HSBC and its partner, Bank of America’s Merrill Lynch, recently published a proof of concept to demonstrate how Blockchain-powered contracts can be used to replace paper letters of credit which are commonly used in international trade.
R3 Consortium, on the other hand, completed two prototypes which demonstrate how distributed ledger technology can address the key challenges facing the USD 45 billion global trade finance industry. However, in separate interviews, when officials of both institutions spoke about the Blockchain technology, the key concept which permeated their conversations was collaboration.
Proof of concept is absolutely fundamental
Vivek Ramachandran, global head of product and propositions for global trade and receivables finance at HSBC, says there is over $2tr trade today which depends on physical exchange of documents. His bank, HSBC, has shown that Blockchain has the potential to take away paper which could be completely revolutionary if commercialized.
He said in a Yahoo interview:
“When you’re trading internationally, there is a fundamental disconnect between the buyer and the seller where the buyer would like to pay as late as possible once he’s got certainty that the goods are being shipped and the seller wants to get paid as early as possible. And that’s impossible without an intermediary made to get trust issues. What this technology does is to provide a transparent mechanism to share information in a paperless world. So the proof of concept is absolutely fundamental to making this transition possible.”
Ramachandran thinks the upside of the technology is going to be more trade:
“The upside is going to be for companies buying and selling internationally. It’s going to be cheaper and quicker. The role of the bank to mitigate trust issues and to provide financing doesn’t go away. So this makes the system much more efficient. So it’s expensive to adopt it but the upside is huge.”
Letter of credit as global standard
He also says that the global standard will be a letter of credit which exists today and what his bank has been trying to do is to replicate that standard on a distributed ledger.
“The solution is going to be collaboration,” he said. “It’s going to be banks, shipping companies and corporates adopting it together. But having the same standard of a letter of credit which has now been around for over a 100 years is going to be free. Collaboration would be key.”
Ramachandran said the Blockchain has felt like a solution looking for a problem. He suggests that looking into trade finance where issues of trust between buyers and sellers exist; or the gap between when payment is made and goods are sent, are the best use cases which are ideal for Blockchain.
Collaborating in the environment which works with banks’ peers
Tim Swanson, Director of Market Research at R3, shares the view that ensuring collaboration between clients who are now interested in the consortium, was one of the key purposes of the firm’s existence. Though he says that prior to R3’s existence, some banks such as UBS, Barclays and BBVA have been working independently and cohesively to find use cases for the Blockchain technology, there was no place for any of them to collaborate in a secure area which is “taking their regulated environment very seriously”.
“In fact there was no effective organization or consortium that allowed that to happen. So, we basically built a solution for this exact problem. We built the ability for them to coordinate and collaborate in an environment that works with their peers.”
Nowhere else to go to explore the Blockchain
R3 currently leads a consortium partnership with over 50 of the world's leading financial institutions. The idea is for them to work together to design and deliver advanced distributed ledger technologies to the global financial markets. Swanson says these clients were, at first, careful about what they said. But later, they all sought to work together as part of the consortium to see whether the R3 ideas are legitimately worth it and if they have any merit.
The collaboration was also necessitated by the fact that, despite the enormous amount of heightened interest, the clients had nowhere else to go to as they sought to delve into the Blockchain technology’s actual utility to determine if revenues could be generated through some new types of use cases or make some savings by removing systems.
Swanson explains that R3, the technology company which built the commercial consortium, has cleared the way for their clients, including in the areas of research and regulations. R3 is primarily and currently looking at the financial sector but could dovetail into other areas which are potentially useful in the future.