded across borders,” Aurélien Menant, founder and CEO of Gatecoin, tells GTR.
Expanding the use of IoT
As the transportation of the Brighann cotton is still underway, the payment of around US$35,000 has not yet been made, Eidel of CBA says. At the time of speaking to GTR, data from the tracker had recorded the shipment to be located around Singapore, and the shipment is expected to arrive in Qingdao in early November.
“So far, all the different trigger points in the smart contract have been working well,” he says. “We see the information distributed simultaneously and in real time across all the different participants. The release of funding when the ship has arrived is the last outstanding proof point of this experiment.”
He says all initial paperwork prior to the shipment was processed using blockchain technology, except for the bill of lading. Likewise, the payment itself will be made in a traditional manner.
“Our ambition wasn’t to have a fully-flexed model, but really to start with the most important new things, combining the different technologies and having a viable great customer experience,” Eidel says.
Going forward, the bank will focus on how to expand the use of IoT and sensors on the ships – and it says the potentials should not be underestimated. Data from these devices could especially be valuable to the insurance industry by improving the monitoring of the goods insured. As such, involving insurance companies in a transaction is the next milestone for CBA.
“An experiment could be to add sensors to measure if the range of permitted humidity and temperature were exceeded,” Eidel says. “Then a smart contract that codified these conditions would trigger a notification to the insurance company that the goods have probably been corrupted.”
In this way, the trackers are particularly useful when something goes wrong, as the devices would show exactly when the issue occurs and who owns the goods at that point in time. “There would be no dispute over the criteria that have been pre-defined by the participants,” he says.
CBA and Wells Fargo are both a part of the R3 consortium, which consists of over 70 financial institutions working together on using blockchain technology in the financial markets, but this transaction is conducted independently of the consortium.