The Significance of the World’s First Yuan-Denominated Letter of Credit Blockchain Transaction

  • Voltron trade finance platform, developed by eight banks could be commercialized next year

HSBC has completed the first blockchain-based letter of credit transaction using Chinese yuan, the bank said on Tuesday.

Just like many of its competitors, HSBC, the largest bank in Europe and one of the ten biggest banks in the world have been looking to use blockchain technology to streamline the bureaucratic and paper-based business of finance trade.

With this first such transaction, this move marks the step towards the use of Voltron trade finance platform, developed by eight banks including HSBC, Standard Chartered, and BNP Paribas.

Transactions using the platform has primarily been individual pilot cases so far but Ajay Sharma, HSBC’s regional head of global trade and receivables finance for Asia-Pacific said it would be commercialized next year, meaning more widely adopted and financially viable.

“Clearly we are hoping that through this technology, the unit cost of doing a transaction comes down, along with other benefits, such as speed,”

Sharma said.

Quick Exchange of Information to Make Letters of Credit more Attractive

The exchange of electronic documents was completed in 24 hours in comparison to eight days it took to do so conventionally.

This deal involved a shipment of raw materials between Hong Kong’s MTC Electronic Company and its Shenzhen-based parent company.

However, this hasn’t been the first but ninth letter of credit blockchain transaction the bank has completed since May 2018, when HSBC first commercialized this process.

“As it is more accepted over time, across the world, it will reduce the complexity and the bad name that letters of credit have gotten as a very difficult instrument to use,”

Sharma said.

It is particularly an important milestone for China, which seeks to internationalize yuan as a trade currency.

Moreover, last year about 1.2 million letters of credit valued at $759 billion were issued in and out of China.

Interestingly, the movement came against the backdrop of the trade war that is forcing a shift in the global supply.

As investment, business sentiment, and financing for export remains the challenges for small business and emerging economies, the banks now hope to ease this with greater adoption of blockchain.

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