Wells Fargo and the Commonwealth Bank of Australia (CBA) have applied the blockchain technology that drives bitcoin to operate and enforce a shipment of cotton from the U.S. to China, in a move that could provide a big improvement for the future of worldwide trade. Blockchain works like a big, decentralized ledger for the cryptocurrency bitcoin, recording every transaction and storing this information on a global network so it cannot be altered with. It’s this technology that banks feel can be used in places from remittances to securities exchanges in order to slash costs and create a fraud-proof record of transactions without the need for third-party permission.
Australia’s Brighann Cotton Marketing bought the shipment, which was going from Texas to Qingdao, China. Usually this process would require large amounts of paper work, back-and-forth communication between all parties via email or fax, and the need to ensure everybody’s records are up-to-date and the same. Blockchain and so-called “smart contracts” can remove the need for all of this. When the bales of cotton arrive at the port and are scanned, this automatically triggers the smart contract to execute the terms, which would involve transferring the ownership of goods and authorizing payment. This happens because there is a single document agreed on by all parties and that is only completed once a certain action has taken place.
This process is designed to battle fraud by being encrypted and tamper-proof. Though it sounds simple, the blockchain technology underlying this is complicated, but attractive for organizations across the globe. Existing trade finance processes are ripe for disruption and this proof of concept demonstrates how companies around the world could benefit from these emerging technologies. Michael Eidel, executive general manager of CBA’s cash-flow and transaction services, said in a press release. Banks are testing all sorts of blockchain uses. Earlier this year, Barclays trialed the use of smart contracts to trade derivatives, while a number of other major lenders have tested the use of blockchain technology to achieve cross-border remittances.