HSBC Completes First Trade Deal with Blockchain System

HSBC said on Monday it had performed the world’s first commercially viable trade–finance transaction using a blockchain system.

The bank issued a letter of credit for US food and agriculture firm Cargill. The trade finance transaction involved a bulk shipment of soybeans from Argentina to Malaysia. In addition, the letter of credit was issued from HSBC to Dutch lender ING.

There have been other trade finance deals that use blockchain in conjunction with other technologies. But the Cargill transaction marked the first use of a single, shared digital application rather than multiple systems, HSBC said.

Letters of credit are issued by one bank to another. This guarantees that a payment will be received by a seller under conditions.

Traditionally, this process takes time, countless paper records, and a lot of back and forth between the parties. However, blockchain technology changes all that.

HSBC logo attached to a wall with 3 cars parked on a parking space
HSBC completed the world’s first transaction using blockchain technology.

Blockchain is the technology that underpins bitcoin. In the case of the cryptocurrency, it records all of the transactions that happen on the network, creating a public ledger.

The introduction of blockchain in the bank industry is expected to reduce the numerous documents. It will also eliminate several days of processing needed for a single transaction to a paperless task that can be done in hours.

Furthermore, blockchain has the potential to be utilized for encrypted and unhackable record-keeping across a range of industries.

“The next stage is actually encouraging as many participants as possible to sign up to the utility,” said Vivek Ramachandran, head of innovation and growth for commercial banking at HSBC.

He also said that banks, shipping companies, ports, and customs operations would have to take up the same technology before it could gain widespread usage.

“We don’t envisage the platform as anything other than a utility.”

The Use of Blockchain with HSBC

The use of blockchain in the banking industry is expected to reduce fraud in letters of credit. This also applies to other transactions as well as reduces the number of steps used.

Putting all of Asia Pacific’s trade-related paperwork into electronic form could cut down time it takes to export goods by up to 44% and cut costs by up to 31%, said HSBC, citing a study by the United Nations.

“The reason why letters of credit have persisted is because of two real challenges – the absence of digital infrastructure and the challenge of coordinating multiple parties,” Ramachandran said.

“This platform helps us overcome the first and I think the technology and everyone focused on it gives us the time to go after the second now with hopefully much better results than we have seen in the past.”

For this transaction, HSBC utilized a platform from blockchain startup R3 called Corda. Additionally, R3 works with a consortium of banks to come up with blockchain solutions to a variety of problems.

HSBC and ING said that the exchange was performed in 24 hours. It was better compared to the 5-10 days it normally takes to complete such exchanges through a paper-based system.

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