A Detailed Explanation Why HSBC Makes First Blockchain Trade Transaction

Let us give you a detailed discussion on why HSBC and UBS are banking on the blockchain and underlying technologies. Read on for more insight into the matter.

The Case Study Of HSBC

Finally, HSBC is revolutionizing its presence as the HSBC Holdings PLC (ADR) has said that it has successfully performed the world’s first commercially viable trade finance transaction using blockchain technology according to reports from CNBC. 

The HSBC-ING Letter of Credit Transaction

While it was seen that the NYSE- and LSE- listed banking and financial service organizations has issued a letter of credit to the Dutch lender ING Group NV (ADR) (ING) for the US food and agriculture firm Cargill, there was this financial trade transaction executed involved a bulk consignment of soya beans that are shipping from Argentina to Malaysia.

Thereafter it was found that the letters of credit were issued when the buyer and seller do not know each other and use their respective banks to secure payments. Hence a LOC is issued by one bank to another and serves as a guarantee that the payment will surely be received by the seller under a set of pre-agreed conditions.

It was then that even with a LOC, however, the process requires a lot of time, paperwork and back and forth communication and verification between stakeholders as the use of blockchain technology is expected to significantly improve the process by cutting down on processing time and thereby make the process more trustworthy.

Therefore instead of banking on paper base records that remain with the stakeholders and are prone to the counterparty default risk whereas blockchain’s decentralized ledger technology is set to overcome these shortcomings. It is being observed that by then additionally, the blockchain’s potential is to handle massive amounts of the data, and transactions within a transparent and trustworthy network bring in additional benefits. 

Hereby while the transaction was executed within a record time of 24hours when compared to the standard period of five to 10 days. Thereafter according to Vivek Ramachandran the head of growth and innovation at HSBC said that the need for paper reconciliation is removed because all parties are linked on the platform and updates are instantaneous. Furthermore, the quick turnaround could mean unlocking liquidity for businesses. 

Why Are The Banks Depending On Benefits Of Blockchain?

Therefore HSBC has used a platform called Corda that was developed by the blockchain startup R3 a New York-based firm leading a consortium of over 200 firms to build and use blockchain technology. The development was thereby added to the growing application of blockchain by leading banks in transaction processing, whereas Spain’s largest bank, Banco Santander had partnered with blockchain firm Ripple to launch a same-day international money transfer service. 

There was then that blockchain has been used by multiple businesses in private as well as permissioned modes where it is the first instance in which two global financial institutions were successful thereby carrying out a global transaction that too in record time. Therefore it was observed that while banks and financial institutions have been wary of using cryptocurrencies due to their unregulated nature, as they are embracing the underlying blockchain technology with open arms thereby owing to the several benefits it offers.

Blockchain comes as 'Almost A Must' for Business: UBS CEO

It was heard that the chief executive officer of the Swiss banking and financial services giant UBS Group AG (UBS) Sergio Ermotti to be saying that it believes the blockchain technology underlying the cryptocurrencies is an opportunity in the long term, according to CNBC.

Blockchain: Is It A Must Have

Hereafter Ermotti sees major benefits in the use of blockchain technology as it offers higher efficiency and allows for a significant reduction in costs for certain operations and processes. He states that it’s almost a must as the freeing up of resources to become more efficient will come through technology and blockchain is a great way to allow them to reduce costs. Therefore it is that he’s convinced that the path-breaking blockchain and also the distributed ledger technology that will be as crucial and disruptive and changing as the regulation was in the last 10 years. 

Subsequently, the Switzerland based global financial company is currently involved in the development of a blockchain-based global trade finance platform called Batavia. Therefore the joint venture has participants who come from the other major banks like Bank of Montreal (BMO), Caixa Bank, Commerzbank, and Erste Group, along with the technology giant International Business Machines Corp. as UBS successfully conducted its first live cross border transactions involving corporate clients using the Batavia platform. Hence it involved carrying out the full cycle of trades including the automatic generation of agreements and execution of the payments. Thereby the process was performed using the power of smart contracts and the necessary transactions were recorded on a blockchain.

Finally To Conclude Cryptocurrency Skepticism Continues

The CEO is not convinced about cryptocurrencies like Bitcoin, based on blockchain despite his confidence in the blockchain technology. It was then mentioned that Ermotti was not necessarily a believer in cryptocurrencies whereas around the same time, UBS had warned that cryptocurrencies like Bitcoin are in a speculative bubble and it is highly doubtful that these will ever become mainstream currencies as it was followed by another warning issued for a big decline in Bitcoin valuation which then turned out to be true. 

Following this during his talk with CNBC, Ermotti had also expressed concerns about the problems looming large as a result of the ongoing rift between US and China trade developments an believes that things are going to get out of control. 

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