Can Blockchain Simplify Trade Finance?

Blockchain has been making inroads into finance — specifically, trade finance — through a series of agreements struck this week that show the distributed ledger concept is catching on with some marquee names, Reuters reported on Wednesday (Aug. 10).

FinTech firm R3 and 15 of its consortium member banks said that they have been successful in completing two prototypes for smart contracts that run across R3’s platform. The contracts are tied to accounts receivable transactions on the purchasing side, more commonly known as factoring, and also letters of credit (LOCs). In the case of the latter, noted Reuters, the LOC typically helps ensure transactions between buyers and sellers but can be unwieldy in terms of paper forms to be filled out and tracked.

Reuters also reported that HSBC and Bank of America Merrill Lynch have linked with Infocomm Development Authority of Singapore to “emulate” LOC transactions. The advantage lies in the fact that the exporter, the importer and the bank are able to view the status of the transaction in real time across the distributed ledger.

Reuters also stated that the blockchain prototypes developed by the financial firms and the development authority — along with the consortium efforts — have been aiming at saving the financial system billions of dollars in annual transaction costs via shared databases. Beyond the prototypes, Vivek Ramachandran, global head of product for HSBC’s trade finance business, said corporations, banks and shipping companies are working to keep developing blockchain’s use cases.