Today, I will go through a short analysis of enterprises blockchains and how they are improving and changing international trade.
Blockchain in Trade Finance
The current challenges include the following:
- One single shipment requires a lot of paperwork including sign-off from 30 organizations
- Containers can get stuck at port due to late approval.
- It takes more than a month for a shipment to be approved and sent.
- The worldwide GDP growth can increase by 5% for using blockchain for trade finance. The trade volume can also increase by 15%
Links to download: Blockchain in Trade Finance pdf | Blockchain in Trade Finance Powerpoint Presentation
I would like to start with a few blockchain basics slides to make sure we are all aligned with the business blockchain.
Let’s get started.
2) How Does a Blockchain Work: A Step-by-Step View
Before we dive deep, let’s understand how a blockchain works.
A blockchain is a decentralized peer-to-peer network. It enables users to interact with each other and send transactions request.
Let’s clarify the basic concepts of blockchain networks, from a non-technical point of view.
We have ledger (like an excel spreadsheet), but this ledger is distributed means it is replicated over plenty of nodes (network members).
Now let’s say a user wants to add a new transaction to the blockchain (the ledger), then the transaction will be sent over the network. Only once the network participants approve the transaction is valid, the transaction will be approved and added to the network.
Again as you can see the network members needs to achieve consensus and validate the transaction, this means we have “no single authority” to control the network.
The step-by-step view is as below:
- First, a user sends a transaction request to the network.
- A block is created. The blockchain represents the transaction. Also, a block can contain hundreds of transactions at once.
- Now, the block is sent to all the network nodes. The broadcasting ensures everyone has an equal chance to validate the block.
- The block is then validated by the nodes, which in turn, validates the transaction as well.
- The block is added to the chain once it is validated.
- This also means that the transaction is executed successfully and verified by nodes.
The above step-by-step view shows how blockchain works. However, not all blockchain works similarly. We have different types of blockchain, including hybrid, private, and so on, that have a different approach.
3) Public vs Private Blockchain Network
There are different types of blockchain which work differently. Two major types of a blockchain network are public and private. The public blockchain is used by bitcoin, and hence, it is popular.
Bitcoin is the first cryptocurrency that utilized a public blockchain. It is also permissionless, which means it is an open network where any device or peer can use the network freely without any limitation or the need to take permission. That’s why it also shows features such as transparency. Other key examples of public blockchain include EOS.
With time, we have also seen an improvement in blockchain as we witness second-generation of blockchain, including Ethereum. It introduced important concepts, such as dApps and smart contracts.
Private blockchain network helps enterprise or closed organization to take advantage of blockchain. They create permissioned networks where each user needs permission to join or access the network. It is done to ensure data privacy and improve network performance. Hyperledger is a popular private blockchain network.
So, how do the types of blockchain impact “blockchain in trade finance.” Let’s explore it by going through enterprise blockchains and platforms in our next slide.
4) Enterprise Blockchains and Platforms (with examples)
There are few popular enterprise blockchain and platforms. These blockchain platforms evolved from the simple idea of the public blockchain. Each one of them offers a unique value perspective and hence solve specific problems.
The Enterprise Blockchains Ecosystem is evolving fast. There are few vendors which offer blockchain as a service, as well we have different enterprise blockchains platforms such as Corda, Hyperledger & Ethereum.
It also gave rise to Blockchain-as-a-Service(BaaS). BaaS is crucial to the industry as it enables small players to use blockchain without buying blockchain from scratch.
Popular Vendors that provide BaaS includes the following:
Now you have to understand these vendors ARE ACTIVE and investing efforts both on technology developments, sales, and marketing. In 2019-2020, we are going to see millions of dollars spent by these vendors.
Oracle who just announced that there are more than 100 projects in production on their blockchain as a service platform.
The enterprise platforms that makes BaaS functional include the following:
The future does look bright! The enterprise blockchain will continue to grow and more and more companies will use it. Moreover, there will be more dedicated networks that are going to use decentralized technology.
To get a better understanding of these platforms and vendors, let’s look into Federated Blockchains.
