The recent announcement of the Microsoft and BoA Merrill Lynch Collaboration created major waves in the blockchain world. Last year few people even knew how to define blockchain technology, let alone what it could do. Banks were slow to begin blockchain projects, but with this new partnership innovation has taken a giant leap forward.
Marley Gray, principal architect project manager for Azure blockchain stated that even as bank vendors were active in blockchain projects, they weren’t clear on what blockchain could do or what they were looking for from the technology. Which is why big banks like JP Morgan Chase, Bank of America, and HSBC have all looked to outside blockchain consultants and advisors.
With an already working platform from Microsoft, BoA focused on reducing transaction time as they already have in their proof of concept, which shows greatly improved transaction speeds when both parties are known, as opposed to Bitcoin which is conducted by parties who don’t know each other.
Even before the process is improved on and streamlined, blockchain will still streamline processes that have previously been paper based.
“We hope to retire the paper-based trail and would like to streamline the workflow using blockchain,” he said. “We hope the paper will go away in this process.”
In the paper-based process, it took five days to stand up a letter of credit; with the blockchain it took five to ten minutes, Gray said. Paper required 14 steps, blockchain just four. With paper, the error rate was up to 50 percent and with blockchain it was zero, he added.
A standby letter of credit is a guarantee of payment by an issuing bank on behalf of the applicant to a beneficiary. In the current, complicated process, multiple parties can only contribute to the letter after others have done so. This means errors and inaccuracies can remain undetected until the final issuer – in this case Bank of America – reviews the documentation.
This is what McCormick calls the “spaghetti world” of finance, because if a problem is discovered the entire process must start again from the beginning. Instead, Bank of America’s solution moves the entire process to a single, self-executing smart contract.
“You have these smart contracts, that the blockchain facilitates, that both do routing and event triggering,” said McCormick. “But they also can have the terms that Microsoft or Bank of America require in that standby letter of credit.”
“With blockchain, processes can be digitized and automated, transaction settlement times shortened, and business logic applied to related data, creating a host of potential benefits for businesses and financial institutions including: more predictable working capital, reduced counterparty risk, improved operational efficiency, and enhanced audit transparency,” Microsoft said in its release.
While future plans have not been released, the two companies intend to add more use cases to the project and further refine the technology. The ultimate goal is to design a blockchain application that makes it easier for global treasuries to do business with new customers.
Together Microsoft and Bank of America are finding proof of greater efficiency, speed, minimized errors, better client solutions, and reduced costs. In the race for functional blockchain technology for finance, this changes the game entirely.
Other companies that don’t want to get left behind will likely start taking blockchain more seriously, allocating more resources into education for their teams such as with workshops from top blockchain consultancies like BlockchainDriven, IBM, or Deloitte and establishing strategic partnerships in a similar vein to this one.