HSBC has joined hands with the IT and telecom agency of Singapore government on a project that applies the blockchain to trade finance. Bank of America, Infocomm Development Authority (IDA) of Singapore, and HSBC has disclosed that they have developed a blockchain app on the basis of the Hyperledger protocol with an objective to reproduce the process of LC (letter of credit) transaction between banks, importers, and exporters.
The trial is focusing on financial institutions that are willing to explore how distributed ledgers can establish trust between parties, as these parties have to rely on banks to issue and recognize paper documents as a mean to facilitate trades.
With the help of consortiums, banks are more engaged than ever in a wide range of proofs of concept. With the emergence of a winning idea, banks and other financial intermediaries agree on common standards with support from regulatory authorities to share the expense of building a blockchain, whether it increases the potential return from their existing infrastructure or not. According to the International Business Times, the proof of concept consists of seven steps that display how a distributed ledger system can be used to verify data. HSBC appreciated the trial and called it an “exciting” initiative that demonstrates how technology can bring about the change and be used at a large scale.
Banks and financial institutions are yet to face a lot of challenges as far as adoption of blockchain is concerned. For example, blockchain might improve the speed of executing financial transactions, but fast transactions do not mean strong profits. Keeping in mind the huge amount of investment in building a blockchain system, the proposed use of the system must generate positive outcomes. They might face other challenges, including aligning incentives, cost mutualization, scalability, and evolving standards.
Apart from that, they might have to face issues, such as, security issues, regulation, or proper governance. In order to sustain for a longer period of time, the blockchain must have a governing body to decide who can access it and manage its maintenance. Moreover, the need to regulate the digital identities and cross-border standards should also be taken into account during the built-out. Another challenge is the involvement of legal risk. The users of the financial services blockchain must be identifiable identities, may be through a single digital passport number. Regulatory bodies would still implement KYC (Know Your Customer) and AML (Anti-Money Laundering) rules regardless of what the application protocols are.
The global head of product for HSBC’s trade finance business, Vive Ramachandran, said that a large number of people are talking about the theory of blockchain, but it is for the very first time, we would be witnessing how technology may be used to cater and resolve the real world challenges faced by the customers.
This experiment is going to be launched in the coming months with supply chain and trade finance as focal points. It is reported that the International Development Association (IDA) and Bank of America have already been working on the similar projects.