Moving to a digital trade finance system could benefit importers and exporters
The way businesses have traded with each other for decades is set to change. HSBC and its partners are adapting blockchain technology to try to remove the need for time-consuming paperwork, making it quicker and simpler for businesses to trade internationally.
‘Letters of credit’ are an important part of the trade system, used by importers and exporters to reduce the risk of trading with each other, and giving suppliers certainty that they will be paid.
What is blockchain?
Blockchain is effectively a database. It can record financial transactions as blocks. For each new transaction, another block is added, creating a permanent information chain. HSBC Securities Services produced a paper on blockchain in June 2016, exploring how the technology might evolve and the practical applications it could have in the future.
Read HSBC’s paper on blockchain.
Last year this type of financing supported more than USD2 trillion of trade. But it is based on 20th-century technology – creating a trail of paper documents, which take time to print, check and process.
HSBC, Bank of America Merrill Lynch and the Infocomm Development Authority of Singapore have teamed up to investigate how blockchain could simplify the process. A joint prototype shows that blockchain technology can, in theory, be applied to letters of credit. A paperless system could make it far simpler for companies to buy and sell overseas while maintaining high levels of security.
Vivek Ramachandran, Global Head of Product and Proposition for Global Trade and Receivables Finance, HSBC, said: “Many people are talking about the theory of blockchain, but for the first time we can start to see how this technology might be used to solve the challenges our customers face.”
The blockchain prototype shows the potential for streamlining manual processes, improving security and increasing convenience. The consortium now plans to test the concept’s commercial application.
“We have a valid proof of concept,” Mr Ramachandran continued, “but much more work needs to be done to commercialise the idea. However, it is still an exciting breakthrough. This work could eventually lead to the conversion of a paper-based financial instrument to a digital one, with all the resulting benefits for companies conducting global trade.”