There is growing consensus amongst major institutions on use cases that blockchain technology can be applied to. While the focus long time has been on payments and the securities industry, trade finance is increasingly mentioned as one of the most promising
early use cases for this technology. Blockchain has great potential to renovate and simplify the present supply chain management and trade finance.
EBA Report
This was also mirrored in a recent report of the Euro Banking Association (EBA) on trade finance and blockchain technology. Also the EBA sees real benefits of using blockchain in reducing the costs of managing trade finance through automated processes. In
its report that was published last May it said:
“By reducing the amount of manual processing involved in trade finance and minimising the costly use of paper instruments, crypto technologies can provide real cost savings to banks both in trade finance and in other areas such as payments or cash management”.
Present state
Trade finance as it works today is still a cumbersome process using multiple paper-based contracts with settlement typically taking weeks. Many parts of the trade finance are dependent upon remittance, clearance, verification and approvals without having
the visibility into the entire demand of the chain. Corporates and institutions in the trade-financing industry are estimated to spend billions of dollars annually, due to the complicated and time-consuming process of managing paper-based multi-party contracts
that require a verification period of weeks, involving custom agents, forwarders, ports, sellers, inspection agencies, insurers, banks, etc. This often leads to settlement delays while. And bank trade finance alternatives are costly.
Blockchain applications in trade finance
Blockchain lends itself easily to the trade finance industry, which heavily rely on the settlement of sensitive information. This technology could be used to digitise sales and other legal contracts (smart contracts), allow the location of goods to be monitored
and facilitate payments in close to real time. Potentially, business transactions can be executed directly on the platform itself through the use of "smart contracts" embedded in the platform and the platform could be further connected to payment systems and
distribution networks for smoother flow of payments, goods and services.
Pilots and projects
Financial institutions, technology companies as well as start-ups have launched projects and pilots (or are planning to do so) to explore and test the various applications of blockchain in trade finance. Blockchain applications around global trade finance
are thereby being planned or piloted in a number of areas. These include: invoice financing; intercompany money transfers; smart contracts, electronic letter of credits; and, supply chain and payable finance.
For R3 CEV, the blockchain consortium of 52 global banks, trade finance has risen towards the top of potential use cases and has become one of the group's main areas of focus. Financial institutions and banks in the R3 are already planning to pilot test
smart contract-based applications in the trade financing industry, with the help of its partners. R3 is working with its members – which include CBA, Westpac, National Australia Bank and Macquarie Group – to create common standards (for trade finance) that
banks and their customers can plug into.
Over the next 12 to 18 months, various trade finance pilots will be tested in the market, and R3CEV expects that within three years, real trade in physical goods could be underpinned by smart contracts executing payments on a blockchain.
Individual banks
But also banks individually like Standard Chartered, JPMorgan, Barclays, HSBC, Bank of America and Singapore's DSB Group are all looking at blockchain trade finance applications.
The first bank-developed blockchain platform for trade finance was the product of a partnership between standard Chartered,
the Development Bank of Singapore ( DBS) and the Infocomm Development Authority of Singapore
(IDA), the government’s IT and communications arm. They developed a blockchain-based invoice trading platform (code-named
TradeSafe) that uses the distributed ledger technology developed by Ripple. Invoices and bills of ladings are allocated unique identifiers and stored on this distributed ledger. The use of unique identifiers enables users to view the status of a particular
invoice/bill, but also reduces the risk of duplicate financing of the same invoice/bill. Further, to maintain confidentiality, users are allocated encrypted identities.
JPMorgan also considers the possibility of implementing the blockchain technology in trade finance operations, including remittances, documentary collection, open account operations and documentary letters of credit.
JPMorgan has started a testing program for blockchain solutions in international remittances. The project was created in
cooperation with Digital Asset Holdings. The bank launched USD transactions between London and Tokyo using the distributed ledger technology. It was stated that JPMorgan would be ready to switch from testing mode to actually implementing the blockchain
technology for a range of operations as soon as the third quarter of 2016.
