Value of blockchain in trade finance yet to be realised
Treasurers needs to overcome barriers like lack of interoperatability for making blockchain technology mainstream in trade finance
Treasurers needs to overcome barriers like lack of interoperatability for making blockchain technology mainstream in trade finance
Given the fact it’s such a talked about technology – and plenty of organisations within the banking and finance sector are racing to develop their own solutions – it’s clear that trade finance is set to benefit from blockchain. Whether it’s about delivering transparency throughout the payments process, or helping to drive automation, Blockchain’s potential is huge.
For example, a trade finance transaction for a commodities cargo shipped by sea involves close to 36 original documents and 240 copies from as many as 27 parties. These transactions regularly take weeks, if not months, to close. Blockchain can be applied to drive efficiencies for corporate treasurers across contract creation, invoice factoring, delayed timeline, AML review, multiple platforms, duplicative bills of loading and delayed payments.
However, before the full potential of Blockchain can be realised, several hurdles need to be overcome.
The reality is that some intricacies need to be addressed before we witness a wider application of blockchain technology in trade finance.
A recent article from The Asset, Blockchain in trade finance making strides outlines the progress in the application of blockchain in trade finance so far, but also cautions that technology still needs to simplify its eco-system to accommodate a wider range of users.
Apart from simplifying its eco-system and interoperability, there are other challenges in implementing blockchain technology like regulation and costs and complexities involved with building and deploying blockchain solutions.
The article mentions: “Within the past year, there have been several real-world applications of blockchain in trade finance. Last November, for example, Cargill, working on the Voltron platform, was able to execute financing for a bulk shipment of iron ore in a matter of hours as supposed to 1-2 days under the traditional method.
“While there are evidential benefits around using blockchain-based solutions, the key to ensuring end-to-end applicability is making sure these different eco-systems, whether it be government-led or technology company-led, can interact with each other under a universal framework. However, more needs to be done to ensure that any company that operates on a blockchain trade finance system is agnostic and not forced out of a trade finance network because it is unable to link up with other trade finance networks.”
A report from Deloitte reiterates the same.
There is a common worry that with so many different networks, no standard exists to allow these networks to interact with each other.
According to Deloitte, the lack of interoperability gives IT departments headaches as they discover that platforms can’t communicate without translation help.
The report said that, on coding site GitHub, there was more than 6,500 active blockchain projects using a range of platforms with different coding languages, protocols, consensus mechanisms and privacy measures.
“Standardization could help enterprises collaborate on application development, validate proofs of concept, and share blockchain solutions as well as making it easier to integrate with existing systems,” the study said.
Many will point to the need for regulation in order to improve interoperability and standards. However, this can cause problems. For example, regulators need to sign-off new blockchain-based systems which could prove to be a bottleneck to technology architecture migrations. In a recent Deloitte survey of blockchain-savvy executives, nearly two in five cited regulatory issues as a barrier to greater investment in blockchain technology. The reason for this is that the technology introduces concepts and methods, such as cryptographic signatures and smart contracts, that existing regulations don’t address.
Nitin Jain, Head of Treasury and Capital Markets at Agrocorp said in a recent Global Treasurer interview: “Management of geopolitical risks, such as sanctions and trade barriers, together with fraud prevention, KYC and AML requirements are growing as mandatory elements of the trade finance business. This can drive up operational overheads even further.”
Another significant obstacle is the cost and complexity involved with building and deploying blockchain solutions. One of the major blockchain features is its resistance to hacking owing to the distributed aspect of the ledger as well as the complicated cryptography.
But once the additional coding complexity is added to fulfill later requirements, it introduces a host of vulnerabilities to the blockchain and reduces the security strength of the ledger. So, customers should avoid the temptation of bespoke modifications and developments to preserve the very attraction and purpose of the blockchain. Vendors will be charged with designing the solution along with other backup protocols to prevent security vulnerabilities from cropping up in the technology.
Though there is a lot of work still to do before the major regulatory hurdles to blockchain adoption are cleared, momentum is building. Continued progress here will help to increase adoption of blockchain technology. Though regulatory understanding of the technology is still nascent, firms can collaborate with lawmakers and policymakers to create a solid regulatory framework – and perhaps look at leveraging policymakers’ experimental facilities.
To address the challenge of complexity and cost, nearly a dozen big technology vendors – including Amazon, IBM, and Microsoft – now provide cloud-based blockchain technology as a service. New cloud offerings have been coming to market at an accelerating pace and have the potential to lower the barriers to developing and operating blockchain networks.
Working on having a universal framework, Hong Kong and Singapore took steps to link up their trade finance platforms back in 2017. Hong Kong took a significant stride last year in October when the Hong Kong’s Monetary Authority (HKMA) opened its eTradeConnect blockchain platform to exchange and confirm purchase orders for financing via a single interface.
Other notable trade finance blockchain platforms have been driven by technology companies with IBM creating we.trade and Batavia to bring various banks together on a common platform while enterprise blockchain technology company R3 formed Voltron and Marco Polo for similar reasons.
Blockchain might be one of the most significant developments with respect to its application in trade finance for treasurers, but there are still plenty of hurdles that the technology must cross before it is wholly embraced by the public.
Given all of the above, corporate treasurers should perhaps be looking to create an ecosystem of partners in order to derive maximum value from blockchain technology. Eventually, trade finance will benefit from blockchain – but there’s still a long way to go.