Blockchain – in the real world of trade and commodity finance, how will this Uber work?

By Steve Chemaly and Rohan Isaacs (ZA) on September 19, 2016Posted in Banking

In our last article in this series we argued that banks can create new markets for themselves in trade finance by providing digitised letters of credit or trade finance instruments for the movement of both digital and physical goods using blockchain. We likened the ease of transacting in this way to the simplicity of ordering a taxi service through Uber. It now seems that Barclays, together with the Israeli start up Wave, may have caught the first blockchain Uber ride.

They claim to be the first organisations to execute a global trade and finance transaction using blockchain technology.

This was a letter of credit transaction and the first to have trade documents handled on the new Wave blockchain platform, with funds sent via Swift.

Digitising the letter of credit will significantly reduce the cost of a trade transaction.

The letter of credit as a payment instrument has been around for more than a century and it has survived because there hasn’t been an alternative instrument that can do the job better.

However, by digitising the letter of credit and loading it onto the electronic trading platform, together with the invoices, bills of lading and other trade documents, we do get a better instrument which will significantly reduce the cost of a trade transaction by avoiding the costs arising from the handling of the vast paper trail required to facilitate its supply chain.

Paperless trade uses digital documents that can be transferred faster, and with fewer errors.

Blockchain technology uses a distributed ledger technology which enables all parties to the transaction to be able to view the relevant title, shipping and other trade documents. The documents can be accessed and uploaded from any device, including mobile ones.

How this will actually work in the context of an import/export transaction has also been addressed by HSBC and Bank of America Merrill Lynch in the application of their recently launched proof of concept project. The importer will input the information that it would like to see the exporter provide, and the exporter and/or its bank will input such information. This information can be tracked and viewed by all parties to the transaction. The exporter can upload images of the trade documents for storing on the distributed ledger. Once the images are loaded, the data is embedded and cannot be altered.

Applying this proof of concept, each of the parties involved in a letter of credit transaction – the exporter, importer and both of their banks – can view images and data  in real time (even using their mobile devices) to see what the next actions to be performed are. Each action in the work flow is captured onto this distributed ledger and is transparent to all authorised participants. Confidential data is encrypted.

(Information generally extracted from articles by Ian Alison dated 10 August titled “HSBC and Bank of America Merrill Lynch use hyper ledger project for blockchain-based trade finance” and 7 September titled “Barclays and Wave complete world’s first blockchain trade finance transaction”)

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