How DLT is Disrupting Global Trade Finance
Institutional presence in the relatively infant blockchain industry has always been a widely discussed topic. Given its intricate relationship with the general cryptocurrency market, there is a tendency to extrapolate the negatives of the highly volatile market towards the merits of the underlying technology. However, beyond the various manifestations and implementation of the technology, there is an obvious trajectory of institutional adoption currently spearheading the advancement of distributed ledger technologies.
Nowhere is this this trend more obvious than in the trade finance sector, where the exploration of blockchain and its applications is happening at an exponential pace. In fact, after the capital markets and insurance industry, the global trade finance sector represents the most targeted industry for distributed ledger technology use. This is particularly inevitable given the glaring issues of the legacy system, with its reliance on paper-based processes and manuality in documentation. With the promise of automation, it is expected that blockchain can streamline the operations of trade financing and effect an increase of global trade volume by more than $1.1 trillion by 2026. (Source: Cambridge Blockchain Research Report; World Economic Forum, Bain & Company Trade Tech White Paper)
Five Leading Initiatives in Trade Finance
There are five leading initiatives that are focused on addressing the $1.5 trillion gap in the global trade finance industry.
Marco Polo network is a blockchain-based trade finance initiative with substantial presence in Europe, the Middle East, and Asia. Established in 2017, Marco Polo aims to address the issues within trade finance through advanced technology. More specifically, its mandate is to replace the inefficiency of paper-based processes with the aim of significantly lowering operational cost and transaction time, while enabling end-to-end transparency for stakeholders.
Marco Polo’s platform is built using R3’s Corda-permissioned blockchain, with TradeIX as the technology partner. A distinctive function of its platform is its capability to integrate with existing enterprise resource planning (ERP) systems, such as Microsoft Dynamics 365 and Oracle Netsuite. Its core features include automated contract enforcement, distributed data storage, asset tracking, and receivables discounting.
At the last quarter of 2019, Marco Polo announced the addition of one of the world’s largest custody bank, Bank of New York (BNY) Mellon, into its network. With a cumulative asset base of over $360 million, BNY represents the second US-based bank to join the network after Bank of America. Marco Polo currently has 27 global banking partners.
Initially conceived at ING’s innovation bootcamp back in 2016, Komgo is a trade financing platform focused on commodities, that was formally established in 2018, backed by 15 of the largest financial and commodity corporations, including Consensys.
Komgo’s platform facilitates communication and transactions between stakeholders in the commodity supply chain, using distributed ledger to enable interoperability, enhance process optimization and data security. The current platform facilitates four core products: a Know-Your-Customer (KYC) module, Letter of Credit (LOC) facility, receivables discounting and standby LOCs.
The platform is built on the Quorum enterprise blockchain solution technology, created by JP Morgan. Komgo’s core proposition is the focus on privacy and security, manifested in its proprietary peer-to-peer document exchange called Kite.
Voltron is a trade finance initiative founded by 12 founding member banks that include prominent names such as HSBC, BNP Paribas and BBVA. Focusing more on documentary trade, the platform aims to streamline current legacy practices by digitizing all documentation relating to the collection, tracking and exchange of commercial documents quickly.
Voltron is distinguishable from other consortiums by focusing specifically on the digital issuance of LOCs and the exchange of documentation on the open network. Additionally, external trade documents that are not native in Voltron can be digitally verified and processed on the Voltron network. According to Voltron, this vital functionality provides legal enforceability of contracts as well as enhanced digitization efforts across enterprise networks.
Voltron leverages R3’s Corda enterprise blockchain, with great success in significantly reducing the LOC process from the traditional 10 days to a mere 24 hours through numerous real-world pilots executed on its platform since its inception in 2017.