5) Federated Blockchain
Basically, there are 3 types of networks: Public, Private, Federated.
In a public blockchain, anyone is allowed to join and participate in the network. Everyone is permitted to see the ledger and participate in consensus.
Only a single organization has the authority in private blockchain. That means that the authority controls who can join and access the network.
We can think of it as “centralized-decentralized” network.
When it comes to federated blockchain, you will get access to a decentralized private environment.
Federated blockchain is at the core of private blockchain. It is used by financial services, insurance claims, multiparty aggression, supply chain management, and more!
The idea behind federated blockchain is to have a centralized approach. However, to maintain a level of balance, multiple authority governs the platform.
During the past 3 years, massive efforts were invested in establishing federated networks, more than dozens project most of them are utilizing R3 Corda or Hyperledger.
This is ideal for industries that need to utilize blockchain without going public. These authority nodes are pre-selected among all the organization connected together with the help of the network. These selected group of nodes are responsible for validating a block. This also means that the selected nodes have access to restricted areas and information.
6) Trade Finance Ecosystem
Let’s start with the basics. Trade financing is the process in which financial institutions provide credit to guarantee the exchange of goods, is a centuries-old industry that hasn’t seen much change with the growth of global trade flows. Trade finance is the financial products and instruments companies use to facilitate commerce and international trade.
The current ecosystem is not so ideal. For example, currently, third-party applications are used to do transactions. Also, it can take a lot of documentation(up to 36 documents) with multiple copies and parties involvement. Overall, the time required to do simple tasks can take weeks.
Now, that we have a clear idea of trade finance, let’s take a look at the players in trade finance ecosystem. By learning about them, you will understand the role of each one that constitutes the trade finance ecosystem.
- Trade finance organization
- Export credit companies
7) Current issues of trade finance
There are multiple issues within current trade finance. These issues need to be addressed if we want to make the most out of the trade finance sector.
There are many issues with the finance sector and we can gauge it from the facts below.
According to research published by Maersk- A shipment from Kenya to the Netherlands was sent to understand the physical process and paperwork that is required for a shipment. It contained roses and avocados and is done in 2014. They found the following problems:
- Each good along the supply chain needs to be checked for quality now and then.
- Each good need to connect with multiple actors and people during the supply chain journey.
- It can take anywhere from 34 days for a good to reach from farm to retailer. Also, it can take up to 10 days for the documents to be ready.
The good news is that blockchain can help to do just that. Before we can use blockchain, we need to list the current issues.
Low Customer Experience
One of the main issues is low customer experience. There isn’t much experience when it comes to handling the complex nature of the system. This leads to improper tracking of parties and also makes it easy to do frauds, including fake deliveries.
The overall process from the banks to clients is costly, especially when it comes to creating the letter of credit. Disputes are also not handled properly and take a lot of time to solve.
When it comes to regulatory, they are under significant burden considering that they have to manage everything, including fraud prevention, KYC/AML protocols, geopolitical risks, and so on. On top of that, the seller finds it tough to maintain product conditions, bringing in product risks.
Product, Manufacturing and Transport Risks
The last three issues with trade finance include currency, transport, and manufacturing risks. Currency risks are introduced due to fluctuations in foreign exchange currency conversion. The transport risk, on the other hand, comes in due to cargo insurance, which adds cost to the whole deal. Last, but not least, the manufacturing risks comes in because of the need for unique features to be added regularly to stay relevant in the market.
8) How Trade Finance Can Work Using Blockchain
Blockchain can truly revolutionize trade finance. It can ensure that no records duplicate. It also removes the chance of manipulation or fraud. It also improves visibility and ensures a level of trust is maintained all-time.
So, how come trade finance make proper use of blockchain?
It can do it in multiple ways. Let’s list them below.
- The buyers and sellers can find trustworthy trading partners using blockchain.
- Both the parties then agree with each other on the terms and initiate the smart contracts. Once the smart contract is created, the order is then initiated
- In the next site, the buyer bank kicks in where it will automatically settle the amount on meeting the conditions mentioned in the smart contract.
