Trade Finance transactions form the foundation of the global financial system and strangely, the tedious, paper and labour intensive documentation process designed to minimise risk and enhance assurance has barely changed in the last century. The shipment of raw resources and finished goods crisscrossing the world entails constant monitoring by countless parties involving complex financing and insurance measures. Blockchain technology, so ideal for trade finance, will transform supply chains for less friction, strengthening trust and increase the velocity of world trade. Accordingly, banks are investing and driving various consortia. The irony? Blockchain effect of digitising trade finance and enabling interoperable ecosystems will end up disrupting Corporate Banking itself.
Understanding trade’s invisible hand
For too long, the lack of assurance in the end-to-end production, shipment and purchase cycle creates repetition and duplication. All parties in the value chain creates their own monitoring systems, from producers to commodity houses, freighters to banks, exporters to importers, inventory warehouses, documentation and legal services as well as ports. The result: enormous paperwork, significant time delays, and substantial insurance covers adding to the high costs to deter fraud.
Not surprising, the physical commodities trading sector is pursuing emerging technologies like blockchain to transform the whole industry for greater security, reduced costs and quicker turnaround. If all stakeholders to an OTC (over-the-counter) transaction are present in the same interoperable network with access to the verifiable transaction in real-time, it would eliminate intermediaries and vastly simplify processes necessary for a deal lifecycle. Blockchain provides the needed trust for immutability, traceability and auditability features within its distributed ledger technology (DLT).
With a number of blockchain trade finance applications neck-to-neck ready for full commercialisation, the next 12 months may decide which platforms will be the gold standard for permissioned DLT. Banking, as a regulated, fast moving and globalised sector, is vested in building blockchain platforms that are scalable and interoperable for commercial viability. This also means that when its enterprise blockchain platforms are ready, it can help inform and provide a ready template for other industries. Trade finance, clearing and settlement are banking’s low-hanging fruits for disruption first. We see three blockchain platforms leading the charge to digitise them: Quorum, the enterprise-focused version of Ethereum, the Linux Foundation’s Hyperledger, and Corda.
Heritage and expertise inform the future
As one of the leading global commodity banks with a centuries-old heritage in the financing and trading of agricultural, energy and metal resources, ABN AMRO’s Trade &Commodity Finance business recognises the need to lead from the front. Accordingly, we are applying blockchain technology at scale throughout commodity financing’s lifecycle from its extraction, production and shipment, right through to the secure inventory storage and distribution across warehouses and ports. Right now, we are also considering how to pair a digital blockchain system with Internet of Things (IoT) sensors solutions and NFC chips.
The birth of trade tech from a maturing fintech
But the big leap forward in trade finance, in my view, will be in Smart Contracts. It will allow businesses to automatically trigger commercial actions based on a set of defined criteria. Lines of program, not contracts in the legal sense, Smart Contracts enforces a relationship with cryptographic code. They broaden blockchain’s utility from secure record keeper to intuitive implementation of multiparty agreements. Smart Contracts can digitise parties’ information, request for underlying documents, develop terms and link payment tenures to the contract.
In fact, innovation in the trade finance space is intensifying and tradetech’s evolution is increasingly differing from fintech’s. Trade, which requires extensive collaboration and interaction reinforcing trust-building between many different parties, is in turn metamorphosing the finance industry towards a more collaborative ecosystem. Without a doubt, the open and connected enterprise blockchain model will see wider and faster adoption instead of a closed blockchain system.
Banking as a digitised network
Likewise, diverse, global markets (such as commodities and general trade) are more interconnected extending beyond perceived borders. As a bank, we recognise that our client relationships expect seamless and reliable platforms and ecosystems. It requires a paradigm shift for an institution like ours to reimagine our role in financial services. It further forces us to re-evaluate what capabilities we must possess for differentiation.
As I see it, the future is a network-to-network world linked by connectors with no single ubiquitous platform fuelling the global trade ecosystem. Of utmost importance then, is the value of interoperability.
A myriad of platform initiatives are addressing different pain points across the value chain. For instance at ABN AMRO, we invested in ÐΞLIVΞR to tackle logistics delivery, in VAKT for the post-trade settlement of transactions (we started with physical energy -- oil trade from the North Sea), and in KOMGO, an open trade financing platform connecting finance providers and consumers. These platforms enable us to streamline and optimise the entire physical commodity operations. Now already in production, work is focused on scalability, expanding commodity classes, and releasing value throughout the supply chain. We are optimistic of blockchain’s commercial viability for trade digitisation, which could reduce the paper-based exchange duration by a factor of 10 –just imagine, 10 days to just 24 hours.
For all of us responsible for technology operations and tasked with connecting to new systems, what lessons can we draw from banking’s experience? I am of the view that we need to take full advantage of the coming disruption by structuring our data and accelerating the digitisation of our processes and systems.
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