As the hype around blockchain technology ebbs, real-world applications are coming to life, particularly in trade finance. Joy Macknight examines market initiatives, lessons learned and the role that blockchain could play in driving the digitalisation and growth of global trade. 

Ian Kerr, Bolero

Ian Kerr, Bolero

A land grab is happening in the trade finance space, with several blockchain-based consortia pushing to commercialise their platforms ahead of the competition. “[The consortia] are building scale and utility, with a growing number of active clients and transactions,” says Keith Bear, vice-president, financial markets, at tech giant IBM. “The aim is to reach a tipping point, where a swell of banks join because they don’t want to miss out on the connected clients and associated volumes going through these platforms.”

IBM and bank-led consortium R3 have been making the most noise over the past six months, especially as their platforms move into production mode. For example, R3’s blockchain project – which has 12 global banks involved including BBVA, Mizuho and US Bank – was the first trade finance prototype to pilot in 2017 aimed at letters of credit (LoCs).

Race to go live

The application is reportedly going live later this year. However, on May 14, HSBC and ING announced a successfully executed live transaction for Cargill, the international food conglomerate, using the application to facilitate a bulk shipment of soybeans from Argentina to Malaysia.

The transaction took less than 24 hours, compared to five to 10 days for a traditional paper-based LoC. “The pilot is not in a sandbox environment but on a working system called CryptoBLK, which is developed on Corda,” says Vinay Mendonca, global head of products and propositions, trade and receivables finance, at HSBC.

Marco Polo is another initiative R3 is involved in, together with trade finance technology specialist TradeIX and BNP Paribas, Commerzbank and ING, plus seven other banks. Also built on Corda, the platform is more focused on open account and supply chain finance (SCF). Launched in September 2017, it completed its first pilot on February 21. The consortium aims to expand the initiative in 2018 to include additional banks and third-party service providers, such as credit insurers, enterprise resource planning (ERP) and logistics providers.

Coming together

Likewise, IBM – in conjunction with bank-led consortia – is moving into production mode with its blockchain platform, built on the Linux Foundation’s Hyperledger Fabric. One initiative, named Batavia, which encompasses both trade agreements and smart contracts, completed its first live pilot transactions with corporate clients on April 25.

DLT solutions must be capable of operating in conjunction with current digital platforms, ERP systems and back-office technologies

Ian Kerr

The Batavia consortium, initiated by UBS and including Bank of Montreal, CaixaBank, Commerzbank and Erste Group, also aims to include other participants, such as insurers, customs and regulatory entities, within the network. However, only banks are on the current platform, according to Mr Bear.

One of the first transactions was an exchange between Commerzbank and CaixaBank to support Audi’s shipment of cars from Germany to Spain. Michael Spitz, head of the distributed ledger technology (DLT) lab at Commerzbank, says: “Usually, for a transaction such as this, we would have to find out who the corresponding bank is, who the car dealership is and assess the relationship. But having CaixaBank and the car dealership on the same blockchain system provides transparency and a single source of truth.”

In addition to Batavia, IBM is working with nine European banks – Deutsche Bank, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Société Générale and UniCredit – on, which launched in October 2017. Test clients of the founding banks have already been using the platform since February and it is expected to go fully live in the third quarter of 2018, managed by a joint venture.

Akin to Marco Polo, is targeting the small and medium-sized enterprise (SME) market, which uses SCF instruments such as open account and invoice factoring. Mr Bear says: “ attempts to address the ‘SME gap’, for example, smaller companies that don’t have access to credit. With, SMEs can identify counterparts outside their traditional markets – it has a ‘directory’-type functionality based on the network banks’ SME clients.”

Supporting global trade

Mr Bear sees as an opportunity to increase global trade. “Seventy per cent of SMEs in Europe transact within national borders. By facilitating cross-border activity through, we hope to see a significant improvement in trade and reduce the gap. This in turn must be good for economic growth because SMEs are the source of more than 60% of employment in Europe,” he says.

