Consortium hatches blockchain tool for trade finance deals

Banks join with two of the biggest voices in tech to bring letters-of-credit transactions into the 21st century

A blockchain-based support tool for global trade finance deals has been created in a joint innovation project between HSBC, Bank of America Merrill Lynch and the Infocomm Development Authority (IDA) of Singapore.

Currently at prototype stage, the consortium’s tool simulates a paper-intensive letter-of-credit (LC) transaction by sharing data between exporters, importers and their respective banks on a private, distributed ledger.

That, in turn, enables the various business partners to execute trade deals automatically through a series of digital contracts.

The process unfolds over seven steps:

1. Importer creates an LC application for the importer bank to review and stores it on the blockchain;
2. Importer bank receives notification to review the LC and can then approve or reject it based on the data provided. Once checked and approved, access is then provided automatically to the exporter bank for approval;
3. Exporter bank approves or rejects the LC. Once approved, the exporter is able to view the LC requirements and is prompted to view through the application;
4. Exporter completes the shipment, adds invoice and export application data and attaches a photo image of any other required documents. Once validated, those documents are stored on the blockchain;
5. Exporter bank approves or rejects the application and documents;
6. Importer bank reviews the data and images against the LC requirements, marking any discrepancies for review by the importer. When approved, the LC either goes straight to completed status, or is sent to the importer for settlement;
7. If required due to a discrepancy, the importer can review the export documents and approve or reject them.

The consortium’s proof-of-concept tool has opened the way for security improvements, error reduction and increased convenience by making working capital more predictable for participating companies.

Vivek Ramachandran, global product head of HSBC’s trade finance division, said: “It’s really exciting to have a valid proof of concept. LCs are an important part of the trade system, but they are based on 20th-century technology – not 21st.

“Our challenge is to take this from concept to commercial use, making it quicker and easier for businesses to connect with new suppliers and customers at home and abroad.”

Khoong Hock Yun, assistant CEO of IDA Singapore’s Development Group, added: “An LC conducted on blockchain enables greater efficiencies and visibility in trade finance processes, benefiting multiple parties across the value chain.

“With participation of more members, greater impactful benefits will be realised by the trade ecosystem.”

Specialist tech partners on the project’s R&D side were IBM Research and open-source software specialists the Linux Foundation. The latter’s Hyperledger software contributed its digital DNA to the new application.

With the concept now proven, the consortium plans to conduct further testing on its commercial potential with select partners, such as corporates and shippers.