Bank of America, HSBC Develop Blockchain Prototype Solution to Replace LC Transactions

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by Polina Chernykh · 3 min read
Bank of America, HSBC Develop Blockchain Prototype Solution to Replace LC Transactions
Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade. There are basically two types: commercial and standby. The commercial letter of credit is the primary payment mechanism for a transaction, whereas the standby letter of credit is a secondary payment mechanism. Photo: Dimitri Dikaios/Flickr

A group of banks, including HSBC and Bank of America, have created a new blockchain solution that will help to streamline the process of global trade.

The Infocomm Development Authority of Singapore, BANK of America Merrill Lynch, and HSBC have announced that they designed a blockchain-based prototype solution that will facilitate the process of international trade finance. According to the consortium, the use of the distributed ledger technology will replace the paperwork involved in securing letters of credit.

A letter of credit, or a documentary credit, is an established financial tool used for financing international trade. It is a guarantee issued by a bank that a seller will get a payment from the buyer from another country.

The process of executing trade finance transactions is very time consuming as it requires banks to conduct multiple checks. The intensive manual document handling sometimes leads to delays, errors and additional expenses.

The new application will enable exporters, importers and banks to conduct a trade deal automatically via digital smart contracts. It will make the process more convenient for all parties, improving security and reducing the manual processing of documentation. Besides, it will help to make working capital more predictable.

The developers of the app used the Linux Foundations open source Hyperledger software, while IBM Research and IBM Global Business Services offered technical and program assistance.

“We are continuously looking for ways to simplify and improve transaction processing for our clients,”  Ather Williams, head of global transaction services at Bank of America Merrill Lynch, told IBTimes.

“Blockchain has reshaped our thinking on how to make transaction processes more efficient and transparent for all parties. The success of this proof of concept is a significant development towards digitising trade transactions, potentially resulting in considerable benefits to the supply chain process.”

Vivek Ramachandran, global head of product for HSBC’s trade finance business, commented: “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 real world challenges our customers face.”

Khoong Hock Yun, assistant chief executive of IDA Singapore’s Development Group, said: “A letter of credit or LC conducted on Blockchain enables greater efficiencies and visibility in trade finance processes, benefitting multiple parties across its value chain.”

“As part of the Smart Nation journey, partnerships and the adoption of such innovations can help transform the banking and finance sector,” he added.

Meanwhile, another banking giant, IBM, is reportedly working on a similar project. Last month, the bank unveiled it had been developing a new blockchain solution that will help to resolve transaction disputes with customers and partners. The solution is scheduled to be launched in September.

Overall, multiple financial firms are starting to recognize the potential and importance of the blockchain technology. The applications based on the technology can be used to serve the unique needs of various industries and businesses.

According to the recent report from Ernst and Young, the blockchain will achieve critical mass in financial services within 3-5 years. The large scale implementation of the technology will not take too long and can be expected in the near future.

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