What is Block Chain? Reliance Receives India’S First LC Payment Via Block Chain (Download PDF)

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HSBC Holdings has executed letter of credit (LC) payment using block chain for export by Reliance Industries to US-based Tricon Energy. Block chain technology offers way for untrusted parties to reach consensus on common digital history.

Image of Block Chain Technology

Image of Block Chain Technology

Image of Block Chain Technology

What is Block Chain Technology?

  • Block chain technology offers way for untrusted parties to reach consensus on common digital history.

  • Common digital history is imp. because digital assets & transactions are in theory easily faked and/or duplicated.

  • Block chain technology solves this problem w/o using trusted intermediary.

Working Process of Block Chain Technology:

  • Blockchain keeps record of all data exchanges. This record is referred to as “ledger” in cryptocurrency world & each data exchange is “transaction”. Every verified transaction is added to ledger as “block”

  • It utilizes distributed system to verify each transaction a peer-to-peer network of nodes

  • Once signed & verified, new transaction is added to block chain & cannot be altered

What is Bitcoin

  • Bitcoin proposed in 2008 presented an alternative.

  • According to its whitepaper, Bitcoin is “peer-to-peer electronic cash system” that “allows for online payments to be sent directly from one party to another w/o going thru financial institution. “

  • Bitcoin made digital transactions possible w/o “trusted intermediary. ” Technology allowed this to happen at scale, globally, w/cryptography doing what institutions like commercial banks, financial regulators & central banks used to do: verify legitimacy of transactions & safeguard integrity of underlying asset.

  • Bitcoin is decentralized, public ledger. There is no trusted 3rd party controlling ledger.

  • Anyone w/bitcoin can participate in network, send & receive bitcoin & even hold copy of this ledger if they want to.

  • In that sense, ledger is “trustless” & transparent.

  • The Bitcoin ledger tracks a single asset: bitcoin.

  • Ledger has rules encoded into it, one of which states that there will only ever be 21M bitcoin produced. Because of this cap on number of bitcoins in circulation, which will eventually be reached, bitcoin is inherently resistant to inflation.

  • All participants must agree to ledger’s rules in order to use it.

  • Bitcoin is politically decentralized no single entity runs bitcoin but centralized from data standpoint, all participants (nodes) agree on state of ledger & its rules.

  • Bitcoin or transaction can’t be changed, erased, copied, or forged – everybody would know.

First Block Chain Transactions

  • HSBC Holdings Plc has executed trade finance transaction using block chain for an export by Reliance Industries Ltd (RIL) to US-based Tricon Energy.

  • Block chain-enabled letter of credit (LC) transaction substantially reduced time taken for such deals.

  • Use of block chain offers significant potential to reduce timelines involved in exchange of export documentation from extant 7 - 10 days to less than a day.

  • Transaction allowed digital transfer of title of goods from seller to buyer.

  • Letter of credit was issued by ING Bank for Tricon Energy USA (importer) w/HSBC India as advising & negotiating bank for RIL.

  • Use of blockchain has significant impact on trade finance transactions & enables greater transparency & enhanced security in addition to making it simpler & faster.

  • At present, buyers & sellers use paper-based letter of credits to underpin transactions & physical documents are sent to each party in transaction by post, courier or fax.

  • While current system provides high level of certainty, time & cost involved in processing documents are deterrents for exporters.

  • Bangkok bank, HSBC, BNP Paribas, CTBS Holding, ING, SEB & Standard Chartered, ING, along w/US-based block chain software firm R3 are working on expanding R3 network & its adoption across country.

  • Lot of domestic lenders like SBI, ICICI & Yes Bank are working on block chain solutions & consider that trade finance is one of best use cases of block chain technology as it cuts time significantly.

- Published/Last Modified on: January 2, 2019

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