Blockchain could ease non-tariff barriers to freedom of trade

Blockchain records transactions in blocks that then form chains of permanent data and could be used to ease trade. Sigtryggur Ari / Reuters

Blockchain technology could revolutionise trade, making it cheaper, quicker and simpler for businesses to trade globally.

From letters of credit (LoCs) to bills of lading, merchandise trade is heavily reliant on paper documents. In our digital, connected world there is a growing need to modernise trade’s many paper-based processes. Digitisation would reduce bureaucracy, improve security, minimise errors and make it easier to amend documents, ultimately saving time and money.

Dozens of financial services organisations are exploring how blockchain, which records transactions in blocks that then form chains of permanent data, could be applied to trade as well as other key processes.

Technical progress has been rapid. And over the past year there has been a series of announcements from organisations demonstrating how blockchain technology could, in theory, be used.

HSBC, Bank of America Merrill Lynch and the Infocomm Development Authority of Singapore, for example, have published a proof of concept showing how blockchain technology could be applied to LoCs. More than US$2 trillion in trade depends on the physical exchange of LoCs, which are issued by banks and used by importers and exporters to reduce the risk of trading, and give suppliers certainty over payment.

In November, HSBC and Reliance Industries completed the first electronic exchange of LoCs in India. In fast-growing countries such as India, where non-tariff barriers such as paperwork requirements represent a potential drag on trade, a switch to online technologies could help to reduce delays, cost and uncertainty.

There are other areas of trade that could also benefit from blockchain. It could be used to digitise bills of lading, the documentation that details what cargo is aboard and where goods or commodities are being shipped.

Testing the theory behind blockchain is one thing, but the real work is in creating a scalable, legally compliant platform that exporters and importers want to use. There are significant legal and regulatory hurdles to clear – trade may be global but each country has its own laws and regulations, so getting policymakers on side is essential. It will also require significant investment.

Within three to five years, however, we believe it will be possible to use blockchain technology on a “closed network” basis, whereby transactions are visible only to registered participants.

This can happen only if there is collaboration on a global scale.

Banks and others must continue to talk to each other as they experiment and test ideas. At the same time, companies also need to engage in the process, outlining how blockchain can work for them. It is only by working together that we will create a platform that all those involved in trade want to use, from banks, exporters and shippers to regulators and lawmakers.

Innovation in banking is about understanding what customers want and need, and using new technology to deliver it. Trade needs to find a 21st-century answer to an age-old problem. Blockchain could provide at least part of the solution.

Vivek Ramachandran is the global head of trade products at HSBC.

Follow The National's Business section on Twitter