HSBC completed the first yuan-denominated blockchain-based letter of credit transaction, the bank said on Tuesday.
The transaction was executed through Voltron, a trade finance platform developed by eight banks including BNP Paribas, Standard Chartered and HSBC itself.
The transaction involved a Hong Kong-based supplier exporting LCD parts and panels to its Shenzhen-based parent company. Conventional document exchanges take five to 10 days compared to the 24 hours required through electronic documents.
As it is more accepted over time, across the world, it will reduce the complexity and the bad name that letters of credit have gotten as a very difficult instrument to use"
HSBC, like many of its competitors, has been looking to use digital ledger technology, or blockchain, to streamline the traditionally paper-based and bureaucratic business of financing trade.
Previously, to arrange a shipment between Hong Kong and Dubai, HSBC partnered with major retail organization Landmark Group which provided its blockchain platform ReChainMe. The companies linked up their respective platforms, which reportedly resulted in the reduction of transaction time by 12 days, or 40%.
A broader adoption of blockchain technology could open up more financing for small and medium-sized businesses seeking to export goods, particularly in the Greater Bay Area, HSBC's head of global trade for Asia told SCMP.
About 1.2 million letters of credit valued at $750bn were issued in and out of China last year, HSBC said, citing data from global financial messaging provider Society for Worldwide Interbank Financial Telecommunication (Swift). Blockchain, by making documents available electronically to the parties in a transaction and their lenders, has the potential of speeding up the process of issuing letters of credit and opening trade finance to an even larger audience.
"As it is more accepted over time, across the world, it will reduce the complexity and the bad name that letters of credit have gotten as a very difficult instrument to use," Sharma said.
"Letters of credit permitted small companies to go to the banks and say: ‘I've got a letter of credit. I'm going to get paid after 60 or 90 days. You know I'll get the money after it is accepted, so could you finance me.' Because people are not using letters of credit [as much] … it became more difficult for [small and medium enterprises] to get financing. If it becomes more easy to get letters of credit, you might actually see volumes go back up. It is an easier financing tool for some of the smaller companies we have."
HSBC's APAC head of global trade and receivable finance, Ajay Sharma, notes that the bank is making progress towards turning the Voltron platform into a full proposition made accessible to clients.
"We are hoping that we will have something by end of the year, maybe the first quarter of next year, where will we know from Voltron what it costs, at which point, a lot of banks who might be sitting on the sidelines will be able to make a decision," he said, in a Reuters report.
"Clearly we are hoping that through this technology, the unit cost of doing a transaction comes down, along with other benefits, such as speed."
In February, HSBC revealed that its blockchain-powered platform cut costs for foreign exchange trade settlement by a quarter. The platform — based on a distributed, but permissioned, ledger — reportedly allowed HSBC to coordinate payments in real time across its trading hubs in the Americas, Europe and Asia Pacific.