HSBC Successfully Pilots Malaysia’s First Blockchain Letter-of-Credit Deal
HSBC, a British multinational investment bank and 7th largest bank in the world as of 2018, and largest bank in Europe, recently announced that it had successfully carried out a live blockchain Letter-of-Credit (LC) transaction in Malaysia.
The parties involved in Malaysia’s first Letter-of-Credit transaction on the blockchain are Malaysia’s Simply Packaging Sdn Bhd (Simply Packaging) and a Singaporean company engaged in the chemicals industry, and the items transacted are the import of resin by the Malaysian company from the Singaporean one. HSBC Singapore acted as the advising/nominated bank while HSBC Malaysia was the issuing bank.
This isn’t the first blockchain transaction conducted by HSBC. Indeed, HSBC has been pioneering the use of blockchain in the finance sector since its innovative Cargill LC transaction last year, which saw HSBC and ING Bank successfully executing a live trade finance transaction for international food and agriculture conglomerate Cargill using R3’s Corda scalable blockchain platform. The blockchain LC transaction in Malaysia is HSBC Malaysia’s first pilot blockchain transaction, while globally it is the eleventh blockchain transaction led by HSBC.
This blockchain LC transaction marks a turning point and milestone for Malaysian companies in the digitisation of trade. It reduces costs and simplifies the process of doing business by significantly reducing transaction times, shortening turnaround times and reducing the amount of paperwork required. The utilization of blockchain in trade finance also contributes to the increase in the velocity of trade, particularly in instances where shipping routes are short, such as cross-border trade between neighboring countries. Current cross-border trade between neighboring countries typically takes at least one week to complete, because even though the physical transportation of goods may take just a few days, the administrative paperwork involved often delays their delivery. For example, just the process of exchanging and checking on documents alone takes five to ten days.
Contrast that to the blockchain LC transaction between Simply Packaging and the Singaporean company, which was completed within 24 hours. It is also noteworthy that Simply Packaging is a local Malaysian company that has grown in stature from a SME to a mid-tier one. According to HSBC, this demonstrates how blockchain solutions can be readily and easily applied to all companies regardless of size.
“The quicker turnaround times does not just save companies money. It will help boost the efficiency of intra-Asean trade, characterised by many close-proximity shipping routes, which in turn helps trade to grow and flourish throughout the region. Intra-Asean trade was worth US$590bil in 2017, ” said HSBC Malaysia CEO Stuart Milne.
Shahid Chachia, joint managing director of Simply Packaging, said: “As a leading manufacturer of plastic films and packaging in Malaysia, we are always on the lookout for the latest innovative initiatives to keep up with changes in the digital and economic spheres”.
He further added: “I believe this will be the mode of issuing LC moving forward as businesses and governments recognise the safety and swiftness in performing tasks using the blockchain technology”.
Several benefits can be gained by utilizing blockchain technology in trade finance and trade transactions as it digitises the administrative process through the e-presentation of key trade documents. It provides end-to-end visibility for all parties, instantaneous updates, transfer of title completion as goods are still in transit while reducing paperwork and removing demurrage charges. Startups and businesses on the lookout for innovative initiatives and solutions to keep up with the fast-paced changes occurring in the digital and economic spheres should keep an eye out for any live blockchain LC transaction developments.