HSBC Issue First Chinese Yuan Letter of Credit on the Blockchain

HSBC Issue First Chinese Yuan Letter of Credit on the Blockchain

HSBC are reported to have completed the first blockchain-based letter of credit transaction. The transaction was denominated in Chinese Yuan currency using the Voltron trade finance platform.

Developed by R3 with the input of eight major banks, with the likes of BNP Paribas, Standard Chartered, Bangkok Bank, SEB, CTBC, ING and Natwest working alongside HSBC, Voltron is said to provide faster and lower cost transactions than the present paper-based practices.

Letters of credit are traditional documents that serve to act as guarantees between banks and have previously provided a layer of trust between parties that payments for commercial deals will be made on time and for the correct amount. In an event where the payment fails to reach the agreed amount, the bank’s letter of credit confirms the bank themselves will cover any shortfall.

Although blockchain smart contracts are perceived by advocates to provide a ‘trustless trust’ scenario – as the blockchain itself removes the need for third party intermediaries – at the current time, the banking industry require these letters of credit to operate effectively.

Hours Instead of Days

This initial blockchain-based letter of credit was for relatively minor value and involved MTC Electronic exporting a shipment of LCD components from Hong Kong to its parent company, Shenzhen MTC located in mainland China. The exchange of documents took less than 24 hours which was a marked improvement on the usual five to ten days required for the paper version.

In this instance though, the significance is not so much the pilot deal itself but rather the size of the market it pertains to. According to HSBC, last year alone China issued 1.2 million letters of credit worth around $750 billion USD.

Ajay Sharma, HSBC’s regional head of global trade and receivables finance for Asia-Pacific, told Reuters that with Voltron they are working towards creating a full commercially acceptable platform.

Sharma stated that “We are hoping that we will have something by the end of the year, maybe the first quarter of next year, where we will 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.”