HSBC completed the world’s first blockchain-based letter of credit transaction using Chinese renminbi, successfully using the technology in a transaction between Hong Kong and Shenzhen, Reuters reported on Tuesday.
Why it matters: The deal is a milestone in HSBC’s plan to make headway in automating China’s largely paper-based finance industry using the digital ledger technology.
- HSBC carried out the transaction on Voltron, a blockchain platform it built along with seven other banks, including France’s BNP Paribas, Natwest and Bangkok Bank.
- The deal marks progress in making a commercially viable proposition for the use of Voltron.
“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.”
—Ajay Sharma, HSBC head of global trade for Asia-Pacific, to Reuters
Details: The technology decreased the processing time for the deal to 24 hours from what normally takes five to 1o days. The transaction involved Hong Kong’s MTC Electronics sending LCD parts to its parent company in Shenzhen.
- Voltron is aimed at reducing transaction costs and processing time through blockchain technology, but has only been used on an experimental basis.
- According to HSBC’s analysis of SWIFT data, China is the world’s largest issuer of letters of credit based on value. In 2018,1.2 million letters of credit were issued to transact a total of $750 billion in and out of China.
Context: HSBC has tried to stay ahead of the curve in integrating new technologies in its offerings.
- HSBC used Voltron to process letters of credit between China and other countries as early as November 2018.
- The bank was among the first to join the consortium R3 in 2015. R3 is a company set up by some of the world’s largest financial institutions to advance blockchain technology.
- Letters of credit are widely used to carry out international transactions, because of varying regulatory and financial environments between transacting partners. Banks guarantee a seller’s payment will take place after goods or services have been received by the buyer, and incur the cost if the buyer fails to pay.