Standard Chartered and JPMorgan are not alone in this - Barclays Bank for example, announced in October 2015 its collaboration with Wave, a blockchain-focused start up to digitalize bills of lading documents. They are thereby experimenting with digitizing pen-and-paper
supply chain processes.
Common Wealth Bank of Australia (CBA) now reckons trade finance is one of the areas offering the most potential for blockchain. At present CBA has three projects under way with global banks and export clients, including one sending shipments of cotton abroad.
In this trial, a humidity monitor inside a cotton container, linked to GPS technology connected to the "Internet of Things" (IoT), can provide the insurer of the goods and the buyers with real-time status of the physical condition of the commodity.
Technology companies
IBM announced plans to establish the first IBM Center for Blockchain Innovation in Singapore, in collaboration with the Singapore Economic Development Board (EDB) and the Monetary Authority of Singapore (MAS). IBM Researchers will work with government, industries
and academia to develop applications and solutions which are based on enterprise blockchain.
Over the next three years, the Innovation Center is expected to deliver a number of technology pilots across the finance and trade industries. These projects will build on IBM’s work with the Linux Foundation Hyperledger platform. The first projects for
the Center will focus on trade solutions using blockchain to improve efficiency of multi-party trade finance processes and transactions. The solutions and associated Blockchain platform will be designed and developed in Singapore.
IBM will also work with PSA Singapore Terminals, the world’s largest container transhipment port, and others to create a trade ecosystem which connects emerging financial technologies with the physical world of global trade and logistics. This to explore
the development and use of blockchain technology for trade, finance, and logistics.
Start ups
There are various ‘blocktech’ start-ups tackling supply chains and trade finance. Such as Skuchain, Cargochain, Blockfreight, Fluent, Wave and Zerado. Solutions from these companies range from smart contracts which govern trade agreements to tracking of
shipping containers. Other pilots include:
A similar blockchain pilot as the CBA one is under way by a Singapore-based start-up, Hellosent, which monitors the condition of French wine being exported to Singapore. This allows insurers to receive automatic, real-time data feeds about the temperature
inside the container and conditions at sea that might spoil the wine.
One Australian blockchain start-up, Full Profile, is preparing for a commercial pilot to run during the wheat harvest in October that will see a buyer of wheat pay growers over a blockchain, eliminating the settlement risk held at present by farmers.
“It typically takes about 30 days for grain growers to be paid upon delivery. In 2014, growers lost $70 million in NSW and Victoria alone due to grain trade insolvencies. This resulted in an estimated $200 million loss in economic activity across regional
Australia”
Full Profile's technology enables automatic payment upon title transfer or physical delivery of grain, removing the risk to growers of buyers becoming insolvent or having problems with payments.
The Hong Kong Applied Science and Technology Research Institute (ASTRI) is working to enhance blockchain technology, such as improving the processing capacity and transaction speed, with the aim of applying it to trade financing within two years.
Need for standards
The trade-financing industry is set to be revolutionised by blockchain technology in the coming years. But these technologies are going to take a while to become mainstream. There are various challenges to the application of blockchain technology in trade
financing that have to be overcome to realise a great uptake of this technology in the trade finance industry and enable the realisation of the many benefits of this technology.
Actual tools using blockchain for international payments and trade finance are still in their early stages as banks remain challenged by scaling the technology, along with uncertainties surrounding security and privacy issues.
As participants to a trade finance arrangement may rely on different banks, for the information shared on the blockchain to be meaningful, the different banks must agree on a common platform.
In the trade finance space, also importers, exporters, government agencies, shipping companies, logistics and transport operators and insurers –must agree for a new system to get off the ground. Key challenge is getting all the different parties to agree
on standards for the "smart contracts" underpinning the trade transactions.
Further developments in the use of blockchain technology in trade finance should therefore be expected.