Microsoft and Bank of America Merrill Lynch are collaborating on a new pilot project aimed at automating trade finance transactions using blockchain technology, the companies announced yesterday.
Blockchain is best known as the distributed database technology at the heart of cryptocurrencies like Bitcoin. It is hardened against tampering, preventing even its operators from revising or otherwise meddling with its continuously growing list of records.
In Bitcoin's case, it serves as its public ledger of transactions. Fintech (financial technology) companies and other security-conscious enterprises are keeping a close eye on the technology, hoping blockchain will usher in an era of automated, efficient and fraud-free recordkeeping and transaction systems.
Microsoft and Bank of America plan to see how blockchain can help modernize and automate trade finance transactions using Microsoft's Azure blockchain-as-a-service suite. Typically, the trade finance process involves a lot of manual work, requiring banks and other institutions to gather and verify the necessary information and guarantees involved in extending financing deals between buyers and sellers or importers and exporters.
The firms announced on Sept. 27 that they are developing and testing an application targeting the standby letter of credit, a guarantee issued by banks during the trade finance process, using blockchain on Azure. Ultimately, Microsoft and Bank of America hope to automate financial processes, shorten settlement times and reduce counterparty risks, among other efficiency- and security-enhancing perks, the companies said.
"The potential benefits of blockchain will help drive meaningful supply-chain efficiencies to the clients of both Microsoft and the bank," Ather Williams, head of global transaction services at Bank of America Merrill Lynch, said in a statement. "This project is another example of our continued commitment to introduce financial innovations for the betterment of global commerce."
Amy Hood, executive vice president and chief financial officer at Microsoft, said the collaboration can potentially have an impact on how her company handles its own finances.
"By working with Bank of America Merrill Lynch on cloud-based blockchain technology, we aim to increase efficiency and reduce risk in our own treasury operations," Hood said in a statement. "Businesses across the globe—including Microsoft—are undergoing digital transformation to grow, compete and be more agile, and we see significant potential for blockchain to drive this transformation."
It comes as no surprise that banks are interested in blockchain and its potentially transformative effects on the fintech industry. However, Blockchain's reach may extend well beyond Wall Street, according to a recent report from Moody's Investors Service.
Moody's identified use cases for blockchain beyond finance, including a smart contract system developed by the State of Delaware and a secure messaging service being developed by the U.S. Department of Defense. The report's author, Nick Caes, a Moody's Investors Service analyst, told eWEEK's Darryl K. Taft that he expects "more blockchain-related research and development, including proofs of concept," and a focus on large-scale applications over the next year as companies grow more skilled with the technology.