According to Reuters reports, HSBC aims to move $20 Billion worth of assets from paper to a Blockchain Custody platform by March 2020. The platform may eventually move up to $50 billion in value of assets. The new platform is known as Digital Vault. Previously, HSBC had processed a Yuan-based Letter of Credit using the Voltron platform, a R3’s Corda blockchain platform solution. Voltron is the open industry platform to create, exchange, approve, and issue Letters of Credit on Corda. Letters of Credit are said to be involved in between 11 to 15% of all global export transactions, racking up over $1 trillion each year.
A Letters of Credit (LC), also known as a draft, a documentary credit, or bankers’ commercial credit, is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received with a specified sum in a specified currency and provided the seller meets precisely-defined terms within a fixed time frame.
When the buyer is unable to make the payment, the bank will cover the full or remaining amount of the purchase. An LC is one of the most common payment methods available in international trade, as in such contexts where banking channels are used for payment between parties who may not trust each other. An issuing bank sends an issued LC to a confirming bank that will undertake to pay the exporter according to the terms of the LC. The following diagram shows a simplified example of an LC process, although a real transaction could be much more complicated:
The LC process is inefficient and typically time-consuming, as it depends on complex financial and administrative operations involving multiple actors. Blockchain technology can help to simplify the process by sharing financial data and documentation through a secure network that requires no third-party verification. Based on the report, the global finance company BBVA was able to reduce the time required to send, verify, and authorize an international trade transaction. The process , that usually takes from around 7 to 10 days, can be reduced to just 2.5 hours by using the blockchain.