- To ensure a faster settlement process, the seller can request the finance from his bank.
- Now, the seller ships the goods. Both parties also track the package.
- The buyer confirms the trade, which means that the condition is met on the smart contract.
- Finally, the seller receives the payment.
The process is simple, and as you can see, most of the things are automated to maintain transparency and trust.
9) Blockchain Advantages for the trade finance
The finance sector is reaping the benefits of blockchain.
One Example includes Barclays and Fintech Startup Wave worked together on their first trade finance deal with blockchain-deal. The permissioned ledger ensured proper export of almost $100K of butter and cheese.
Of course, there are other plenty of advantages of trade finance blockchain. The benefits include the following:
Real-time reviewing and previewing
The documents on the blockchain trade finance platform can be reviewed for authenticity anytime! It saves time for all involved parties. All of this also means that fraudulent activities don’t happen.
Blockchain for trade finance also provides transparency. It is an important factor that is helpful for all actors. This also becomes essential considering that invoices need to be generated and sent immediately. Also, the fact that the invoices can be sold to a third party. Overall, transparency can lead to better payment and ensure that everything can be done within a small period of time.
There are no intermediaries which improve overall system decreasing fraudulent. This improves the banks can do trade financing without any risks or issues.
No Double Spending
Double spending can be prevented with blockchain in trade finance.
Smart contract execution
Smart contracts can help automate and ensure that there is no time wasted in paperwork. The smart contracts need to be finalized before they can be executed on the network. To do so, both partners have to meet and finalize the details before the smart contract agreement is drafted.
Also, the smart contract is only executed only when a certain condition or pre-defined rules are met.
Proof of Ownership
Blockchain lets buyers and sellers have proof of ownership which ensure transparency locating the shipment’s location.
Regulations can be managed from one place. It includes KYC/AML solutions. It also improves international trading as the difference in regulations between countries can be managed.
10) Blockchain in Trade Finance Use Cases: International Trade – Letter of Credit(LC)
There are tons of blockchain trade finance use cases. A popular use case is the International Trade – Letter of Credit(LC).
It is a letter that serves as a payment guarantee from one bank to another. It covers all the international trades that are impacted by different laws, distance, and personal trust.
A real-world implementation of LC is Voltron. It is powered by r3. Few banks use Voltron, which includes NatWest, BBVA, HSBC, Scotiabank, CTBC Bank, and much more! In total, 12 banks are working under Voltron to make LC more functional and accessible.
11) Blockchain in Trade Finance Use Case – Maritime Trade – Bill of Laiding(BoL)
Bill of Laiding(BoL) is yet another interesting blockchain trade finance use case. It allows all members in the supply chain to exchange documents without any form of risks and disputes.
The cost of trade paper reaches $420 billion. Sometimes, it can also cost 5-10% of the whole transaction. BoL also improves the flow of trade documents.
Importers, exporters, shipping companies, ports, customs agents, and banks can take advantage of BoL.
One of the examples includes Tradelense by Maersk and IBM. Insurwave, an Israeli startup is also working to use BoL in their platform.
12) Leading Trade Finance Blockchain Consortia
There are few leading trade finance consortia out there. These consortia work towards a particular goal. Let’s go through a few of them below.
We.Trade powered by IBM. The key members include HSBC, UniCredit, Natixis, and others. A total of 8 banks are working together. IBM is currently providing trade finance blockchain support. They are also taking help from the likes of Hyperledger Fabric.
Komgo powered by Ethereum and Kaledio. The key members include SGS, Citi, MUFG, and others. Their key target is to offer security and efficiency. They solve data exchange issues through their decentralized blockchain platform.
Voltron powered by r3 Corda. Key members include HSBC, CTBC Bank, NatWest and others
Marco Polo powered by r3 Corda and Tradeix. Key members include OP Lab, SMFG, Standard Chartered. Their main aim is to provide better bank service. They also plan to offer better trade solutions to customers as well.
Batavia powered by IBM. Key members include CaixaBank, UBS, and others.
