Blockchain technology is speeding up trade-finance transactions. But there’s more work needed to scale up and develop common standards.
The difference couldn’t be more stark: On a blockchain platform, a trade-finance transaction that would otherwise take five days to process can be carried out in a single day. That advantage has many close observers optimistic that more parties to trade transactions will embrace blockchain, and it has a host of consortia vying for the position of market leader.
While many subsectors of finance have been noodling around blockchain possibilities, trade finance has aggressively embraced this technology for the host of benefits it delivers in this area.
“Trade finance has been a leading adopter of blockchain, to power transactions in 2018,” says Sankar Krishnan, executive vice president of banking and capital markets at consultant Capgemini.
In November 2017, TradeIX reported one of the earliest successful trade-finance transaction pilots. Using TIX Core, Standard Chartered was able to digitally discount receivables and simultaneously secure credit risk through insurer AIG for an undisclosed logistics company. Adoption ramped up in 2018: In May, HSBC issued a letter of credit on the Corda platform to Dutch lender ING for Cargill on a bulk shipment of soybeans from Argentina to Malaysia. In April, the Batavia platform ran two import pilots: one importing German cars and another Austrian textiles, both to Spain. The Hong Kong Monetary Authority went live in mid-2018 with some 21 banks on a blockchain trade platform powered by China’s OneConnect. In July, R3 launched Corda Enterprise, a commercial version of Corda (R3’s open source blockchain platform) complete with a blockchain application firewall that enables the platform to be deployed inside corporate data centers while retaining the ability to communicate securely with other nodes anywhere else in the world. Also in July, we.trade reported it was operational across 11 European countries and had successfully executed seven live trade transactions between 10 companies on the platform. All this, as well as many proofs-of-concept now being conducted, may yield new tools down the road.
“I expect this trend to continue, and more parties to the trade ecosystem—importers, exporters, banks, suppliers, customs departments, ports, insurance, logistics and the rest—to embrace the concept,” says Krishnan. “There will be more transactions executed on the trade blockchain in 2019.”
Blockchain solutions will help speed up and benefit an expected expansion of trade finance in the coming year, he predicts: “The risks and uncertainties caused by trade wars and sanctions underway will further ensure that open-market transactions will move back to a trade services or finance product.”
Three main blockchain technologies for trade finance—Corda, Hyperledger Fabric and Ethereum—have already emerged, and each has a distinct set of strengths. “From a business perspective, Corda seems to be very suitable for financial services, given that smart contracts are key to the industry; and it prevents any unnecessary sharing of data and comes with regulation and supervision,” Krishnan says. “Ethereum seems very suitable for decentralized applications. It runs on a peer-to-peer network and can handle multiple types of transactions; everyone on the trade network can see all aspects of information. Hyperledger [backed by IBM] is like SWIFT: an industry initiative that is all about collaboration between various parties to bring about efficiencies in an open-source setting, so that all parties to a trade transaction can collaborate if they choose to.”
While there are many consortia developing trade-finance solutions, the four largest have chosen the blockchain platforms that best suit their purpose and a particular customer type. Marco Polo, backed by TradeIX and R3’s Corda and the largest number of banks, is the most broadly focused, looking to develop an end-to-end, open-account trade-finance network. Voltron is backed by 12 major banks and also runs on R3’s Corda, with a focus on digitizing documentation. Komgo is working specifically on the commodity trade-finance sector and is built on Ethereum. Finally, we.trade, which now also includes Batavia, is based on Hyperledger Fabric and helps participants track open transactions in cross-border trade.
Competition And Compatibility
Since the big consortia are building their solutions on different platforms, it remains to be seen which ones can be seamlessly integrated into the trade ecosystem. “I am sure there must be a desire for these platforms to compete and collaborate at the same time, just like the banks they serve,” Krishnan says. “Question is, we do not know much about the financial viability of each of these platforms. Would there be an M&A of sorts to build scale?”
Commerzbank began tests on two different platforms last year: Batavia on Hyperledger and Marco Polo on Corda, to identify valuable use cases for both itself and its clients. While Batavia was successful (with a pilot transaction for car manufacturer Audi to ease the export of vehicles from Germany to Spain), Enno-Burghard Weitzel, head of product management trade services, says Commerzbank has jointly decided with Audi, following a proof-of-concept (PoC), that Marco Polo was the more attractive option to start the second phase.
“We found out that it is relatively easy, once you have the business logic, to actually switch the framework and technology,” says Michael Spitz, CEO of Main Incubator, the research and development unit of Commerzbank. “We looked to switch from Hyperledger Fabric to Corda and vice versa. It’s not so much a question about the underlying technology as about engaging with new business logic and new business models and how technology can help.”
