You’d be forgiven for thinking of cryptocurrency when you hear the word blockchain. Whilst originally built in 2008 to underpin cryptocurrency exchanges, blockchain has now evolved into one of the world’s fastest-growing and most publicised technologies with the potential to reshape our economy and society in ways not seen since the advent of the internet.
Singapore is a frontrunner in the race to explore, develop and commercialise blockchain technology. Through industry initiatives, the country has been advancing the understanding of how Distributed Ledger Technology (DLT) – which lies at the heart of every blockchain - can be used commercially.
So with companies, fintechs, financial institutions and regulators having come together – virtually – last week to ‘talk shop’ at the Singapore Blockchain Week – perhaps now is a good time to take a step back and ask – what can blockchain actually do for a Singapore business and is it too good to be true?
The COVID-19 environment has seen businesses transition to near total digital operations. Many firms are fast getting to grips with new technologies. So where does blockchain fit in?
Let’s start at the basics - what exactly is blockchain?
Blockchain is a system of recording information in a way that makes it difficult or impossible to change or hack the system – ‘immutable data’. The best way to understand a blockchain is to imagine a massive, virtual spreadsheet, duplicated across multiple computers, or nodes, which are all connected to each other forming a chain. When you add to the spreadsheet, each copy on the chain gets updated with a timestamp, making it almost impossible to tamper with.
Perhaps the most well-known use of blockchain is cryptocurrencies like bitcoin. However, blockchain has much broader applications and the benefits for small businesses extend far beyond providing secure payments. Blockchain is creating new opportunities for businesses in every sector to solve existing pain points and develop new operating models.
One of the biggest universal challenges plaguing businesses – particularly over recent months – is cash flow. Indeed HSBC’s recent Navigator survey revealed that Singapore businesses identified the challenge of maintaining sufficient cash flow as the biggest hurdle to their resilience in the coming months.1 In the wake of COVID-19, 71% of businesses in Singapore are planning to increase their working capital, their cash flows or both; much higher than their global peers at 64%.2
So how can blockchain help with cash flow challenges? Let’s start with its use in ‘Smart contracts’. As its name suggests, ‘Smart contracts’ not only automates agreements but also enforces contracts between customers and suppliers. Think of a smart contract as a self-executed, coded agreement that delivers guaranteed outcomes if certain preconditions are met.
This has the potential to make life significantly easier for businesses by removing paperwork, creating frictionless and efficient transaction processes, allowing invoice payments to be made swiftly and without the need to chase for payment.
Another advantage of blockchain is the security benefits it provides. Blockchain applications are inherently decentralised, meaning that data is distributed to different computers around the world in parallel and simultaneously. Transactions cannot be manipulated or deleted through a cyber-hack because each transaction is linked to the one that preceded it.
Our latest Navigator survey shows that, having been more acutely impacted by COVID-19, Singapore firms are now prioritising their supply chains as a way to ensure sustainable operations for the future. In fact, Singapore businesses are more intent on securing their supply chains than their global counterparts. Significantly, they are also placing a heavier emphasis on integrating technology into their supply chain management, with 36% of firms saying they will focus on digitising their supply chains in the next 1 – 2 years.3
Blockchain also has the potential to help businesses build smarter and more secure supply chains. Since most products are not made by one single company, a blockchain-backed supply chain means that each transaction from point-of-origin to point-of-sale can be tracked through a transparent and traceable audit trail with real-time visibility.
Blockchain in this instance, holds the promise of improved processing speed, enhanced security and better inventory management.
HSBC has been working with Contour4, the Singapore-based open trade finance blockchain network, to make trade finance simpler, better and faster. We are focusing on one of the most paper intensive of processes – Letters of Credit (LC).5
Our work to explore blockchain in trade finance has developed over recent years, having successfully executed the world’s first-ever live blockchain LC transaction here in Singapore with Cargill in 2018. Since, HSBC has completed fourteen transactions for businesses of varying sizes involving over US$30 million worth of goods across eleven different HSBC offices and three independent financial institutions. The next big milestone is to do regular transactions across various industries and clients to take blockchain in trade finance to the next level.
Blockchain has the potential to answer a number of businesses pain points including payments and collections, supply chain inefficiencies, cybercrime and information transparency.
However, whilst blockchain and its potential benefits are well publicised, its benefits, applications and limitations are only just beginning to come to fruition. Businesses should be engaging with industry experts and regulators to understand whether blockchain is truly the answer to their problems.
There are a couple of things that businesses should do to get cracking with blockchain. First, identify the problem you’re trying to fix, be it creating efficiencies or ensuring security of data. Like any new solution, its application will be in vain if you don’t know what you are trying to achieve. Exploring the different blockchain platforms in the market is key – understanding what their intended purpose is and who else is involved is a starting point.
It is also worth bearing in mind that you need a peer network to use blockchain; for instance, in a supply chain, each component supplier of a particular product needs to be on the chain for the company that assembles and markets the final product.
Businesses should also think about access to blockchain platforms, the upfront costs can be high. However, if you’re banking with someone that’s already part of your desired platform, the service should be available to you. For example, HSBC is part of an upcoming initiative called Contour, a letter-of-credit blockchain platform. Once this is up and running, our clients will have easy access to initiate Letter of Credit applications with HSBC using these blockchain facilities.
The future for blockchain is becoming clearer as trials move into investments and commercialisation. We see certain platforms succeeding to drive new value as smaller local or regional networks, such as we.trade in Europe. Or, with single-market focused solutions, for instance, our work with Temasek and SGX here in Singapore where HSBC is exploring the use of blockchain/DLT within the bond issuance process.6
Blockchain is at a tipping point. For those willing to accept decentralisation as the future direction, it could solve many of the fundamental challenges businesses experience daily. Blockchain is more a ‘foundational’ technology rather than a ‘disruptive’ one. Singapore is the hotbed of activity for the region. Local businesses would be wise to prepare themselves for the technology and its applications to hit their doorsteps. Let’s get ready now.
A contribution piece by Cherie Teng, Head of Corporate Banking, HSBC Singapore. A version of this piece was first published in The Straits Times on 11th August.
1. HSBC Singapore News Release: Contingency planning key to supply chain resilience for hard hit Singapore firms: HSBC, 21 July 2020
2. HSBC Singapore News Release: Contingency planning key to supply chain resilience for hard hit Singapore firms: HSBC, 21 July 2020
3. HSBC Singapore News Release: Contingency planning key to supply chain resilience for hard hit Singapore firms: HSBC, 21 July 2020
5. HSBC News Release, HSBC and ING execute groundbreaking live trade finance transaction on R3’s Corda Blockchain platform, 14 May 2018