There is countless paperwork involved in conventional trading systems across borders. For instance, exporters and importers have to wait for their respective banks to verify purchase and receipts before issuing a letter of credit.
All because there is no trust within the system. So, the need for a trustless system that will automate a letter of credit is a must.
The average time to issue a Letter of Credit is 5-10 working days. However, that won’t be the case for a letter of credit on the Blockchain.
Blockchain will reduce the time and bureaucracy in exchange and processing. This method is becoming possible with a project the HSBC bank is piloting.
Obviously, Bringing Letters of Credit to the Blockchain will decrease the time and cost. It has several features that will remove unnecessary third parties in the system.
If trade deals are programmed to execute tasks without the help of a third party, there will be ease, and cross border trade will increase rapidly. Blockchain’s Smart Contract will, of course, play the role of automating deals.
Therefore, instead of the complexity of the system to delay trade, the only requirement will be for users to meet the terms of the letter of credit on the Blockchain’s Smart Contract. The smart contract, in this case, predefines trades and queries, as the need arises, between exporters, importers, and their respective banks.
On the contrary, the bank will only vet or audit the Letter of Credit and reciprocate, as stated in the Smart Contract. Similarly, the distributed ledger technology of the Blockchain will ensure that the deals are transparent, immutable, and evenly shared across the system.
HSBC And R3 Corda Blockchain
HSBC Holdings is a multinational investment bank and financial services holding company whose headquarter is in Britain. This investment bank is the largest banking and financial services institution in the world.
On the other hands, R3 Corda is an open-source Blockchain-based platform allowing direct business transaction in strict privacy using Smart Contracts. With Smart Contracts, R3 can reduce transaction and record-keeping costs while streamlining business operations.
As helpful as the Blockchain has proven itself to be across various industries, HSBC is experimenting letter of credit on the Blockchain. The rationale is to improve trade between the Malaysia branch and the nominating Singapore branch.
Fintech News Malaysia, on October 14, announced that HSBC launched a pilot Letter of credit on the Blockchain. The report went further to say that the bank has so far tried eleven Blockchain-powered transactions.
Though still under the pilot, the goal is to attain a commercially acceptable model by the year-end. Ajay Sharma, who is HSBC’s Regional Head of Trade and Receivable Finance at Asia pacific made the announcement
Impact On Trade and Finance Sector
- There will be an increase and transparency of transactions, which will help to tackle the risk of documentary fraud.
- It will reduce the cost of transaction reconciliation.
- The traceability feature of Blockchain could potentially assure the supply chain network.
- The immutability of Blockchain will provide a secure transfer of value.
The adoption of R3 Corda Blockchain for Letters of Credit on the Blockchain by HSBC will significantly revolutionize the trade and finance sector. Moreover, the streamlining of the methods of business and trade transactions is apparent.
The potential for Blockchain technology is enormous. It keeps disrupting and improving businesses.
You can share your thought on this topic using the comment box provided below.