Banks are still wary when it comes to distributed ledgers, but appreciation for their practical benefits is growing.
Just two years ago, few banks would commit to moving any part of their business onto blockchain. At that stage, they were still coming to grips with the implications of this disruptive technology and many struggled to disassociate it from cryptocurrencies like Bitcoin. In 2016, Swift, the financial messaging network owned by banks, published a position paper suggesting that blockchain wasn’t ready for prime time and couldn’t yet provide the same level of security and scalability as existing financial networks.
“Blockchain was so overhyped, it was pitched as a solution for everything from trade wars to world hunger,” observes Ville Sointu, head of emerging technologies at Nordea Bank. “You still find vendors saying, ‘We solve problems using blockchain,’ but as banks, now we’re able to ask the right questions. What does the blockchain really do? How is the network governed? How do you run the nodes, maintain consensus and manage the data? Vendors have to articulate how they manage all these things.”
When it comes to blockchain, banks are still on a steep learning curve. But at Sibos 2019 in London, it was clear they had moved on from the pilot phase to real-world implementation of the technology. There may still be some skeptics who question blockchain’s scalability; but on the whole, banks are more comfortable and vocal about its ability to solve real-world business problems, particularly in the trillion-dollar global trade finance industry. “The lack of digitization in trade finance is a really good area for blockchain to come in and solve,” says Sointu.
Nordea is one of 14 banks involved in the we.trade blockchain initiative, an open-account trade finance solution for small and midsize enterprises (SMEs) trading in Europe. We.trade replaces costly and time-consuming manual paper-based processes for SME customers with data-driven digital trade agreements enforceable on we.trade. These agreements mean the seller can process a buyer’s order automatically. “When the recipients indicate they have received a shipment, it automatically triggers a direct debit for payment,” Sointu explains. “The buyer’s bank then collects the payment on the due date and sends it to the seller.” Greater transparency of data on the trade side, says Sointu, means banks can now offer more-competitive pricing to SMEs, lower risk margins and financing for smaller invoice sizes.
Other blockchain-based trade initiatives include the Marco Polo consortium, which leverages R3’s Corda technology to help digitize and speed up the flow of goods and money. In September 2019, Bank of America became the first US-headquartered bank to join the Marco Polo trade finance network. “Ultimately our goal is to start to close the trade finance gap, which has been estimated at as much as $1.5 trillion, according to the Asian Development Bank and others in the industry,” says Geoff Brady, head of Global Trade and Supply Chain Finance, Global Transaction Services, at BofA. “Marco Polo is the baseline for how blockchain can help facilitate what we are looking to do in the future.”
Brady says the bank wants to be part of a broader industry discussion around the ways new technologies like blockchain can help solve traditional pain points in trade finance. “Greater transparency of trade information via the blockchain means banks can be more predictive when it comes to helping customers better manage their cash flows,” he ventures. “It will help them optimize cash and working capital that might be deployed to create value for themselves and their suppliers.”
Last October, Russia’s Alfa-Bank and Novolipetsk Steel, in cooperation with Commerzbank and engineering firm Vesuvius, launched a pilot cross-border payments project via the Marco Polo trade finance network. The ambition was to build a digital end-to-end trade and supply chain finance solution on the blockchain, powered by application programming interfaces (APIs) integrated with companies’ enterprise resource planning (ERP) systems. Via this integration, banks hope to offer a vaster range of international trade finance solutions.
One such solution is Marco Polo’s Payment Commitment, which looks to replace costly letters of credit and Swift Bank Payment Obligations in open-account trade finance. The Payment Commitment enables buyers to install blockchain nodes integrated with their ERP system via APIs, allowing them to connect to multiple trading parties in the physical and financial supply chains. Once a buyer issues a purchase order, it is automatically shared with the supplier via the blockchain.
The purchase order is then approved by the buyer’s bank, and its status on the network is updated to accepted, which results in a contingent irrevocable payment visible to all parties. The supplier’s invoice is then validated against the purchase order and approved for early payment. “This new instrument meets our customers’ growing demand for increased speed of transaction and transparency, optimized financing, enhanced working capital management and possible integration of ERP systems,” states Enno-Burghard Weitzel, Commerzbank’s global head of trade finance products, in a bank press release. Commerzbank has also used the Marco Polo network to integrate other parties in the supply chain, such as logistics providers. “The goal for future development is to expand the Marco Polo network, bringing additional relevant parties for trade transactions on board,” says Weitzel. “In this way, the entire supply chain can swiftly and digitally be mapped.”
The zeal with which banks are now implementing blockchain solutions to solve decades-old inefficiencies in the physical and financial supply chains is not lost on companies like ConsenSys, a global blockchain company that uses the Ethereum platform. Emmanuel Marchal, managing director at ConsenSys, says blockchain is ideally suited to help solve inefficiencies in paper-based businesses like the $2.4 trillion commodities trade finance industry. “Today, banks and counterparties in commodities trade finance have to double- and triple-check information with one another and each maintain their own ledger, which results in unnecessary duplication of effort,” he explains.
With the help of ConsenSys, komgo was set up in 2018 to digitize the commodities trade finance business by leveraging Ethereum’s private, shared blockchain network. Marchal says komgo, backed by 15 of the world’s largest institutions—including global banks, trading companies and oil majors—significantly reduces the amount of paperwork and risk. Data is automatically shared with each counterparty. “There’s also a reduction in fraud and errors,” he says; and different forms of financing can now be offered, which wouldn’t have been possible in a paper-based environment.
Not a month goes by, it seems, without a new blockchain trade finance initiative rearing its head. In November, Singapore’s DBS Bank announced a partnership with physical commodities trading group Trafigura, the Infocomm Media Development Authority, the International Chamber of Commerce (ICC), Enterprise Singapore and trading-technology firm Perlin, to develop an open-sourced blockchain trade platform called ICC TradeFlow. The first trade to be conducted on the platform, later the same month, involved the shipment of $20 million worth of iron ore from South Africa to China.
But as much as banks appear to have overcome their fear of blockchain, they are still reluctant to use the B-word. “Smart vendors downplay the use of the word ‘blockchain,’” says Sointu. Most of the bank-led projects involve private permissioned blockchains, which are a far cry from the public, permissionless networks Bitcoin uses and where most of the developer community resides. “As banks, we don’t see blockchain as a public network,” explains Sointu. “We are focused on creating distributed-consensus networks that are blockchain inspired. They do scale and provide transaction privacy and settlement finality, which cannot be really achieved with public networks.”