Last week, HSBC and ING Bank successfully executed a live trade-finance transaction for international food and agriculture conglomerate Cargill using R3’s Corda blockchain platform.
This was a bulk shipment of soybeans from Argentina, through Cargill’s Geneva trading arm to Malaysia, with Cargill’s Singapore subsidiary as the purchaser. A letter of credit (LC) was issued using Corda by HSBC to ING. The two banks were acting on behalf of the Cargill organizations.
But why should anyone care?
Banks have been touting such transactions for the best part of two years now. HSBC, Bank of America Merrill Lynch (BAML) and the Infocomm Development Authority of Singapore announced a breakthrough prototype in August 2016 for handling LCs on blockchain.
Then in January 2017, HSBC was one of seven bank founders of the Digital Trade Chain consortium. It was built for SMEs in Europe to use distributed ledger technology on the Hyperledger to bring new levels of simplicity, efficiency, security and transparency to the paper-heavy blizzard of often manual and insecure processes companies undertake after a buyer has agreed to purchase goods and a supplier to deliver them in open account trading.
That consortium has since rebranded as we.trade.
Are we going round in circles here, or are we threatening to get anywhere yet?
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Vinay Mendonca, |
Vinay Mendonca, global head of product and propositions, trade and receivables finance at HSBC, agrees that there have been lots of test trade-finance transactions during proofs of concept for blockchain technology, but he claims this Cargill transaction – which focuses on trade using LCs rather than conducted on open account – is more significant.
“A lot of those earlier prototypes were testing the blockchain technology,” he says. “We have now built a production scale platform with scalable architecture. This is a live commercial use-case. It is not a dummy transaction. This is no longer something that it is being incubated in a laboratory. It is working technology that we can scale up in the months ahead, as we continue to enhance the platform.”
He suggests that the Cargill transaction is as significant an advance as the work done in partnership with BAML in 2016 and now brings blockchain much closer to the day-to-day way these transactions will be handled as a matter of course.
Mendonca says: “We have soaked up a lot of learnings from those earlier tests and we are now up and running with a scalable platform to support live transactions that we see as a utility that many banks are interested to join.
“The platform also offers different nodes for various users beyond buyers, sellers and banks. As an example, there is a node on Corda for Bolero [the company established by Swift and the global shipping and insurance industries to drive the digitization of global trade] to join to offer an electronic bill of lading title registry service. And Corda offers nodes for verification and certification.”
He adds: “We need to get the shipping companies and ideally the ports and customs authorities on the system as well.”
Conventional exchanges for paper-based documentation relating to LCs usually take between five to 10 days.
“You sometimes find that the ships move faster than the documents,” says Mendonca.
The soybean exchange was completed in 24 hours on a single shared application rather than the multiple systems of the buyer, the seller and each of their banks.
“You could crash those times even further,” Mendonca suggests. “It needn’t be 24 hours. It could be two hours.”
Rani Misra, regional treasurer, Apac, at Cargill, says: “Simply put, we took a highly manual, complex transaction and made it more secure and efficient.”
She adds: “We see the exciting potential of extending this technology into other areas of our financial ecosystem.”
Exchange of payments
That won’t, for now at least, reach as far as exchange of payments. The Corda trade-finance platform allows the various parties in a trade-finance transaction using LCs to view associated records in real time on a shared platform, rather than sequentially passing paper confirmations.
“We have had a lot of interest from clients, especially commodities companies, in solving the complexity of paper records around letters of credit, which are central to a significant portion of all trade, and also to reduce the time involved and provide better visibility,” says Mendonca.
“And banks need to respond to that. The associated exchange of payments works well on Swift and is not the immediate pressing problem there.”
And how long will it be, does he think, before the blockchain becomes the default method for handling trade-finance LCs?
“There’s still a long journey ahead,” he says. “It could be five to 10 years, but it reminds me of how standardized container boxes came to dominate shipping. When they first appeared, market participants in global trade weren’t immediately convinced, but over time they simply became the way goods move.”
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