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HSBC and ING in First “Blockchain”-Powered Trade Finance Deal

But is it really blockchain?

By CBR Staff Writer

HSBC & ING Bank have used “blockchain technology” powered by Corda to agree finance for an international grains for the first time, UK-based HSBC announced on Sunday.

The successful digital transaction could open the door to wider adoption of Corda technology in the £6.6 billion trade finance market.

The system obviates the need for paper contracts, certificates or manual checks in a traditionally paperwork-heavy industry. Unlike previous tests, last week’s transaction for Cargill could be replicated if the same counterparties were involved, HSBC said, showing that Corda is ready for commercial use.

Vivek Ramachandran, HSBC’s global head of innovation and growth for commercial banking, said in an emailed statement. “With blockchain, the need for paper reconciliation is removed because all parties are linked on the platform and updates are instantaneous.”

The transaction agreed credit for a soya shipment on behalf of food & agriculture conglomerate Cargill.

The step comes after ING in January of this year teamed up with global merchant Louis Dreyfus Company, ABN Amro and Societe Generale to complete the agricultural sector’s first blockchain commodity transaction; on that occasion using the company’s own “Easy Trading Connect” blockchain system.

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But, it’s Not Really Blockchain…

Corda, an open source system developed by the R3 group, was designed especially for use by regulated financial institutions. It is not, however, strictly a blockchain: it has no cryptocurrency built into the platform and does not require mining-style consensus.

It has been described, rather, as a “business-to-business messaging protocol that is inspired by bitcoin.”

R3 solutions architect Clemens Wan described the benefits of the system in a recent blog: “Corda is providing an atomic transaction solution to the standard two-phase commit model. By using the point-to-point consensus mechanism, called the Flow framework, Corda nodes can sign transactions and agree on changes before they are committed to their respective databases. Via the flow framework, CorDapp developers can customize the negotiations of signatures of transactions for different use cases.”

He added: “The business benefit is a transparent chain of provenance for a legal document’s full life cycle from partial settlement to full maturity. The smart contract template portion of the use case showed the ability to create the parameters of the ISDA contract and reflect it on a DLT. The nested/combined transactions allow for any coordinated state machine update patterns between parties.

It uses what it calls a “Notary Cluster” for consensus, allowing a group of servers to assure the uniqueness of a transaction and reaches “absolute privacy” through the following mechanisms.

  • Full encryption of the peer-to-peer network.
  • Key rotation and randomization with automatic identity management to de/anonymize transactions.
  • Transactions structured in a Merkle tree allowing selective information to be revealed.
  • Intel Software Guard Extensions (SGX) enclave technology allowing records that can be verified while remaining encrypted to all parties ensuring privacy.

“We currently support a simple notary and Raft. We plan to add support for Byzantine Fault Tolerance (BFT) in the near future”, R3 says. Corda uses the Java Virtual Machine 5 virtual machine for contract execution and validation. This is augmented with a custom sandbox that is “radically more restrictive” than the ordinary JVM sandbox, and it enforces not only security requirements but also deterministic execution.

Corda’s technical whitepaper can be seen here.

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