Based on blockchain technology, the solution digitises the sharing of information among exporters, importers and their respective banks, making trading transactions more efficient, secure and transparent.
In simple terms, blockchains, which were developed to keep track of Bitcoin transactions, are similar to Excel spreadsheets. The difference is that these "ledgers" accept inputs from different parties and can be changed only when there is a consensus among the group running the blockchain. This, potentially, makes them more secure and does away with the need for a central authority clearing or approving the transactions.
The application developed by the consortium mirrors the traditional paper-intensive Letter of Credit (LC) transaction methodology used for sharing information among exporters, importers and their banks. The significant change is that it does this on a private distributed ledger, which enables the users to execute a trade deal automatically through a series of digital smart contracts.
Trade-finance processes are typically time and labour-intensive, involving multiple documents and checks to reduce risk and provide assurance to sellers, buyers and their banks. An LC or Documentary Credit is essentially a guarantee provided by a bank that a seller will receive payment from a buyer once certain conditions are met - for example, once the seller provides proof that he or she has shipped the buyer's goods.
The consortium utilised the Linux Foundation open-source Hyperledger Project blockchain fabric, the development of which was supported by IBM Research and IBM Global Business Services.
The consortium said that the proof of concept shows the potential to streamline the manual processing of import/export documentation and improve security by reducing errors; this could also increase convenience for all parties through mobile interaction and make companies' working capital more predictable. The consortium now plans to conduct further testing on the concept's commercial application with selected partners such as corporates and shippers.
Ather Williams, Bank of America Merrill Lynch head of Global Transaction Services, said: "We are continuously looking for ways to simplify and improve transaction processing for our clients. 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."
HSBC's Vivek Ramachandran added that many people are talking about the theory of blockchain, but for the first time, the potential of the technology to solve real-world challenges faced by the bank's customers has become apparent.
Mr Ramachandran, who is Global Head of Product for HSBC's trade finance business, added: "The work we have done in Singapore has the potential to make trade easier. LCs are vital to mitigating risk for companies and last year, supported US$2.2 trillion of trade. This work could lead to the conversion of a paper-based financial instrument to a digital one, with all the resulting benefits."
IDA's assistant chief executive Khoon Hock Yun noted that an LC conducted on blockchain enables greater efficiencies and visibility in trade-finance processes, benefiting multiple parties across its value chain. "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," he said.
How does the blockchain solution work?