Trade finance is a paper-laden, error-filled and laboriously slow method of facilitating transactions between buyers and sellers, but one that is critical to the flow – and growth – of global trade. What if it were possible to remove the paper and manual processes, automate payments embedded in a trade contract, improve efficiency, reduce fraud, cut costs, track and trace shipments, mitigate risk and allow every participant in the end-to-end chain to view the same unalterable information?
This is the potential that blockchain, or distributed ledger technology (DLT), offers in the trade finance space – full digitalisation of trade – and the reason that several bank consortia have been enthusiastically piloting DLT-based solutions in the past few years.
Several bank consortia have been enthusiastically piloting DLT-based solutions in the past few years
Many of these solutions are now coming to market, including bank-led consortium R3’s Marco Polo initiative, as well as Batavia and We.trade, both using the IBM Blockchain Platform built on Hyperledger Fabric.
Emboldened by initial successes, the consortia are now talking about bringing other constituents beyond corporates into the fold, including credit insurers, regulators, enterprise resource planning software vendors and logistics providers, and, importantly, small and medium-sized enterprises, which have not had access to traditional trade finance instruments such as letters of credit.
With numerous consortia and blockchain technologies jockeying for position, some platform consolidation is expected in the coming years. Yet most disagree that this will end with just one global DLT-based trade finance platform, which highlights the important issue of interoperability.
The vision most articulated is one of a ‘plug-in’-type functionality to the various projects focused on financing trade – but for that to happen, the data must be standardised, and a technical standard to provide seamless interoperability across multiple DLTs must be agreed to ensure a paradigm shift in trade finance.
