IT took nearly 10 years of trial-and-error (mostly error) experimentation, but it seems someone has finally developed a practical use for blockchain, the technology underlying the otherwise dubious concept of cryptocurrency.
Earlier this week, London-based HSBC announced that along with Dutch banking giant ING it had successfully carried out a trade transaction over a blockchain platform built by a developer called the R3 Consortium. The trade in question was a shipment of soybeans from a seller in Argentina to a buyer in Malaysia, backed by a letter of credit issued to Minnesota-based agricultural conglomerate Cargill Inc.
Having had to manage similar shipments once upon a time – in my case, it was cars and various pieces of them, not soybeans – the barely concealed glee with which the HSBC statement said the entire deal was wrapped up in less than 24 hours definitely caught my attention, because it is hard to describe just how mind-numbingly complex these kinds of transactions can be. HSBC has not yet provided many details of the deal, but just from what was shared in the bank’s initial press statement, a general description of what was involved can be reconstructed so that everyone can appreciate how revolutionary this successful test may be. (An HSBC apparatchik thanked me for my interest, and put my name on the mailing list for the white paper he assured me would be forthcoming.)
A vendor in Argentina – most likely the holder of a commodity contract – has several thousand tons of soybeans, and has agreed to sell them to a buyer in Malaysia. Grains giant Cargill’s involvement could be in a couple of different forms; perhaps it extended credit to the farms in Argentina to produce the soybeans, or it has a follow-on agreement with the Malaysian buyer to purchase all or part of the shipment later after it arrives or is processed, or it could be involved both ways. In any case, Cargill’s letter of credit indicates it has a strong interest in seeing the basic transaction – soybeans physically delivered to the buyer in exchange for payment to the seller – carried out, and is in effect underwriting the whole deal, providing assurance to all the parties in the chain that has to make this happen that they will get paid.
There are many links in that chain, and for most of them, getting paid for doing their part depends on the next step in the process being carried out successfully. First, the soybeans need to be physically retrieved from wherever they are and delivered to a port. The seller (or buyer, depending on what the terms of the purchase agreement specify about who is responsible for costs) – who is now represented by a freight broker – pays the storage facility when it is confirmed the soybeans have been picked up, and pays the local delivery firm when it has been confirmed the soybeans have been delivered to the port.
The port facility is paid for its storage and handling of the shipment after it is confirmed the soybeans have been loaded aboard a ship, but that can only happen after the Argentine customs clears the outbound shipment, which, of course, is another set of fees to be paid. Then there is the actual shipping cost for the seaborne freight, which is payable to the shipping company once the cargo has been delivered and offloaded at the port in Malaysia.
After that, there are port handling fees to pay in Malaysia once it has been confirmed that the soybeans have been picked up by a local delivery firm on that end, and that, of course, doesn’t happen until Malaysian customs duties and fees have been paid and the inbound shipment cleared. Finally, the Malaysian local delivery firm gets paid when it has been confirmed the soybeans have been delivered to the destination designated by the customer. Also at that point, payment for the soybeans is due the seller, while payment for successfully getting the soybeans from point A to point B is due the freight broker.
That is no fewer than 11 separate entities involved in a single shipment, and there are hundreds of thousands of such shipments being initiated every day. It would be ridiculously inefficient to wait for weeks until a giant pile of soybeans arrives on the other side of the planet to transfer all the various payments. So some of the process is shortened; for instance, inbound shipments can sometimes be pre-cleared at their point of origin, shipping fees can be prepaid on the presumption that the shipping company’s insurance will cover the value of the load if the ship sinks, and with a reputable broker handling the shipment, the buyer can pay the seller once the shipment is on the move, on the presumption that it will be delivered as expected.
The overarching letter of credit to Cargill likely serves in this case as a form of broad assurance that if any of the presumptions turns out to be wrong, the parties affected will be covered.
But even with the process shortened as much as possible, the various confirmations through different channels and the virtual forest of paperwork created by just one transaction can take several days. Using the public ledger of the blockchain, however, everyone involved can view the progression of the transaction in near real-time, and need not wait to receive confirmation.
Although this trade transaction was considered a test and there are likely still to be bugs to be worked out that won’t be discovered until use of the system is scaled up, the possibilities are tantalizing, which is why the world’s biggest shipping company Maersk Lines, which has to manage the movement of about 12 million containers a year, is investing heavily in blockchain development.