Other DLT trade finance initiatives are also taking off. For example, on May 16, Infosys Finacle launched India Trade Connect, in partnership with seven Indian banks, including Axis Bank, Kotak Mahindra Bank and Yes Bank. The network is being used to run a successful pilot of Finacle Trade Connect, a technology-agnostic DLT-based solution, which means it can work on a Hyperledger, Corda, Ethereum or the Bitcoin blockchain.

Rajashekara V Maiya, vice-president and global head, business consulting, at Infosys Finacle, emphasises that DLT is “a network play”. He says: “For the first time, the technology is bringing competitors together to work in a collaborative way. We worked with the consortium to prepare a draft of the rules of engagement, while keeping the regulators updated on a continuous basis, and then began testing transactions.” The number of banks has since increased to 10.

Importantly, even the regulators are testing the waters. On November 15, 2017, the Hong Kong Monetary Authority and the Monetary Authority of Singapore signed an agreement to develop the global trade connectivity network (GTCN), a cross-border DLT-based infrastructure, to digitalise trade and trade finance between the two cities with the aim of expanding the network in the region and globally. The GTCN is expected to go live by early 2019.

Why blockchain?

As the examples illustrate, DLT can improve transaction speed and efficiency by removing paper and manual processes, which reduces errors, as well as employing smart contract functionality, which automates the execution of a contract. “Quite often the shipment moves between ports faster than the paper documents; the traditional methods are almost holding back trade because the paper isn’t able to keep up,” says HSBC’s Mr Mendonca.

Additionally, DLT can reduce the cost of trade finance. Nikolaus Giesbert, the head of trade finance and cash management and head of fixed income, currencies and commodities at Commerzbank, says: “In conjunction with smart contracts, a participant in the trade can follow – in a regulatory and technology-safe way – a transaction with limited document movement. This will reduce transaction costs.”

Through track and trace capabilities, DLT increases transaction transparency, as well as providing parties with access to the same data in real time, which cannot be altered or falsified – a single source of truth that instils trust. As Mark Evans, member of the International Chamber of Commerce (ICC) banking commission executive committee and ‎managing director, transaction banking, at ANZ, explains: “DLT enables every participant in the chain to be able to see all transactions or touch points in one ‘block’ of information. This provides a high level of visibility and transparency to the progress of the transaction.”

This, he adds, means greater certainty of authenticity, especially for open account transactions. “It also provides an opportunity for a bank to fund a portion of a supply chain that matches its risk appetite, with other banks picking up where it stops and funding other portions of the same supply chain. This collaborative approach has significant potential to help address the problem of the underfunded SME sector,” says Mr Evans.

Infosys Finacle’s Mr Maiya highlights how DLT can be used to reduce fraud in trade transactions, referencing the recent alleged $1.77bn fraud involving Punjab National Bank (PNB), India’s second largest state-owned bank. Fake letters of undertaking allegedly issued by the bank enabled a jewellery firm to receive overseas cash advances – supposedly for trade finance – from other Indian lenders, all supposedly backed by PNB.

“By putting the documentation on the blockchain, every transaction can be guaranteed as genuine. Plus, all parties are on the network: the bank issuing the LoC, the bank honouring it outside of India, the borrower and the regulator. The whole ‘block’ is consensus driven and is an automated transaction end to end,” says Mr Maiya.

Lessons learned

Many lessons have been learned through the various proofs of concept (PoCs) and pilot tests over the past few years. One lesson, according to HSBC’s Mr Mendonca, is that banks cannot work in an environment that allows for anonymity. “A conventional blockchain can be open access, but we need to have a permissioned environment,” he says. “While we don’t hold the data centrally, we still need a gate keeper to assign nodes to specific partners, such as a buyer or seller.”

