How Blockchain Is Enhancing Trade Finance
Trade finance which concerns itself with monetary activities related to commerce and international trade, involves a network businesses or multiple counter-parties spread across the world, and complex processes that require various parties such as exporters, importers, banks, truckers, shippers, custom agents and regulators to do verification at various points along the supply chain. Each of the parts of this chain depends on successful completion of previous phases and on reliable information.
During the processes, importers and exporters use letters of credit mainly in order to guarantee trade transactions. Banks are the ones that supply these letters of credit. Currently, most buyers and suppliers use letters of credit typically concluded by physically transferring paper documents, which creates a long paper trail and exchanging of documents can take between 5 to ten days. This is in addition to other problems of inefficiencies, fraud, and high costs in trade finance.
It is becoming clear to different parties involved in trade finance and supply chain businesses that stand-alone solutions will not solve the problems and challenges in the industry. Thus blockchain is being used -- most of it currently in trial phases -- to enhance or facilitate trade finance in a variety of ways by creating blockchain trade finance ecosystems that combine all different stages of the trade from production to delivery. This involves bringing together banks, regulators, customs and all parts of the trade cycle and enabling interoperability through establishing networks with common standards.
Here are some of the blockchain
1. Batavia Platform
Batavia is being developed by IBM in collaboration with a consortium of banks and is involving transportation industry experts and bank's customers coming together to use blockchain to facilitate and make better trade finance. The motive is to reduce or eliminate trade finance's reliance on paper-based records and to simplify the processes and making them more efficient, transparent, secure and cost-effective.
Thus sellers, buyers, and their banks can execute transactions more efficiently and with more transparency. In 2016, IBM together with UBS launched an initiative to build a new global trade platform based on blockchain and the Batavia platform derives on that initiative.
Currently, banks participating in the Batavia initiative include Bank of Montreal (BMO), CaixaBank, Commerzbank and Erste Group. The first trade transactions for live piloting of the project with corporate clients were carried out already. One transaction tracked the transport of Audi cars from Germany to Spain and the other, textile raw materials for furniture production from Austria to Spain. These two transactions used various modes of transport, geographies and trading parties of differing sizes.
The platform is based on the IBM Blockchain Platform -- a permissioned blockchain -- and powered by the Hyperledger Fabric Blockchain. It will use smart payments/contracts where payments are initiated by specific events in the supply chain and recorded on the blockchain. It has other features including track and trace for key events and risk management tools.
Currently, the platform is open-access for any organization of any size around the world and supports trade finance for transactions across all modes including goods transported by air, land or sea. It also encourages broad participation by many banks, vendors, and regulators.
The organizations using it can use it to build multi-party, cross-border trading networks worldwide more easily.
2. Marco Polo
Marco Polo is named after the famous Venetian explorer Marco Polo and is involving a Blockchain consortium R3, trade finance company Tradex and several global banks. Others involved since the launching of the project in September 2017 include BNP, Commerzbank and ING, Standard Chartered, DNB and OP Financial Group as well as third-party players, including credit insurers, logistics companies and more.
The post-shipping trade finance platform is built with R3's distributed ledger technology product Corda and delivered via TradeIX's open TIX platform, a blockchain-based system of applications and tools for trade finance. It also uses Microsoft Azure solution to help with speed. Basically, the platform uses distributed ledger technology to manage data and enable smart contracts in order to make trade finance more secure, efficient and transparent.
Basically, with Marco Polo, trade networks, systems and entities can use the platform for end-to-end, real-time, seamless connectivity and real-time trade links. It eliminates data silos and removes inefficiencies and discrepancies by encouraging the free flow of information. It is an open-standard technology infrastructure for banks, credit insurers, shipping and logistics providers, B2B networks and other technology providers.
It focuses on three areas of trade finance: risk mitigation by the provision of payment commitments based on the matching of trade data, payables finance, and receivables finance.
Moving forward, the Marco Polo trade finance initiative then kicked off the piloting and hopes to add in more banks and third-party service providers such as insurers, ERP providers, and logistics firms.
Digital Trade Chain is a blockchain trade finance for corporate clients launched by a joint venture of nine European banks. This would advance the earlier 2017 initiative by some of Europe’s biggest banks who joined behind KBC’s blockchain prototype to help SMEs increase trade across the continent.
