Another consortium has announced progress towards applying blockchain or distributed ledger technology in letter of credit (L/C) transactions.

Financial innovation company R3 and over 15 of its consortium member banks have successfully completed two prototypes that they say demonstrate how distributed ledger technology can address challenges facing the trade finance industry.

Distributed ledger

The banks designed and utilised self-executing transaction agreements, known as smart contracts, on R3's Corda distributed ledger platform to process L/C and accounts receivable purchase transactions.

The developers claim the R3 prototypes validate distributed and shared ledger technology as a digital alternative for trade financing that is significantly faster, more reliable and cost effective.

Benefits

Estimates suggest that such technology has the scope to reduce operational and compliance costs of paper based trade financing by 10 to 15 per cent and provide a platform for banks to grow revenues by as much as 15 per cent according to R3.

Distributed ledger technology's ability to provide a single, immutable record of a trade, verified by all parties involved in a transaction aims to provide several benefits for trade financing.

These include a reduction in fraud risk, whereby a seller may submit the same invoice to a bank more than once, and removal of time consuming reconciliation processes, which occur when a buyer's payment information is not accompanied with the necessary data for banks to reconcile a payment with the relevant invoice.

Bank interest

Over 15 R3 consortium members were involved in the trials including Barclays, BBVA, BNP Paribas, Commonwealth Bank of Australia, Danske Bank, ING Bank, Intesa Sanpaolo, Natixis, Nordea, Scotiabank, UBS, UniCredit, U S Bank and Wells Fargo.

A new prototype developed by Bank of America Merrill Lynch, HSBC and the Infocomm Development Authority of Singapore (IDA) using blockchain technologies in L/C transactions has also been announced, (DC World News, 22 August 2016).

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.