A Chinese worker checking a machine making blankets. STR/AFP/Getty Images

Blockchain, the technology behind digital currency bitcoin and now being used to simplify secure financial transactions, has been applied for the first time in a deal facilitated by an Australian bank to sell cotton to China.

The Commonwealth Bank and Wells Fargo used blockchain in what they say is a world first global trade transaction between independent banks for a shipment of cotton from Texas to Qingdao in China.

The trade involved an open account transaction, mirroring a traditional bank letter of credit, between the seller (Brighann Cotton of the US), the buyer (Brighann Cotton Marketing Australia), and their banks (Wells Fargo and Commonwealth Bank).

A letter of credit is a guarantee from a bank that a seller will receive payment from a buyer once certain conditions are met, such as proof that they have shipped the goods.

Commonwealth Bank says the use of blockchain technology, smart contracts and the Internet of Things creates greater transparency between buyer and seller, a higher level of security and the ability to track a shipment in real-time.

Michael Eidel, executive general manager of the Commonwealth Bank’s cash-flow and transaction services, says existing trade finance processes are ripe for disruption.

“This proof of concept demonstrates how companies around the world could benefit from these (blockchain, smart contract, Internet of Things) emerging technologies,” he says.

“We strive to stay at the forefront of disruptive technologies to understand how they can be used to enable greater efficiencies and solve the real world challenges our customers face.

“The interplay between blockchain, smart contracts and the Internet of Things is a significant development towards revolutionising trade transactions that could deliver considerable benefits throughout the global supply chain.”

Cameron Austin, general manager of Brighann Marketing, says the combination of emerging technologies could eliminate many inefficiencies in international trade.

“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,” he says.

Chris Lewis, head of international trade services for Wells Fargo, says there are still significant regulatory, legal and other concerns to be addressed with the technology.

However, he says Wells Fargo is committed to exploring these emerging technologies.

“In this case, we demonstrated how a new approach to trade could benefit a joint Wells Fargo and Commonwealth Bank customer, Brighann Cotton,” he says.

“This marks another step in evaluating technology that, over time, could support the evolution of trade finance.”

Blockchain is technology created by the founder bitcoin, a person of persons still unknown.

The key to blockchain is a digital ledger that can only be changed if all parties — such as the buyer, seller and the banks in the Commonwealth’s transaction — agree.

So instead of everyone keeping their own spreadsheets, blockchain is a secure way for all to keep track of a sale.

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