Blockchain and trade - Where are we now?

Feature | 21 September 2017
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Does blockchain actually add value to trade? And is it better to be a first mover or a late adopter of promising but unproven technology? Rebecca Brace reports on the state of play following countless proofs of concept and strategic moves across the industry

Blockchain has been widely hailed as the future of trade finance - and for good reason. The technology underlying bitcoin provides transparency, immutability and traceability, while presenting the opportunity to disintermediate third parties from an exchange.

Where trade is concerned, there are many possible applications, some of which are already being adopted to varying degrees. Blockchain can be used to monitor relationships, thereby building trust between trading partners and bringing new opportunities to access financing. This technology could also be used to track containers throughout their journey and monitor the quality and origin of raw materials throughout their lifecycles. In addition, the possible benefits include the ability to exchange information quickly and efficiently without the need for paper-intensive processes.

However, as more providers complete proofs of concept (PoCs) using blockchain - or the wider category of distributed ledger technology (DLT) - the potential obstacles are also becoming clearer. There is still much to learn about the technology, and those adopting it should think carefully about their goals and whether blockchain is essential to achieving them.

Blockchain and open account

While it is still early days, many initiatives currently underway are exploring ways in which this technology can support global trade. Vivek Ramachandran, head of growth and innovation, commercial banking at HSBC, points out that DLT is being developed in the context of both open account and documentary trade. "In the open account space, what is needed is a secure mechanism to find out who your counterparty is, and get financing on the back of the transaction," he says.

Particularly significant is the Digital Trade Chain initiative. A consortium of seven banks - KBC, HSBC, Deutsche Bank, UniCredit, Natixis, Societe Generale and Rabobank - is in the process of building a trade finance platform using Hyperledger Fabric 1.0. The project aims to help European small and medium sized enterprises (SMEs) access financing to support both domestic and cross-border trade.

Keith Bear, vice president, financial markets at IBM, explains that the Digital Trade Chain project goes considerably further than previous blockchain-related projects. "The project was initiated by KBC bank in Belgium. They had the original point of view that the SME marketplace is relatively underserved in terms of access to formal credit, and that if there was a means of being able to increase trust and transparency in trade transactions, banks would be able to provide more credit than they currently do."

Building a platform

Following a request for proposal (RFP) process, IBM was appointed to provide the cloud-based platform which will be central to the project. "Essentially, what we are building is a single platform which uses blockchain technology to enable a single version of the truth, regarding transactions between SMEs that are trading with each other," says Bear.

"This covers all stages of the lifecycle, from the initial order to the final delivery. All steps within the transportation process and financing process are captured on the blockchain". As a result, banks will have a much stronger picture of who's trading what, and what the status of the transactions is, and will therefore be in a better position to offer their credit facilities to SMEs.

As the project develops, Bear notes that one challenge is the seven banks involved have different views on topics such as security policy and cloud policy. "So we're having to design both for those banks that want to run the blockchain network on their premises within their IT networks, and for the majority who are happy to take it on a software-as-a-service basis," he adds.

Supporting documentary trade

Developments are also underway to use DLT in the context of documentary trade. "Unlike in open account trade, documentary trade brings the benefit of enabling companies to access financing much earlier," says Ramachandran. "The pain point for corporates is the paperwork and administrative work involved."

Ramachandran says that where DLT can help is by enabling data to be shared without the need for paper. "We did a proof of concept (PoC) with Bank of America Merrill Lynch, which was the first to show that a letter of credit can be replicated on distributed ledger," he explains. "This was an eye opening and positive exercise, although it exposed a few restrictions. For example, the moment you start embedding images, the computational requirements become unmanageable."

Nevertheless, work continues - and HSBC is one of 11 banks that have partnered to develop a trade finance application on R3's distributed ledger platform. "We're building a prototype that will enable companies to complete a letter of credit transaction without any paper," says Ramachandran. "The project incorporates not just buyers, sellers and their banks, but also shippers."

Smart contracts and beyond

Beyond these applications, other DLT-based projects are incorporating other new and emerging technologies into trade and supply chain solutions. Last year, for example, Commonwealth Bank of Australia (CBA), Wells Fargo and Brighann Cotton carried out a trade transaction that involved the shipment of 88 bales of cotton from the US to China, with a letter of credit executed through a digital smart contract stored on a private distributed ledger.

In another recent PoC, Standard Chartered worked with four banks in Hong Kong and Deloitte Touche Tohmatsu, under the Hong Kong Monetary Authority (HKMA) FinTech Facilitation Office. The goal of the PoC was to use blockchain to prototype smart contracts for open trade financing.