We.Trade is a trade finance blockchain platform founded by 14 large banks in the Europe region, including HSBC, Santander Bank and Deutsche Bank. It was established in 2018 with IBM as the technology provider. The platform focuses on alleviating the issues faced by SME and mid-sized firms in the pursuit of trade finance, allowing them to easily source trading and service partners, as well as communicate with their trade banks and suppliers. We.Trade aims to significantly reduce process cost – by up to 90% – using blockchain technology.
The platform is built on the Hyperledger Fabric platform by IBM, providing full transparency on the end-to-end trade process from order creation to payment execution. In July 2019, We.Trade launched its first pilot transactions involving ten firms and four banks across five countries. HSBC became the first bank to leverage a blockchain platform for the end-to-end execution of trade finance transaction
eTrade is a blockchain-based platform jointly developed by a consortium of 12 major banks and the Hong Kong Monetary Authority (HKMA). In one of the few collaborations between private and public entities within the blockchain space, eTrade aims to enhance trade efficiency, reduce systemic process risks and automate the trade financing process in a cross-border setting. Although initially conceived for the Asian region, eTrade has set its sight to Europe as well, to foster interoperability between global trade arrangements.
eTrade’s platform is built on the permissioned Hyperledger Fabric solution, the proof of concept for which was conceived at the end of 2016. In November 2017, the HKMA and the Monetary Authority of Singapore entered into a collaboration to develop a DLT-based trade finance network with eTrade, to facilitate cross-border trade between the two countries.
Enterprise Blockchain Solutions Overview
The underlying technological base that is widely used by the aforementioned consortiums are enterprise blockchain solutions. There are three main enterprise blockchain solutions in the market, which will be discussed below.
Fabric is an open source permissioned blockchain infrastructure started by Linux and contributed to by IBM. A core feature of Fabric is the modularity of its solutions, ensuring clear separation between smart contracts execution, consensus layers and node roles. This modular approach streamlines development, as developers can create their own standalone components, or leverage existing tools available in the market. Fabric achieves data privacy and security through the implementation of “channels”, enabling private and encrypted communications between two or more network members.
There are some limitations of Fabric in an enterprise setting. The significant amount of channels required to be established and maintained in the pursuit of full production presents significant operational challenges. This impairs the scalability of Fabric, which is a major consideration for enterprises when deciding to explore blockchain.
Corda is a blockchain platform conceived by R3, an enterprise blockchain technology company that is backed by over 300 member firms. Backed by a conglomerate of enterprises spread across numerous industries, including financial services, healthcare, regulatory and digital assets, R3 is the largest blockchain consortium and project ecosystem globally. Corda is natively built from scratch to adhere to the needs of members. A fundamental difference relative to traditional blockchain architecture is partial viewing, where users can only see transactions on the network on a need-to-know basis, ensuring transactional privacy as well as scalability, since not all data is required to be shared with all nodes.
A key advantage of Corda is its focus on privacy and scalability. However, the ability for the removal of transaction intermediaries means that it loses a core property of blockchain: immutability.
Quorum is a variant of Ethereum’s code base, conceived by JP Morgan. Although it is built from the public Ethereum code base, Quorum is a permissioned blockchain network in and of itself. One of Quorum’s core properties is its focus on privacy, leveraging the technology of a privacy-focused project called zCash. Quorum enables private transactions and smart contracts using a peer-to-peer encrypted message exchange called Constellation. Since it is a permissioned network, it offers multiple consensus algorithms that are more appropriate towards consortium chains such as raft-based consensus.
A major limitation of Quorum is the inability of private smart contracts to be public or discoverable. This could inhibit the development and interaction of the private smart contracts in a higher-level setting.
Global trade finance is set to embrace advanced technology – by virtue of blockchain – in order to realize tremendous value. The five consortiums highlighted in this article broadly represent the most active initiatives within the blockchain space, which are manifested through various pilot studies and actual integrations by prominent firms.
* The information above does not constitute any form of financial or investment advice and should not be relied upon. Investing in Digital Assets carries risk. For more information please see our risk warning.