The transformation from paper to blockchain

Microsoft and Bank of America Merrill Lynch’s blockchain project is taking the complexity, cost and error out of labour-intensive trade finance processes. We find out more about the work they’re doing together

Rebecca Lambert
Rebecca Lambert
By Rebecca Lambert on 09 March 2017
The transformation from paper to blockchain

This article first appeared in the Winter issue of The Record.

It was during Sibos, the recent financial services event, that Microsoft and Bank of America Merrill Lynch (BAML) went public about the work they’re doing around blockchain.

The two are building and testing blockchain-powered financial exchanges on Microsoft Azure – Microsoft serving as the technology provider and test client, through Microsoft Treasury, and BAML providing the necessary trade matter subject expertise. Their aim is to develop applications that optimise trade finance processes, which tend to be highly manual, time consuming and costly.

“Blockchain can transform our business,” says Chris Bozek, who leads the Global Trade and Supply Chain product team at BAML. “Specific to trade, there is significant potential because it is inherently a document heavy business. It relies on bilateral exchanges of documents that need to be reviewed, agreed upon and then complied with to satisfy the financial side of the transaction. It’s an exciting time as we learn how to take advantage of technology to not only accelerate transactions, but reduce risk and cost, and improve transparency for all parties.”

Marley Gray is a leader on the Microsoft Azure Engineering team, which has been tasked to help identify where and how Microsoft Treasury can use this distributed ledger technology to improve its operations. “Microsoft Treasury is a perfect use case for blockchain,” says the principal program manager. “The unit manages over US$150 billion in assets and, as our company has moved from a products to a services selling strategy, its processes have become far more complex.”

To start with, Microsoft and BAML have been focusing on standby letters of credit – documents issued by a bank, providing payment assurance on behalf of a client should the counterparty not perform as intended.

“The application process has traditionally been a long, painful one,” says Gray. “It was manual, took too long and also had a very high error rate, because of the number of steps and parties involved.”

“The challenge was to understand how blockchain can reduce cycle time and also provide Microsoft with a better risk view – not only from a portfolio but from a client perspective,” explains Bozek.

At Sibos, the two parties demonstrated their proof of concept and shared the results. “Our paper-based process took five days,” says Gray. “With blockchain, the cycle time was reduced by more than half, regardless of how many parties were involved. And the error rate went down from 50% to zero.”

Microsoft and BAML are now refining the technology and exploring how they can apply blockchain to other trade financing products. “We can now tackle additional transaction types using our standby letters of credit solution as a basis,” says Bozek. “It’s a great solid foundational product for us to build upon.”

Over time, they also expect to add new features from Project Bletchley – Microsoft’s open, modular blockchain fabric powered by Azure – and bring more parties into the mix.

“It’s been a very good learning process to see first-hand how a treasurer is evaluating the benefits of blockchain specific to trade transacting,” says Bozek. “As we work through the adoption challenges of this new technology, we’re gaining some valuable insights into blockchain as a service and transacting in the cloud.”  

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