"We see a lot of potential in extending the use of Smart Contracts to execute supply chain transactions more efficiently, to the integration of IoT (internet of things) sensors and the use of other digitisation techniques like digital invoice capture and eDocs along the physical supply chain," says Ben Jarrold, solution and marketing strategist, corporate banking at Finastra. "This creates new digital trigger points that can feed into DLT systems and bring new levels of transparency and automation in trade finance."

First mover advantage

This year has seen the development of many PoCs - but this is just the beginning. "The key challenge now is not on developing a successful PoC but on how to transform a PoC to a real commercial usage that delivers client value," says Gautam Jain, global head, digitisation and client access, transaction banking at Standard Chartered.

But with development still at such an early stage, what advantage is there for providers to move quickly to adopt DLT? The short answer is that it depends on the solution, and its likelihood of success. As Jon Matonis, vice president, corporate strategy at nChain, observes, "First mover advantage only matters if one is moving in the correct direction."

That said, first movers certainly have much to gain when it comes to helping shape the direction of development. Zaki Manian is the founder of SKUChain, a blockchain platform that aims to bring transparency, security and efficiency to the supply chain. "The protocols that are adopted for DLT and the supply chain will have a direct impact on revenue recognition, cost of capital and expectations of confidentiality," he says. "Players that dive in early will have a seat at the table in deciding how these rules get made." As Manian points out, once networks are running, the late comers will play by the rules that have been shaped by the early adopters.

Where the Digital Trade Chain project is concerned, IBM's Bear says that the seven banks involved "have a commercial benefit by being at the forefront of this, should the business model and the technology succeed - which obviously we are expecting to be the case. They can dictate the shape of the platform and the basis by which other banks join." Even so, Bear points out that the technology is still maturing and there will be many lessons to learn along the way.

Consequently, there may also be advantages to being a second mover. As Enrico Camerinelli, senior analyst at Aite Group, explains, "First movers can establish practices and technology standards. Second movers benefit from others' mistakes." He adds, "I don't think that the gap between front runners and laggards will be difficult to fill, because it's all in the hands of the end adopters who will share their experience once they see the technology works."

Proceeding with caution

Organisations should therefore think carefully about the types of solutions they need before embracing DLT. "It's easy to get excited about the technology itself - it opens up a huge number of options in a variety of applications," says HSBC's Ramachandran. "But in the space of trade, I would advise clients to make sure that anything they adopt is something that solves a genuine pain point. For example, a project which doesn't include shippers or support bills of lading won't solve your pain point if the end goal is the digitisation of documentary trade."

According to Jarrold, people who are interested in this area should ask whether a PoC exercise is truly reliant on blockchain, or whether it could have worked just as well without - "Did the blockchain element actually add value?" He also notes that emerging blockchain solutions currently lack both the rules and the standards that will eventually be required to support mainstream adoption.

Jon Matonis at nChain, meanwhile, advises that enterprise strategists ask themselves some key questions before deploying a blockchain solution, such as why they need a distributed decentralised solution, and whether they might be better off remaining centralised with a private blockchain or database solution. "These litmus test questions are important because decentralised public blockchains are typically proposed for eliminating the trusted third party or rent-seeking gatekeeper in the middle (international payments, loan syndication, trade finance, supply chain management)," he says. "If that gatekeeper cannot be identified, then maybe it's you."

Rebecca Brace is a freelance financial journalist

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What is blockchain?

 

Blockchain - the technology which enables bitcoin to operate - is a permanent and immutable decentralised ledger which is used to record transactions and track assets across a particular network. Batches of transactions are recorded in cryptographically protected units of information called 'blocks' and are added consecutively to the chain, with each new block containing a reference to the preceding block.

Box-out 2

Notable projects 

 

SWIFT is working on a blockchain proof of concept that is part of the SWIFT global payments innovation (gpi) service. As well as six founding banks, the project has recently added 22 more global banks that will test the application and evaluate the performance of the technology.

 

IBM is working with Maersk on a global trade digitisation solution that aims to move the administrative processes and transactions associated with container shipments to the internet. According to Maersk's research, one container shipment alone accounts for over 200 interactions, with over 30 people involved.

 

IBM is also collaborating with Dubai Customs and Dubai Trade on a trade finance project that involves delivering real-time data on the flow of goods in and out of Dubai, in line with the previously announced Dubai Blockchain Strategy.

 

In Singapore, Standard Chartered and DBS have worked on a PoC using blockchain to avoid the risk of duplicate invoice financing.

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