Letter of credit (LC) transactions conducted on a blockchain-based platform have become a reality, as research into trade finance uses for distributed ledger technology are intensifying.
Barclays/Wave pilot LC
Last week, Barclays and an Israel-based start-up company carried out what they claim was the world's first real-life trade transaction using blockchain technology.
Reuters reported that the deal involved almost $100,000 worth of cheese and butter from Irish dairy co-operative Ornua to the Seychelles Trading Company. The trade was a pilot and was executed via a blockchain platform provided by fintech company Wave. It was done using a traditional LC, which is usually a cumbersome and lengthy process involving paper documentation, which is vulnerable to errors and fraud. However, the documentation aspect of this LC was executed with a blockchain-based electronic record-keeping and transaction-processing system, which enabled all parties to track documentation through a secure network and required no third-party verification.
Despite this breakthrough, Reuters quotes 'those in the know' as saying that widespread adoption of blockchain is still “between five and 10 years away”.
LC "within minutes"
Barclays' global head of trade and working capital, Baihas Baghdadi, was quoted as saying: “I've been here for more than two decades and I never even dreamed of a solution where you can remove completely the documents from the circle and just get everything moving around the world on an electronic basis within minutes, rather than days of couriers and shipping and all that.”
And David Rourke, Ornua's group trade finance manager, said: “Moving to paperless trade would be hugely beneficial in supporting the supply chain, through reduced costs, error free documentation, and fast transfer of original documents to our customers worldwide.”
Research into blockchain intensifies
Many hope that trade transactions guaranteed by documentation exchanged on distributed ledger platforms could become a reality in the near future. The Barclays/Wave pilot transaction is just one part of a whole flurry of activity and intense research and investment into finding the best use for blockchain in the financial industry. A leader in this search is the Hyperledger project, which is seen as being at the cutting edge of blockchain. It's an open source collaborative effort created to advance blockchain technology and hosted by the Linux Foundation. Launched in February 2016, it now has 80 members who come from various industries, including finance, banking, trade finance, supply chain management and technology.
A blog by Carlo R.W. De Meijer, published on Finextra, points out that the Hyperledger project has also announced plans to develop blockchain prototypes for trade finance innovation. Like the recent pilot transaction executed by Barclays and Wave, Hyperledger has said it will explore how distributed ledger technology could streamline the LC process.
CTMfile take: While Barclays and Wave seem to have got there 'first', there is probably much more to come from this industry-led initiative and we will see further banking uses and open source applications for distributed ledger technology in future.
Blockchain security remains major concern for banks
A report from Greenwich Associates looks at how distributed ledger technology is being adopted by organisations involved in capital markets.
Blockchain will “fundamentally alter” global finance
A report from the World Economic Forum says that blockchain “will fundamentally alter the way financial institutions do business around the world”.
Block chain distributed ledger technology is coming to trade finance and banking
Proof of concept from initiative from SCB, DBS and IDA to lower risks in trade finance, and as Nomura Research Institute announces it will develop a proof of concept for blockchain technology in banking