Indian Institute of Management, Rohtak

Term-III
Management Information System
Assignment: Session 10
HSBC: Facilitating Trade Finance using Blockchain

Submitted by:
Group 02
Abhijeet Nagpal PGP12111
Gagan Sharma PGP12116
Jayash Lamba PGP12121
Palak Agrawal PGP12085
Shivangi Gautam PGP12081
Shreya Chaurasia PGP12106
1. What are the key steps in the trade finance process? What is the role of banks in the
trade finance process? How is risk apportioned?

Key steps in trade Finance

1. The buyer's bank issues a letter of credit in the seller's favor.
2. The buyer's bank sends the original letter of credit to the seller's advising bank.
3. The credit is then authenticated and approved by the seller's bank and sent to the seller.
4. The seller examines the letter of credit before making arrangements for the products.
5. The seller prepares and submits export documentation to his bank.
6. The letter of credit is verified by the seller's bank (negotiating bank).
7. The bill is negotiated with the seller's bank.
8. The bill and paperwork are received by the buyer's bank from the seller's bank.
9. The buyer verifies and accepts the bill that he has received from his bank.
10. The payment is made by the buyer.
11. The buyer receives the shipment paperwork, which contains the details of the goods he
ordered, after making the payment.
12. The amount is reimbursed to the seller's bank by the buyer's bank.
13. The payment is paid to the seller.

Banks manage various financing instruments in Trade financing. The documents include
Bill of exchange: A bill of exchange is a non-interest-bearing legal document that obligates a
seller's foreign customers to pay a certain amount to another party at a later date.
A letter of credit is a document issued by the seller's bank to the buyer's bank that specifies that
the seller is entitled to payment if certain delivery conditions are met. It reduces the seller's risk
by ensuring that the buyer's bank will pay him. At the same time, the buyer is safe from harm
and fraud because payment is not made until the vendor meets the requirements.
A bill of lading is a document issued by a shipping agency and signed by authorities of the
carrying vessel for commodities being delivered from the seller's location to the buyer's location.
Banks can give lending lines of credit to both importers and exporters, and letters of credit
reduce the risk associated with international trade because the buyer's bank guarantees payment
to the seller for the products shipped.
The buyer, on the other hand, is protected because payment will not be made until the seller
complies with the LC's conditions. Both parties must follow the conditions of the agreement in
order to execute the transaction.
Factoring is when a percentage of a company's accounts receivables is paid to them Exporters
might be provided with export credit or working capital. Insurance can be used to cover the cost
of shipping and delivery of products, as well as to safeguard the exporter against non-payment by
the buyer.
2. How does blockchain work? What are its strengths and weaknesses compared to the
traditional process of trade finance? Why is it thought to be a good platform to move to for
trade finance?
● Blockchain refers to a distributed database that is maintained by a peer-to-peer network
of computers (one of the varieties of Distributed Ledger Technology). Each transaction
was recorded as a block in a database. Each transaction added a block to the permanent
information chain. Each block in the blockchain contains data and a hash reference. The
hash pointer was used to record the address of the previous block as well as the hash of
the data within the block. A small change in data (tampering) would cause the preceding
block to change, and hence the chain. As a result, the blockchain was designed to
withstand data manipulation.
A blockchain was a distributed system that was managed by a collection of computers
from diverse businesses. It didn't have a centralised authority. In contrast to centralised
systems, this network's entire network was aware of a transaction. Previously, the
information on the blockchain was saved in a database (shared and continually
reconciled). It was an immutable and shareable database.

Strengths
Develop innovative financing solutions and letter of credit options to seek for new
revenue streams.
Small and medium-sized businesses (SMEs) and businesses that would ordinarily trade
on an open account can benefit from banking services.
Find out everything you can about a customer's financial status and transaction history
Utilize blockchain security features to provide greater visibility and control over
transactions, which will aid the bank's capital adequacy.
The trade financing products and services offered by participating institutions are more
accessible than traditional methods.
Access to global markets can help you grow your business and broaden your reach.

