Banks Baby Step Onto a Blockchain With a Letter of Credit App

by Tim Sloane 0

Banks continue to sniff around for a good use case that leverages the attributes of blockchain technology. With the support of the Infocomm Development Authority of Singapore, two banks have decided that Letters of Credit is the app that hits the sweet spot:

“Two financial outfits are planning to simplify their trading process using blockchain technology.

For those who came in late, blockchain is a distributed database that maintains a continuously-growing list of data records which are protected from tampering and revision. Both HSBC and R3 have said separately that they had created ways of using blockchain technology to simplify trade finance processes.

The two banks said they had joined with the Infocomm Development Authority of Singapore to emulate a letter of credit (LOC) transaction. This is important because those Letters of credit are one of the most widely used ways to reduce risk between importers and exporters, helping guarantee more than $2 trillion worth of transactions. Using blockchain would remove the need for this to be a huge time consuming paper trail.”

Despite the meltdown of Ethereum that demonstrated both an inability to fully debug smart contracts and then a total lack of fiduciary control over the smart contract software environment, R3 continues to promote smart contracts:

“R3 said more than 15 of its consortium member banks have also designed self-executing transaction agreements, known as smart contracts, on R3’s distributed ledger platform to process accounts receivable purchase transactions, known as invoice financing or factoring, and LOC transactions.

By putting the transaction on a distributed ledger, the importer and its bank, together with the exporter and its own bank, can see the data in real time.

The money men and women have been tinkering with blockchain technology. The theory is that it could save billions of dollars in costs and speed up transaction times. It also underpins the digital currency bitcoin, which creates a shared database in which participants can trace every transaction.”

Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group

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