There is nothing unremarkable about a shipment of soybeans from Argentina to Malaysia; nor is it surprising when a transaction of this nature is financed using a letter of credit, issued by one bank, on behalf of the buyer, to another.
But what is remarkable about one such transaction, completed on behalf of US food and agriculture firm Cargill last Monday, and involving 2 banks; HSBC and Netherlands headquartered ING, was that it was the first such transaction, in history, to be completed using blockchain technology.
Whilst the world’s biggest banks may not, as yet, have embraced the rise of cryptocurrencies with open arms; Jamie Dimon, Chairman and CEO of JP Morgan, has labelled bitcoin a fraud, and banks have largely left crypto to its own devices; the blockchain technology that underpins the rise of crypto has exerted a fascination for even the most die-hard of financiers.
The beauty of blockchain, it is thought by financial institutions, is that it is decentralised. Rather than using an expensive middleman or third party regulator to confirm each stage of the transaction process; Bank A informs Bank B that it will be sending them money, Bank B confirms the message has been received, Agency C receives money from Bank A and moves it to Bank C; requiring written authorisation at every stage; and so on; the blockchain is a “decentralised ledger”, whereby a network of connected parties independently confirm every single transaction; doing away with the need for a middleman, and significantly speeding up the entire process.
The blockchain makes the process of moving money cheaper, as well. With blockchain, because all parties are linked onto the same network and continuously monitor one another looking for updates or new transactions, there is no longer any need for a paper trail. The majority of the “red tape” is therefore done away with; because no transaction can complete without being verified by all parties on the network, the possibility of fraudulent activity or mistakes is all but eliminated; transactions completed on the blockchain ledger are permanent, irreversible, and can be seen by all parties.
Last Monday’s historical breakthrough moment; the first ever letter of credit to be issued and confirmed using only the blockchain; was achieved using a platform developed by a startup named R3, using a platform called Corda.
R3 is one of a number of blockchain developers; Ripple is another, as well as Digital Asset; whilst many major banks try to develop their own in-house solutions; attempting to deliver the technology that banks need to successfully implement blockchain solutions.
R3 completed a $107m fundraising last year, with a 40-strong consortium; 38 of them banks; backing the project, which is “open source”, meaning financial institutions can “plug and play”; tapping into the system and adapting it for their own needs.
Whilst a number of founding members; most notably Goldman Sachs and Santander; who are now building a blockchain based international money transfer service with Ripple; subsequently pulled out, R3 still boasts an impressive network of financial institutions, who pay an annual subscription fee rumoured to be between $250-500k, to use the service, with financial regulators permitted to join the platform free of charge.
HSBC says that it completed last week’s exchange of funds in less than 24 hours – a significant improvement on the 5-10 days that a letter of credit usually takes to complete using a paper based system.
Vivek Ramachandran, head of growth and innovation at HSBC, commented on the transaction, saying that: “The need for paper reconciliation is removed because all parties are linked on the platform and updates are instantaneous; “The quick turnaround could mean unlocking liquidity for businesses.”
HSBC added that the successful transaction could have commercial implications.
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With transaction speeds as fast as this, and low fees; it’s rumoured that a recent cryptocurrency transaction of $100m between two parties completed in less than 2 minutes and cost just $0.4 dollars; blockchain really does have the potential to be a game changer when it comes to all forms of financial transactions, not just trade financing.
There are complications; blockchain processing speeds are not always as quick; there are concerns about the amount of processing power required to confirm transactions; and the role of the regulators and the nature of interactions between different financial institutions are yet to be ironed out and formalised; but the increased flexibility and immediacy does indeed, as HSBC point out, have the ability to increase liquidity for all. From a C2C perspective, these kinds of developments will increase the pressure on banks to offer faster, cheaper services.
When it comes to money transfer, we await the first commercially viable services that are ready to take on significant transaction volumes and deliver excellent, reliable customer service at the same time, but when they do, rest assured we will be featuring these services alongside our stable of vetted, regulated brokers on our price comparison site.
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