Banks and fintech firms are optimistic that blockchain technology can help transform the paper-heavy industry of trade finance, despite a recent wave of news about project cancellations and transitions to other technologies.
When Barclays PLC issued the world’s first blockchain-based letter of credit in 2016, it said that a “blockchain revolution in trade finance” was coming. Transactions that normally take up to 20 days have been cut to less than 4 hours by him.
In the years that followed, trade finance players lined up behind countless proofs of concept, pilots, and industry consortia to realize the promise of blockchain. Collaborations with banks such as we.trade, Marco Polo Network, Contour, Komgo, Batavia and CordaKYC aimed to build an industry-wide platform, while fintech companies have expanded from letters of credit and bills of lading to fraud detection, border We have adopted every technology, from trading across Payments, Asset Allocation, Know Your Customer Utilities.
In 2018, the World Trade Organization labeled blockchain as potentially “the biggest disruptor to the shipping industry and international trade since the invention of containers.”
Trade finance is a paper-heavy business involving the exchange of documents between numerous entities such as exporters and importers, banks, insurance companies, transportation and logistics companies, and government authorities. Blockchain’s intrinsic properties — its ability to connect multiple parties in a decentralized network while providing a persistent, tamper-proof digital record of decentralized transactions — make blockchain a $5.2 trillion global It has become the perfect technology to make the trade finance ecosystem more efficient and transparent. safety.
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Fast forward to 2022 and blockchain has yet to deliver on its promise in trade finance. We.trade, a platform owned by 11 European banks, announced in May that it would cease operations, and the Marco Polo Network has shelved its blockchain-based payment commitments this year. Companies originally focused on blockchain, such as Komgo and MonetaGo, have embraced other technologies. Many more initiatives never made it past the proof-of-concept or pilot stages.
what happened?
Business model challenges and poor corporate understanding are the biggest obstacles to bank-led projects.
“Technology wasn’t the issue. It was essentially a commercial model,” said Marco Polo Network chief, who developed an open-account trade finance platform with a large network of banks, including Bank of America. , BNP Paribas SA, The Bank of New York Mellon Corp., SMBC. The company still uses blockchain-based infrastructure, but has shelved its payment commitment product to focus on investing elsewhere.
“This product was developed with banks to meet their requirements and solve their problems, but it didn’t translate into enterprise demand,” Sutter said.
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According to Sutter, the Marco Polo Network has not been able to attract enough corporate customers to make it a sustainable business model. The company is now focused on its supply chain automation solutions, which are sold directly to businesses and target the pain points of buyers and suppliers. This is attracting more attention among enterprise users, he added, Sutter.
We.trade seems to face similar business model challenges. Similar to the Marco Polo Network, we.trade aimed to help businesses and banks facilitate account opening and financing, with a focus on small and medium-sized businesses in Europe. Blockchain-based platforms include IBM and European banks such as CaixaBank SA, Deutsche Bank AG, Erste Group Bank AG, HSBC Holdings PLC, KBC Group NV, Nordea Bank Abp, Rabobank, Banco Santander SA, Société Générale SA and UBS Group. We were collecting investments from banks. AG and UniCredit SpA, but corporate uptake has been slow.
We.trade said in a May 30 statement: He said an agreement would be reached to finance the necessary new investments.
The independent consultant, who led trade finance innovation at ING until earlier this year, says most blockchain projects in banks either haven’t solved the problem they were trying to solve or have failed because the problem doesn’t exist. Chris Sunderman said. “Or the market doesn’t want it,” he said.
However, external events such as the coronavirus pandemic and the war in Ukraine also played a role, as banks had to prioritize more urgent operational and compliance issues, Sanderman said.
Migrating to other technologies
Elsewhere in the trade finance market, blockchain consortia and solution providers recognize that what they are trying to achieve does not require blockchain technology at all.
For example, MonetaGo provides a data repository that allows banks to detect duplicate loans by matching information on invoices and trade finance documents with other network participants. Fintech companies have already used blockchain to build solutions in India, but decided that the technology would not be suitable for a global platform as it would slow down transaction execution and increase costs, he said. Managing Director Michael Hogan says he’s in the UK at MonetaGo.
“Our primary focus is protecting the privacy of our customers’ data, and we achieve that through security best practices and confidential computing technology.” Hogan Said.
Komgo, a platform to digitize commodity trade finance workflows, also no longer offers blockchain-based letters of credit, citing cost and scalability challenges. The platform is owned by banks such as ABN Amro Bank NV, BNP Paribas SA Citigroup Inc., Credit Suisse Group AG, ING, MUFG, Natixis SA, SMBC, Société Générale, as well as major commodity traders.
Komgo CTO Guy de Pourtales said the company is focused on reducing complexity, managing volatility, improving profit margins and improving transaction security for trade financiers. “Many of these problems do not require complex and expensive technical architectures to solve,” he said.
Moving from paper documents, emails, Excel sheets and PDF documents to smart contracts running on a decentralized blockchain is “like going from horse-drawn carriage to flying car.” said de Pourtales. “It sounds great on paper, but in reality it is more complicated.” Komgo is still free to use blockchain, but its deployment will depend on specific business needs and desired outcomes, he said.
lesson learned
Blockchain has not revolutionized trade finance as portrayed, but the technology is still relevant to the industry in practice, according to industry insiders who spoke to S&P Global. And the attempts were not in vain. Market intelligence on the sidelines of the International Trade and Forfaiting Association’s annual conference in Porto on September 8th.
“Sometimes I didn’t reach my goals, but I learned a lot about technology.” we.trade board member. Banks have grown accustomed to and embracing blockchain and other new technologies, Zecker said.
Daniel Cotti, an independent trade finance fintech consultant and former managing director of the Marco Polo Network, says the industry has also made a significant contribution to overcoming legal hurdles to implement digital trading instruments. increase.
The UK introduced the Electronic Trade Documents Bill to parliament earlier this month as part of the G-7’s efforts to reform trade documents. We plan to modernize the 1982 and 1992 legislation to put digital trade documents on the same legal basis as paper-based documents.
The International Chamber of Commerce published uniform rules for digital trade transactions last year. This helps standardize digital trade transactions and promote the use of electronic documents.
Blockchain still offers important advantages such as data privacy and security, data immutability, Cotty said. “This technology will become ubiquitous over the next decade and will certainly gain momentum in the financial services industry as well as other industries,” he said.
However, there is growing recognition across the trade ecosystem that while blockchain may be suitable for certain use cases, it is not the most important part of the digitization of trade finance.
“To be successful, a solution must either provide value to the customer or solve a problem. If it is based on blockchain, that is just part of the technical due diligence,” said Zekkar. said.
“Once you start living through the hype, blockchain has some really cool uses. But it doesn’t solve everything.
Far from giving up blockchain for the trade finance industry, companies such as Tradeteq, Enigio and Contour are advancing the technology for specific applications.
HSBC, one of the world’s largest trade finance banks, also continues to see opportunities for blockchain technology to accelerate the digitization of trade, said Shehan Silva, global head of digital solutions for the bank’s trade finance business. said in an email.
“We believe the greatest potential lies in use cases where networks leverage distributed ledger technology to connect and collaborate.” This includes trading based on letters of credit or documents of title and, in the future, tokenizing trading assets. Silver Said. HSBC, like other we.trade shareholders, did not want to reveal details about why its blockchain initiative was not successful.