Similarly, CargoSmart, which offers blockchain-based solutions for managing shipments through the supply chain, ran a PoC with Kerry Logistics and Deloitte, to see if it could connect multiple distributed-ledger technologies (DLT). “We demonstrated the interoperability capability across multiple DLT platforms by exchanging and recognizing the data from different industrial networks,” says Lionel Louie, CargoSmart’s chief commercial officer. “It opens up the opportunities to reduce complex transaction and documentation processes in the shipping and logistics industry as well as to interoperate with other industry networks, such as bank and finance networks, to realize the extensibility of DLT networks.”
Parties can enter blockchain trade platforms via anchor-led initiatives or with the support of their partner bank, explains Raof Latiff, head of digital for the Institutional Banking Group at DBS Bank. “Anchor-led is when a major buyer or supplier on the blockchain trade platform initiates a need for a party’s participation. In the bank-led model, with DBS, we assist players in their onboarding onto open platforms and support their integration into the ecosystem by providing trade and settlement services.”
Scaling up to industry level is the logical next step, but banks and their tech partners have been moving slowly in this direction. DBS first began working on pilots with other banks and the wider ecosystem but is currently developing projects for specific industries and businesses, such as Agrocorp’s agribusiness supply chain and the YunLiangMeng automotive blockchain platform in China. “YunLiangMeng” means “logistics supply chain connect” in Mandarin, and the platform was launched by DBS together with China Capital Logistic and Wanxiang Blockchain in December 2018.
“We have not said a complete no to consortiums and are still exploring how to efficiently scale up in such models,” says Latiff. “Notably, industry-led initiatives have to see faster adoption and greater ease when it comes to scaling up, in order for platforms to gain meaningful traction.”
Success may come first in industries where a small group of participants essentially make the market, says Weitzel, such as agricultural commodities. ADM, Bunge, Cargill and Dreyfus, for example collectively control 90% of the grain market and have formed a partnership to investigate ways to digitize international grain trades. They could push the application of blockchain technologies in the agricultural commodity trade sector; this, in turn, would ensure that shipping companies and ports adopt them as well. “For example, once a major port is onboard, all containers entering that port can use blockchain technology,” Weitzel says. “Once a port is blockchain-ready, it’s possible step-by-step to increase the application rate.”
It is also critical to develop applications that make more blockchain solutions more easily accessible. The introduction, in a few months, of the Marco Polo enterprise resource planning (ERP) app will allow companies to access multiple working-capital finance solutions directly from within their ERP systems, says Nicole Lefevre, delivery manager at R3, which is a backer of Marco Polo. “Offering the app to corporate clients will further increase the growth of the Marco Polo network beyond financial institutions,” she adds. “The involvement of third parties is critical, moving forward, to ensure we’re continuing to add value to the network.”
Chase Gordon, an associate at R3, believes there will be a clear shift from proof-of-concept projects toward real-world applications offering value to financial institutions and their corporate clients this year. “The Marco Polo Network is planning to go into production with live customers in the coming months. The ongoing growth of the network via corporate traction is critical for 2019 and will only enrich the ecosystem further. In terms of the Marco Polo platform, the road map is exciting, with additional modules being cocreated to cover not just one single trade-finance product, but a wide aspect of solutions such as receivable finance, accounts payable finance, guarantees or factoring.”
Perhaps the biggest challenge to convergence and interoperability, and thus to wider adoption, may be the lack of universal standards and protocols for blockchain trade-finance platforms—and this will have to be addressed by the developers themselves.
“Any platform, in order to be successful and perceived as a value creator from the mightiest to the smallest of the clients, needs to create a ‘one-stop-shop’ solution, where clients can access seamlessly their preferred products and services at the time they need them,” suggests Roberto Mancone, we.trade’s chief operating officer. He foresees consolidation of existing consortia and development of new initiatives that will spark competition, since the platforms have shown their technological maturity.
“Partnering and collaboration require several elements,” Mancone explains, “strategic vision, open API [application programming interface] architecture, defined return on investment, clear business models and market strategy.” He says the role of APIs in the facilitation of trade finance on blockchain platforms “is a must in order to create an ecosystem that can leverage third-party providers of value-added solutions to the clients, and generate wide and fast acceptance, shifting the paradigm from ‘provider centric’ to ‘client centric’ models.”
The biggest industrywide initiative, the Universal Trade Network, aims to create a suite of open technology standards and protocols that enable seamless interoperability between digital trade systems, applications and networks. Says David Sutter, chief strategy officer at TradeIX, “We’re in the process of setting up an independent industry body that coordinates the creation, maintenance and promotion of these standards and protocols.” Members will be regulated financial institutions, technology companies, utilities, corporates and industry bodies.
“Within this group, we are seeing a high level of collaborative spirit even between rival platforms, networks and protocols,” says Sutter, since “we all stand to gain from standards and the interoperability they can enable. This is a similar dynamic to what we have seen work so well in other industries, like the internet and telecom, where competitors come together to agree on standards to ensure interoperability between their proprietary devices and networks.”
As with so many other tech solutions in business, there’s nothing like reducing friction to encourage widespread adoption. “Corporates are not interested in which blockchain solution they use,” concludes Weitzel. “They just want to be sure that their way of doing business is facilitated.”