Blockchain – Transforming the

future of trade finance

Behind the first live letter of credit on a scalable blockchain platform
HSBC has just completed the first live end-to-end trade finance How is HSBC leading blockchain adoption?
transaction on a scalable application for the issuance of a fully We believe that blockchain has the potential to create a new
digitised letter of credit, using Distributed Ledger Technology, market infrastructure for global trade, but replacing the current
more commonly known as blockchain. The application was ‘digital islands’ and paper trails connecting buyers and sellers
built using R3’s Corda blockchain. will need collaboration across the trade ecosystem.

While the flow mirrors the existing letter of credit process The above transaction is part of our collaboration with R3,
(involving agreeing terms of a letter of credit, the application, a consortium of over 100 financial institutions. Twelve banks
the issuance, the advising, the amendment request and were directly involved in supporting this letter of credit
its approval, the document presentation, the discrepancy application, which HSBC developed further to enable live
resolution, and the bill settlement instructions), a single transactions. HSBC is also involved in developing innovations
blockchain network was used for all participants, instead of in other areas of trade. We are actively involved in
relying on multiple systems. regulator-led and consortium based blockchain projects
such as we.trade and are actively exploring other applications
Agricultural conglomerate Cargill was on both sides of the
for open account trade.
transaction as applicant and beneficiary of the letter of credit
– sending a cargo of soybeans from Argentina to Malaysia What next?
– with HSBC Singapore acting as the issuing bank and ING Developing a network to support the deployment of
Geneva acting as the nominated bank under the digitised blockchain-based applications will be one of the critical next
letter of credit. steps. We will continue to work with R3 to expand the number
of partner financial institutions and increase adoption by
Why is this a significant step for you?
others in the trade ecosystem.
While there are digital solutions for documentary trade, their
siloed nature leads to what the International Chamber of We will continue to develop and refine the application with
Commerce calls ‘digital islands.’ This is because such digital each new transaction and facilitate the inter-operability
solutions still need to be bridged using paper. between partners.

New technology holds the promise of improved speed and We anticipate HSBC and other banks will conduct more live
processes and completely eliminating paper. However, transactions this year, while the system is readied for a full
realising these advantages requires a decentralised network, commercial launch within a year and it could take another
mirroring the decentralised nature of global trade. 3-5 years of collaborative work to gain critical mass. In
the interim, clients are embracing existing digital offerings
This is where blockchain comes in.
like electronic Bills of Lading, Mobile & Desktop Trade
R3’s Corda uses blockchain to track, and trace information Applications, SWIFT for Corporate for Trade, etc., that would
as it moves between parties. The Corda technology keeps prepare them to embrace blockchain in due course.
all players in sync, reducing the need for reconciliation and
We remain focused on working with other global and
speeding up your transactions, whilst providing you with
local financial institutions and governments, to ensure
end-to-end visibility. In the above transaction, this technology
that we empower businesses like yours, by revolutionising
helped reduce the time taken for exchanging and checking
trade finance.
documents, from the typical 5-10 days to less than 24 hours.
 Questions Fréquentes

What is a blockchain or distributed ledger Is this transaction an industry first? Is this just another
technology (DLT)? Proof of Concept / Pilot?
Distributed ledger technology (also known as blockchain There have been other proof-of-concept transactions,
technology) involves a distributed database maintained dummy transactions and proprietary transactions
over a network of computers connected on a peer-to- completed over the last 18 months but this is the
peer basis, such that network participants can share and first live transaction to be completed using Corda’s
retain identical, cryptographically secured records in a scalable technology.
decentralised manner. We believe the success of this transaction provides
Blockchain in the final context is a continuously growing list an excellent foundation for a scalable production of fully
of records that documents every financial transaction as a digitised letters of credit.
‘block’. For every new transaction, another block is added,
What are the benefits of participants in this transaction?
creating a permanent information chain.
The use of blockchain can help complete the document
Unlike a bank’s ledger, which is centralised and private,
exchange and transacting process involved in letter of credit
blockchain can be either public or private. It is distributed
transactions within 24 hours, whereas conventional paper-
directly to users who can then verify transactions without
based usually takes 5-10 days.
relying on a central authorising entity.
In addition, efficiencies through eliminating paper and
What is a private blockchain? streamlining processes will help make the letter of credit
Private blockchain is also known as permissioned more accessible to counterparties that do not enjoy mutual
blockchain. In contrast with the public blockchain, only trust, and that were formerly driven away from using the
participants, who are given access, are able to join the conventional letter of credit due to its complexity and higher
network and their identity will be validated by the network costs.
prior to onboarding. This mirrors real business scenarios This could promote international trade and unlock liquidity
in trade finance as all participants in the transaction are for businesses.
known to each other.
How does blockchain help facilitate a Letter of Credit
Private blockchain solves two major drawbacks of public
(LC) transaction?
blockchain. Given the trust level in a private blockchain
The primary reason for long lead times in conventional
is much higher than in a public one, substantial amounts
LC transactions is the need for physical documentation
of computational power to achieve consensus among
exchanges, including transfer of title of goods and
participants is no longer required. In addition, private
separate communications among counterparties, shipping
blockchain also allows transaction information to be shared
companies, banks, etc. These can be entirely transformed
with relevant parties only, instead of the entire network,
using blockchain technology.
enhancing the privacy standard as required in business
scenario. Blockchain technology shortens the transaction time of
LC transactions by allowing electronic transfer of title
Corda developed by R3, is one of the private blockchain
documents and connecting all parties in a single blockchain
technologies.
network, allowing instantaneous updates and removing the
What is Corda? long lead time for back-and-forth communication among
Corda is a built-for-purpose blockchain platform created the counterparties in an LC transaction.
by R3 for their members.
The core design principles are to build something that
will integrate with bank systems and that ensures speed,
scalability and privacy.
Essentially Corda is designed to enable secure global
communications and exchange of digital assets across
a global shared ledger for banks and their customers.
This transaction was built on Corda v3.1, which was
released in April 2018.

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