The joint venture, which includes the nine founding banks as equal shareholders: Deutsche Bank, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Société Générale and Unicredit, incorporated under the name We.Trade. They intend to bring it to commercial clients in the summer of 2018. It will first cover 11 European countries: Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden, and the UK.
Currently, the banks have their network of small and medium-sized enterprise (SME) clients that have gone through know-your-customer and anti-money laundering checks as permissioned entities.
The platform is powered by the Hyperledger Fabric blockchain and it will act as a platform for managing, tracking and protecting trade transactions between SMEs. It will bring together all parties including buyers, buyer’s banks, sellers, seller’s banks and transporters in other places.
Basically, trade in the app is registered and tracked from order to payment and payments are done when all contractual agreements are met. The platform will have logistics companies that use the latest track and trace technology to verify the arrival of goods in agreed condition at key points from supplier to buyer. This will help trigger automatic payments.
They aim to expand the platform such that others can join in on a licensed basis and this will make it have as many banks and as quickly as possible. Also, port authorities and national customs departments might become nodes on the network depending on logistics companies.
4. HSBC Trade Finance Platform
HSBC and ING performed their first viable trade finance transaction on a single blockchain platform for US food and agriculture firm Cargill when a bulk shipment of soybeans was transported from Argentina to Malaysia. The bank issued a letter of credit to ING that backed the shipment.
The exchange of the letter of credit was performed in 24 hours instead of the five-to-10 days it normally takes to complete such exchanges through a paper-based system. Like is the case with the Cargill transaction, the platform enables end-to-end trades between buyers and sellers and their respective banks. It removes the need for paper reconciliation and the updates are instantaneous.
HSBC wants to work with regulators, other financial institutions (FIs) and customs players and bring them on-board.
5. Hong Kong Trade Finance Platform
The Hong Kong Trade Finance Platform (HKTFP) is part of the trade finance blockchains from Asia. Others are the India Trade Connect and the ICI Trade Finance Blockchain platform.
HKTFP was started in December 2016 and is a collaboration between the Hong Kong Monetary Authority (HKMA) and the Monetary Authority of Singapore (MAS), and supported by Deloitte and five of the city’s top banks including HSBC. Some more banks have also joined the network.
It is expected to connect firms and use distributed ledger technology (DLT) to trace global trade flows between Singapore and Hong Kong, reduce the risk of fraudulent activity, increase business transparency, increase operational efficiency and productivity in trade finance.
The platform is expected to launch by early 2019 and will involve over 20 global banks and financial institutions. These include Bank of China (Hong Kong), The Bank of East Asia, Hang Seng Bank and Standard Chartered Bank (Hong Kong).
6. Infosys India Trade Connect
The Infosys India Trade Connect platform is also called India Trade Connect and is being developed by Infosys in partnership with seven private-sector banks. It is targeted at a variety of issues in trade finance including ownership validation, certification of documents and payments.
Banks such as ICICI Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank, IndusInd Bank, RBL Bank, and South Indian Bank are also using the platform to help manage risks in trade and supply chain financing.
7. ICICI Trade Finance Blockchain Platform
The ICICI Trade Finance Blockchain platform, which has already attracted 250 corporate who want to use it to cut cost, increase efficiency, and secure domestic & international trade transactions. It was created by ICICI Bank, which is also collaborating with peer banks and other partners to create a comprehensive ecosystem in the industry using blockchain and to develop common standards in order to advance adoption. In addition to removing and simplifying the paper-intensive trade finance process by bringing counter-parties together on the same platform, it enables decision making in almost real time.
The banks want to also onboard buyers, sellers, logistics partners, insurance companies and other authorities and entities on to the blockchain ecosystem to provide end-to-end digitized trade solutions. As regards piloting, ICICI did it in 2016, becoming the first in India to test a cross-border transfer pilot project on a customized blockchain. During the piloting, it transferred funds in real time from a branch of ICICI Bank in Mumbai, India, to an Emirates NBD branch in Dubai.
It employs distributed and unalterable ledger to digitize the paper-intensive international trade finance process. It also provides parties with the access of information on a single place/source. Not only will organizations have a real-time view of data at one place, but they can also track documentation and authenticate ownership of assets digitally and execute trade finance transaction on a encrypted and secure digital contracts.
Many banks are already using the platform/custom-made blockchain for cross-border remittance for salary payment to employees, domestic vendor payments in another city and to pay for raw materials to domestic channel partners, and many other applications.