Because all the participants on a permissioned network are known, the amount of computing power to authenticate the transaction through consensus is significantly lower than a traditional blockchain. Mr Mendonca says: “As such, what we have developed is truly scalable. In the financial services world, a network needs to support vast transactions per second and cannot be challenged by computing power.”

Having CaixaBank and the car dealership on the same blockchain system provides transparency and a single source of truth

Michael Spitz

Another lesson he highlights is to avoid creating new rulebooks. “The danger is that new rulebooks will delay or even prevent adoption,” says Mr Mendonca. Thus, the R3 consortium is leveraging the existing ICC uniform customs and practices for documentary credits to define the obligations of banks, buyers, sellers and so on.

IBM learned many lessons while developing the consortium operating models. In the case of, this meant constructing a framework for nine banks, all with different rules for processing transactions, different payment systems and approaches to security and compliance. “We defined processes in terms of onboarding new banks, upgrading smart contract code, etc,” says Mr Bear. “That added to the complexity of building the platform, but is a useful experience for the banks, as well as us, which can be applied to other initiatives.”

Other lessons came in part because of how new the technology is and the pace of change. Mr Bear points out that Hyperledger Fabric has a new release every three months, which is a lot of new functionality to come to grips with. In March 2018, the latest release of Hyperledger Fabric, version 1.1, saw a major improvement in performance, “which reflects that, as we moved from PoCs into production, the focus on scalability has become even more intense”, says Mr Bear.

Driving adoption

As the industry addresses DLT’s performance and scalability – and business processes are enabled and a legal framework put in place – more banks are expected to sign up. However, to see mass adoption, the platforms will need to get corporate clients on board.

As Ian Kerr, CEO of Bolero, which is working with R3 to design an electronic bill of lading solution, says: “To have the greatest chance of successful implementation, DLT solutions must be capable of operating in conjunction with current digital platforms, ERP systems and back-office technologies used by the banks, corporates and shipping carriers.”

Sophie Wiberg Holm, project lead at R3, reports that much work is going into ERP integration. “We don’t want to create a completely new portal for corporates to adopt, but rather use the gateway that the ERP providers have with all the corporates to provide these services,” she says.

On May 17, Commerzbank completed an end-to-end integration between S/4HANA, SAP’s ERP system and R3’s Corda blockchain platform. Through this integration, the existing application programming interfaces can be used to access business networks and systems across all industries. This is a step in the right direction, according to Ms Wiberg Holm. “Corporates can go through the ERP user interface or portal, for example, and click to apply for extra liquidity, etc. It allows for native integration of the trade asset into the underlying infrastructure,” she says.

While many of the highly publicised PoCs have focused on large corporates as the main beneficiaries, Enrico Camerinelli, senior analyst at Aite Group, argues that those that really need trade finance solutions are smaller companies and banks. “These highly publicised PoCs make SMEs feel that DLT is out of their reach and only for the big companies with lots of money to invest,” he says. He takes up Mr Bear’s point regarding the importance of serving the SME market, and argues that banks need to articulate the benefits of a technology that is applicable to the ‘long tail’ of the supply chain.

Ms Wiberg Holm agrees that there needs to be more focus on the supplier segment. “It challenges us to think about how to engage with corporates, because once the large corporates are on board, that should drive adoption in the lower tier suppliers,” she says.

But ultimately, she argues, the industry needs to move away from categorising trade finance and SCF as different products. “We should be getting closer to the point where SCF and trade finance are not seen as separate business divisions. We should be thinking about it as 'trade as a network', where a corporate or SME has one point where they can access the appropriate solutions that fit whatever transaction they need support for,” says Ms Wiberg Holm.

It is yet to be determined which DLT solution will win the land grab. Many banks, such as Commerzbank and HSBC, are playing the field to gain experience and expertise, not willing to place their bets just yet. And while consolidation is on the cards, most agree that there will be many DLT solutions in the future, which is why 'interoperability' is the word of 2018.


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