HKTP key members include DBS, HSBC, ANZ and others. It is a Hong-Kong based trade finance blockchain platform. The Hong Kong Monetary Authority collaborated with banks for the platform. Their goal is to ensure that everything is digitized.
There are also popular enterprise blockchains aimed towards trade finance.
- R3 Corda
13) R3 Corda
R3 Corda is one of the enterprise blockchains for trade finance. It is enterprise grade and optimized for the IT environment.
R3 Corda works well with Oracle DB and SQL. The application firewall can also be configured in R3 Corda, giving it the necessary security. It is also compatible with the trade finance application.
Corda’s long-term vision is to become the shared global logical leader. This means that everyone can participate, including companies, individuals, and machines can interact and transact seamlessly. They also want to lower costs and do quality control. To do so, they are going to release a new version of Corda. They will also make sure that quality is maintained through the development.
To keep with the other services, they will also do innovation and focus on new services that will help enterprises. Lastly, their long term goal is also to get rid of friction and make it more comfortable to integrate applications and processes.
R3 Corda real-world use-cases: TMX, Payments Canada, Maersk, NatWest, CrowellMoring, and Swift.
Corda BaaS vendors include Amazon Web Services, Microsoft Azure and Hewlett Packard Enterprise.
14) Quorum Blockchain
Quorum Blockchain is open-source, enterprise-ready, and customizable. Quorum is one of the mature blockchain frameworks that offer high performance and throughput.
It is created by JP Morgan and utilizes Ethereum blockchain. The main focus of Quorum is to provide the financial sector a platform to customize blockchain according to their needs. Quorum uses RAFT-based consensus, which offers improved block storage and faster transaction. It also utilizes Istanbul BFT, an effective fault-tolerant consensus method which ensures network protection against bad actors.
The Quorum architecture consists of Quorum node, Constellation transaction manager and Enclave.
Quorum is open source, which means that it has 318 active contributions, over 10,000+ commits, and 3.0 LGPL license.
Quorum is a blockchain framework that offers few enterprise capabilities.
- High performance
- Peer and network management
- Voting-based consensus mechanism
- Trustworthy and enterprise-ready
- Enhanced contract privacy and transaction
Want to read more about Quorum? Check out the Quorum Blockchain Ultimate Guide.
15) Real-World Companies Using Blockchain for Trade Finance
Many companies are using blockchain for trade finance. They include the following.
- SWIFT: They launched their Proof-of-Concept(PoC) which is known as GPI link.
- Mizuho: They have already carried their first trade finance transaction between Australia and Japan. They are also working with Marubeni Corp. and Sompo Japan Nipponkoa Insurance.
- Barclays: They are working along with Wave to offer their approach on trade finance. Their aim is to solve global trade issues.
- People’s Bank of China: They are working towards a platform which will improve the trade finance blockchain. Their initiative is known as Guangdong, Hong Kong, and Macao Dawan District Trade Finance Blockchain Platform. It will help reduce cost up to 7-8%.
- KBank: Kasikornbank Public Company Limited is trying out Letter of Guarantee trade finance blockchain with the help of IBM’s Hyperledger solution.
- Dubai Trade and Dubai Customs: Dubai is exploring how they can use blockchain to improve trade finance.
- Scotiabank: They are working with AlphaPoint’s blockchain platform.
- SEB: SEB is capable of handling regulations and trade finance transactions. They are using CGI’s trade finance blockchain solution.
16) Getting Started: How to implement blockchain?
Awesome! We now understand the leading platforms for blockchain in trade finance, use-cases, and companies using blockchain for trade finance, it is now time to learn how to implement blockchain.
The steps to do so includes the following:
- Identify a use-case
- Develop a Proof of Concept(PoC)
- Test and build a blockchain solution
- Onboard partners to help grow and do integration
- Manage and operate your blockchain network
Also, you should look for factors that will help you implement blockchain – the permission type, ideal use-case, and partnerships. You also need to learn about common hurdles such as inefficient system, difficult user interface, expensive and not growing.
Links to download: Blockchain in Trade Finance pdf | Blockchain in Trade Finance Powerpoint Presentation