Executing financial transactions on the blockchain happens every single day in the Bitcoin space. But executing Letter of Credit transactions is an entirely different matter. A new alliance between HSBC, IDA Singapore, and BofAML aims to tackle this concept. In doing so, the involved parties want to make trading more efficient for companies and banks.
A New Consortium Embraces Blockchain Technology
Many financial institutions are focusing their attention on the blockchain industry right now. Prototype solutions are being built all over the world, as the financial sector is prone to disruption. The Infocomm Development Authority of Singapore, HSBC, and Bank of America Merrill Lynch are focusing their attention on Letter of Credit transactions.
Ather Williams, head of Global Transaction Services, Bank of America Merrill Lynch, stated:
“We are continuously looking for ways to simplify and improve transaction processing for our clients. Blockchain has reshaped our thinking on how to make transaction processes more efficient and transparent for all parties. The success of this proof of concept is a significant development towards digitizing trade transactions, potentially resulting in considerable benefits to the supply chain process.”
By using the Hyperledger Project blockchain codebase, this prototype has been developed successfully. The solution mirrors Letter of Credit transactions by sharing information between banks, importers, and exporters. A private distributed ledger is used to achieve this goal, which lets parties executed trade deals automatically by using smart contracts.
Digitizing The Letter of Credit Concept
For the longest time, documentation associated with import and export has to be processed manually. This process is also more prone to errors and is often experienced as inconvenient. The new prototype blockchain-based solution makes working capital more predictable and allows for mobile interaction. Further testing with selected partners will occur over the next few months.
One of the main advantages blockchain has is how it reduces labor intensity. It can also contribute to reducing risk and provide assurance to sellers, buyers, and banks. The letter of Credit is a guarantee given by a financial institution the seller will receive a payment from the buyer. That is, assuming specific conditions are met. Through blockchain technology, all parties involved can visualize data in real-time.
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