Blockchain in Trade Finance: How the Technology Can Optimize Business Processes
Blockchain technology is an all-purpose tool suitable for virtually any industry. Let’s look at some more examples of its application. Jointly with Andrei Lukashenkov, an expert at QIWI Blockchain Technologies, we will discuss blockchain consortia and platforms for trade finance.
What is Trade Finance
Trade finance is a diverse set of financial instruments allowing institutions to provide buyers with deferred payment terms on goods or services ordered. The very term “trade finance” is closely related to international trade and implies settlements in cross-border trade transactions.
Trade finance involves purchasers (or importers), sellers (exporters), financial intermediaries (banks), logistic and insurance companies. To add transparency and security to transactions various guarantees, letters of credit, and escrow accounts are used.
In today’s globalizing world, banks increasingly adopt blockchain technology to reshape the framework of international trade transactions. There is a global trend toward joining forces between banks and government entities to digitize trade finance and steer away from inefficiency and outdated paperwork. Financial institutions team up in blockchain consortia to develop pilot projects powered by DLT, a tool that lets them perform transactions in near real-time.
The most prominent projects include trade platforms Voltron and Marco Polo. Based on the “I see what you see” principle, blockchain platforms add transparency and security to transactions, providing a common information representation and making data available to all members of a certain business process.
Platforms for Trade Finance: How they Work
Let’s start with some examples. A modern information system can be represented as a matrix with companies. The companies operate at three levels: information, financial, and physical representation.
The information level. Consider a scenario: A container with a certain amount of goods was shipped from port A to port B.
The physical representation level. At the moment, the container is in port P on site M. Soon it will be shipped on ship K, which departs at 12:00 and arrives at its destination in three days.
The financial level. Company N must pay for the shipment, insure goods, pay for unloading and delivery of the container.
All members of trade finance operations work in autonomous systems, with communications performed in independent channels. A transaction is typically carried out in a standard manner: a buyer orders the goods by sending a seller an email, following which the seller emails an invoice to the buyer. All parties to a transaction may decide on upfront payments. Should one party require funding, it may submit a full set of documents confirming the transaction to the bank. In that case the bank does not have a full picture of the transaction and operations carried as part of it.
In the traditional IT landscape, these elements add up to a matrix of disparate systems, with data being isolated both at different levels and within different companies. The role of blockchain technology here is to connect the data, removing boundaries between levels and creating possibilities to perform transactions across levels and between companies.
Blockchain powered solutions can reshape the logic of the process, bringing all industry players together in a shared ecosystem. Banks, purchasers, suppliers of goods, logistic and insurance companies all join the network and can track all operations related to a transaction in real time. This means, for instance, that an order for goods will be available to both the supplier and banks. An invoice, insurance and logistic documents will also be available in the system.
Pertinent Cases
Voltron and Marco Polo were developed in an effort to simplify and optimize existing processes, lower the processing time and cost, and minimize risks.
In March 2019, Russian-based Alfa-Bank joined the Marco Polo trade network on R3’s Corda blockchain platform. Marco Polo members include the largest financial institutions in Europe and Asia, such as BNP Paribas, Commerzbank, ING, NatWest, Bangkok Bank, SMBC, and Danske Bank, among many others.
The Marco Polo platform aims at building a shared ecosystem for commercial transactions and trade finance, and minimizing risks. Bringing together banks, suppliers and customers, logistic and insurance companies, Marco Polo adds transparency to their interaction. By joining the platform banks could track transaction-related documents in real time and make informed decisions about finance. According to Alfa-Bank experts, Marco Polo can reduce the time taken to execute a transaction from 5–10 days to 1–2 days.
The Voltron platform is yet another R3’s project powered by Cords. In May 2019, over 50 banks from 27 countries tested the solution. The trial saw participation from CommerzBank, MUFG, Standard Chartered, ING, National Bank of Egypt, and Societe Generale. The platform aims at optimizing trade finance and simplifying Letter of Credit transactions.
What are Blockchain Consortia?
The cases we have reviewed were developed in blockchain consortia.
A blockchain consortium is an association of independent companies or organizations with the objective of coordinating business processes and jointly exploring blockchain technology. Among the most prominent consortia are R3, Hyperledger, Enterprise Ethereum Alliance (EEA), and Fintech Association in Russia.
QIWI Group is a member of R3, an international consortium focused on financial innovation. R3 unites the largest banks and technological companies, such as HPE, Intel, and Microsoft. QIWI is the first in Eastern Europe and Russia in particular to have joined the R3 network, whose partners work together in a unique lab of R3’s R&D center.
What is the aim of blockchain consortia? They want to jointly develop and apply blockchain powered solutions in various industries and build global ecosystems.
Consortia can be broadly grouped into two categories:
Business oriented. These are consortia whose goal is to develop and utilize blockchain powered platforms tailored to a certain task. One example is supply chain.
Technology oriented. Associations of this kind develop blockchain powered platforms according to technical standards. An example of those is the Hyperledger consortium developing business platforms of diverse focus under the aegis of Linux Foundation. The consortium brings together more than 100 companies, among which are Airbus, IBM, Fujitsu, SAP, Huawei, Nokia, Intel, Samsung, American Express, J.P. Morgan, blockchain startups like Lykke, Consensys, etc. Sberbank of Russia also joined the Hyperledger Project.
Yet another example is R3, a consortium developing Corda, whose members include Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, Bank of America, Deutsche Bank, Banco Santander and dozens of other major financial institutions. The QIWI Group is the first from Eastern Europe to have joined the consortium. QIWI Blockchain Technologies was founded to develop blockchain and distributed ledger technology.
Each consortium is an independent institution, and its members are able to influence its work and development. Different consortia have their own principles of governance, with coherent processes helping each party to make decisions. The majority of companies joining such consortia are interested in blockchain technology in itself and want to develop joint projects with other members of a given consortium.
Mid-sized companies do not have to join a consortium, pay entrance fees, and invest in the technology. What they can do is take a close look at the consortium’s community. Taking part in special events and networking will help expand the network of quality contacts, find new partners and clients.
What kinds of benefits can a business get from partnering with a global blockchain consortium?
а) When developing a solution on the consortium’s blockchain powered platform (say, Corda or Hyperledger), a company becomes part of the global community;
б) A company can draw on the experience of other members of the community;
в) Belonging to the community is a straight path to partnering with foreign companies who would be difficult to work with otherwise, especially given the recent regulatory practices in the markets.
By exploring more and more blockchain use cases, we become more and more convinced in its potential to reshape the industry. Trade finance is a prime example of how blockchain technology helps establish complex processes on a global scale, building a new, open environment for businesses to prosper. Stay tuned for more insightful articles to come!