Weakness
1. The lack of standard protocol for blockchain networks:
A. One of the most serious challenges with the development of digital platforms in trade
finance is that each platform developer is aiming to do something different.
B. Even within the blockchain ecosystem, different code languages, consensus methods,
and privacy protections exist, resulting in silos that are unable to communicate with one
another.
 2. The Need for Legal Systems to Recognize Digital Documents in Trade
When it comes to the digitalization of trade, the importance of establishing a unified
regulatory framework that allows for the digitization of international business cannot be
understated. One of the most fundamental barriers to blockchain adoption in the
commerce industry, it may be argued, is legal ambiguity concerning the legal status of e-
documents across legal systems.
3. High costs associated with adopting and operating the blockchain
The cost of building up and maintaining a blockchain network is considered as a
roadblock to mainstream adoption of the technology. In the aggregate, the efficiency and
speed with which blockchain networks can conduct peer-to-peer transactions comes at a
high cost.

3. What are the key challenges in implementing and commercially rolling out blockchain-
based trade finance services for HSBC to its clients?

a. From a governance viewpoint

b. From a technology standardization viewpoint
c. From a regulatory standpoint

Ans :

(a) From a governance viewpoint

Trade systems are disconnected, with the majority of them still relying on paper. This not only
produces friction between all trade parties, but it also limits their ability to expand globally.
The absence of industry standardisation was one of the reasons behind blockchain's slow
adoption. Blockchain (also known as DLT) was used by the consortia founded to connect global
trade partners to facilitate communication between various parties. Before blockchain technology
can be deployed at scale, issues including scalability, security, and law must be addressed.

(b) From a technology standardisation viewpoint

It allowed banks to be more transparent in their trading dealings and operations. Because
blockchain-based systems are self-sufficient and can settle everything on their own, banks will
be able to complete transactions quickly. However, it was uncertain if externalising their entire
system at once was a good idea. Integrating existing systems was also problematic because they
couldn't be totally removed.
Before using blockchain, financial institutions had to ensure that they had enough capacity to
handle large volumes of data and that the energy consumption issue was overcome.

Customers would find it difficult to adopt blockchain technology since the processes required in
a transaction would necessitate technical knowledge. Customers would also have to keep the key
in a secure location.

(c) From a regulatory standpoint

Because there are presently no regulations governing blockchain, it is subject to both profits and
losses. Banks that utilise blockchain would need to enact regulations to cope with the consequent
confusion in the case of a data breach.

4. How has the nature of the service that HSBC offers to its trading clients changed
between the traditional process and the blockchain-based process? What are some critical
differences for HSBC and for its customers in the entire process?

● HSBC is one of the eight founding partners of the Contour(opens in new window)
platform, which enables end-to-end digitalization of trade finance and allows clients to
benefit from quicker, simpler, and more effective working capital management. The bank
was instrumental in the creation of both the technology and the laws that regulate its use.

● Since May 2018, HSBC has utilised Contour to complete 18 commercial transactions
totalling more than USD35 million in commodities. The platform is now in commercial
usage, and they want to start transacting on the network on a regular basis in early 2021.

● Due to HSBC and its clients' global, crossborder character, thousands of foreign currency
(FX) transactions take place across numerous balance sheets in dozens of markets every
day.

● To settle these payments instantaneously, HSBC FX Everywhere uses distributed ledger

technology, which improves the client experience by increasing efficiency, lowering
processing costs, and reducing risk.

● HSBC has settled over 2 million agreements on the ledger so far, with a total notional
value of approximately USD1.7 trillion. They intend to have more than 85% of internal
FX back-to-back trades eligible for settlement on the platform by the end of the year.
● Many parties benefit from HSBC's On-Chain Payment service, which connects
blockchain-based ecosystems so that they may trade in multiple currencies nearly
quickly, 24 hours a day, seven days a week.

● This method was used by HSBC to successfully execute cash settlement in a trial digital
bond offering in Singapore, which was a first for both HSBC and Singapore.

● We successfully simulated a fully digital bond offering on SGX's DLT-enabled platform

– in combination with a traditional issuance – reducing overall settlement time from five
days to only two days and making the process more efficient.

● HSBC's Digital Vault is a blockchain-based custody platform that allows global custody
clients to access details of their private assets – including equity, debt, and real estate –
directly and in real time via our online banking platform, HSBCnet, rather than having to
request a search of paper-based records. There are now USD13.5 billion in assets on this
blockchain network.