HSBC-ING Letter of Credit Transaction
The NYSE- and LSE-listed banking and financial services organization has issued a letter of credit to the Dutch lender ING Groep NV (ADR) (ING) for the U.S. food and agriculture firm Cargill. The financial trade transaction executed involved a bulk consignment of soybeans that is shipping from Argentina to Malaysia.
Letters of credit, or LOCs, are issued when the buyer and seller do not know each other and use their respective banks to secure payments. An LOC is issued by one bank to another and serves as a guarantee that the payment will be received by the seller under a set of pre-agreed conditions.
However, even with an LOC, the process requires a lot of time, paperwork and back and forth communication and verification between stakeholders. Use of blockchain technology is expected to significantly improve the process by cutting down on processing time and make the process more trustworthy.
Instead of banking on paper-based records that remain with the stakeholders and are prone to the counterparty default risk, blockchain's decentralized ledger technology is set to overcome these shortcomings. Additionally, blockchain's potential to handle massive amounts of data and transactions within a transparent and trustworthy network brings in additional benefits.
The transaction was executed within a record time of 24 hours, compared to the standard period of five to 10 days.
"The need for paper reconciliation is removed because all parties are linked on the platform and updates are instantaneous," Vivek Ramachandran, head of growth and innovation at HSBC, said in a statement. "The quick turnaround could mean unlocking liquidity for businesses."
Banks Bank on Benefits of Blockchain
HSBC used a platform called Corda, which was developed by the blockchain start-up R3, a New York-based firm that leads a consortium of over 200 firms to build and use blockchain technology.
The development adds to the growing application of blockchain by leading banks in transaction processing. Last month, Spain’s largest bank, Banco Santander partnered with blockchain firm Ripple to launch a same-day day international money transfer service. (For more, see Santander Launches Blockchain Payments Service.)
While blockchain has been used by multiple businesses in private as well as permissioned modes, this is the first instance in which two global financial institutions were successful in carrying out a global transaction in record time. (See also, Public, Private, Permissioned Blockchains Compared.)
While banks and financial institutions have been wary of using cryptocurrencies due to their unregulated nature, they are embracing the underlying blockchain technology with open arms owing to the several benefits it offers.