Trade finance is one of the areas of global finance that is going to be fundamentally altered by blockchain. These are three initiatives that everyone in keeping a close eye on.
It is one of the areas identified by the World Economic Forum in its report on how blockchain will “fundamentally alter the way financial institutions do business around the world”. And it's a world that has changed little in the past few decades. As business and finance have moved towards digital, automated, cloud-based and real-time processes, trade finance has largely retained its preference for paper-based processes and manual intervention.
Blockchain and trade finance: a perfect match?
So how could blockchain change all this? According to a blog written by Carlo R.W. De Meijer, an independent financial services advisor, banks, IT companies and start-ups around the world are developing and piloting applications based on blockchain that can be used in the following areas of trade finance: invoice financing; intercompany money transfers; smart contracts, electronic letter of credits; and, supply chain and payable finance.
De Meijer writes: “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.”
Some of the notable projects currently underway that seek to marry trade finance functions with blockchain-based processes include:
1. Smart contracts
Perhaps the most exciting innovation to date comes from the R3 financial innovation consortium. It announced on 10 August that is has “successfully completed two prototypes that demonstrate how distributed ledger technology can address the key challenges facing the USD 45bn global trade finance industry”.
The group created a distributed-ledger platform (called Corda), for smart contracts, which are self-executing transaction agreements that can fulfil the function of letters of credit (LCs), invoice financing and factoring.
R3's CEO, David Rutter, said: “Trade financing is a crucial income stream for banks and provides an integral role in enabling businesses in different countries to trade with each other with certainty and peace of mind. However, the processes used to facilitate trade financing have become antiquated and unfit for purpose in today’s increasingly digital world. These trials have proved that the blockchain-inspired technology used on our Corda platform holds the key to transforming trade financing for modern financial markets.”
2. Invoices into digital assets on a distributed ledger
At the end of last year, Standard Chartered Bank, DBS Bank and Infocomm Development Authority of Singapore (IDA), announced that they had delivered “the world’s first application of distributed ledger technology to enhance the overall security of trade finance invoicing”. They claim the system reduces the risk of duplicate invoice financing for banks, as well as protect client confidentiality. The system allows banks to convert invoices into digital assets on a distributed ledger. This gives the participants the ability to access a single source of information for the status of invoices seeking financing across all the participating banks.
3. Investing in blockchain innovation
Last month, IBM announced its own blockchain initiative – again, in Singapore. The Blockchain Innovation Centre is an IBM Research Initiative, in collaboration with the government, that will put resources into developing trade finance processes based on distributed ledger that will make commerce in the region “simpler, safer and a lot more efficient”.
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