Blockchain technology, through a private distributed ledger, allows exporters, importers and their respective banks to transact and share information with unmatched security and privacy. Such deals can then be executed automatically utilizing a series of “digital smart contracts”. Smart contracts are essentially contracts written in computer code that get automatically executed after a few pre-specified conditions are fulfilled. In a blockchain-enabled transaction, all the involved parties can visualize data in real-time on their devices, and have access to a list of actions that need to be performed by each party.
In a historical move, a specific trade finance transaction (organized for an export by India’s Reliance Industries Limited to US-based Tricon Energy), has been organized using Blockchain technology by HSBC Holdings Pvt Ltd. This was organized as a Letter of credit (LC) transaction, and the technological superiority allowed both parties to substantially reduce the deal-flow time. Shortly thereafter, RIL issued a press release to acknowledge and confirm that the trade was a success.
“The use of blockchain offers significant potential to reduce the timelines involved in the exchange of export documentation from the extant 7-10 days to less than a day.” – Srikanth Venkatachari (Joint Chief Financial Officer, RIL)
This transaction allowed the seller (Reliance Industries Limited) to digitally transfer the title of goods to the buyer (Tricon Energy USA). The letter of credit in question was facilitated by ING Bank (representing Tricon), with HSBC India acting as the advisory bank on behalf of RIL. Hitendra Dave (Head of global banking and markets at HSBC) said that the use of blockchain in such deals, will have a significant impact on trade finance transactions, and that he expects such processes to enable greater transparency and enhanced security, in addition to making the transactions simpler and faster.
In the current system deficit of blockchain-enabled smart contracts, both buyers and sellers are dependent on paper-based letter of credits that are used to underpin transactions. In this legacy system, physical documentation (paperwork) is usually sent to each party in the transaction by post, courier or fax – and while the system may be robust, the costs and time undertaken by far outweigh the benefits. RIL explained the benefits of the new digital era of trading in its original press release.