Eighty-eight bales of cotton have created history by becoming the first physical commodity to be traded and settled by banks using a blockchain-based smart contract system.

The cotton bales were purchased in Texas and shipped to Qingdao, China, using the Skuchain Brackets distributed ledger in conjunction with Brighann Cotton, Wells Fargo and the Commonwealth Bank of Australia.

Utilizing the Skuchain platform, the trade involves an open account transaction which mirrors a traditional bank letter of credit, with payment made upon the cotton bales being in transit, or being delivered and scanned depending on the contract terms, without the need for physical paperwork or human involvement.

“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,” Commonwealth Bank Executive General Manager Michael Eide said in a statement.

Improved efficiency

The new system is said to improve efficiency in the trade finance market by digitizing each step of the process. “The benefits of lower costs and improvements to security through reduction of errors, risk and time, enable a company to achieve greater efficiency and have more predictable working capital,” Brighann Marketing General Manager Cameron Austin noted.

The delivery of the cotton did not involve R3 (R3CEV LLC), the consortium of over 50 financial institutions building fintech solutions using the blockchain, a group that the Commonwealth Bank and Wells Fargo are members of. Skuchain is a Mountain View, Calif.-based startup backed by Amino Capital, the Digital Currency Group and Fenbushi Capital.

That R3 was not involved is notable as ultimately further growth in the space will eventually require standards and interopability. “Absolutely trade finance is going to move this way,” Deloitte analyst Jonathan Perkinson told Fairfax Media. “Really the question becomes how quickly the sector can align to one solution.”

The cotton shipment is currently between Singapore and Hong Kong, and is due to arrive in China in early November.

Image credit: visitmississippi/Flickr/CC by 2.0