Hong Kong’s first blockchain-based trade finance platform, eTradeConnect, was formally launched last month under the patronage of the Hong Kong Monetary Authority.
When a new technology-based platform is introduced, it comes as a MVP, a minimally viable product. In eTradeConnect’s case, it’s not viable yet for most corporate treasuries.
At this initial stage, the platform is confined to open-account transactions within Hong Kong.
Bankers say, however, that eTradeConnect’s main developer, Ping An OneConnect, the fintech arm of the Chinese insurance group, is working to expand its cross-border network of counterparties, as well as to plug in directly to large companies’ enterprise resource planning (ERP) systems or supply-chain management systems.
“It’s more engineering work than a technology challenge to link eTradeConnect with other networks,” Frank Lu, head of blockchain development in Ping An OneConnect, told DigFin.
What it does
Although user numbers remain limited, the backers of eTradeConnect say it is a sophisticated offering.
The basic function of eTradeConnect is for buyers and sellers to create, exchange and match invoices with the purchase orders; on top of that, if finance is necessary, it can be secured on the same platform.
“Normally the open-account trade and the financing are two separate processes, but now they can be combined seamlessly,” said Joshua Kroeker, blockchain lead for global commercial banking at HSBC.
Moreover, says Ping An’s Lu, eTradeConnect is the world’s first blockchain trading infrastructure that allows all participants to encrypt their data fully on the distributed ledger.
“Throughout our blockchain framework, all data is encrypted by the participants themselves. Information such as the bank’s quotation or the amount of financing is not shared on the chain,” said Lu.
The technical challenge is to validate all the data without decrypting them.
“If two numbers are both encrypted, how do you know which number is bigger? We use zero-knowledge proofs to cross-validate the data in the encrypted environment,” Lu said.
Security versus efficiency
Sohfern Boey, head of global transaction services at DBS, says first, buyers and sellers create contracts online and put documentation onto the platform. They can then give one certain bank permission to look at the documents in order to obtain financing.
The technology ensures the information can’t be passed around: other banks can see a particular invoice may have been financed, but not by which lender, for example. Or, if the permitted bank’s credit line is full, it can release the files back to the platform, giving the corporate the chance to permit a different bank to access the documents.
As we know, efficiency and privacy are a tradeoff: letting a corporate shop a deal among multiple banks at the same time would lead to a faster deal, but eTradeConnect has opted for security that doesn’t allow this. This was partly to convince corporates of the safety of their information, but it also reflected banks’ nervousness at seeing price wars break out over open-account bids if everyone could chase the same business.
Boey says the system makes up for this by making the documentation process more efficient: corporate treasurers don’t need to re-enter the same paperwork for different banks. And it saves banks costs too: “Fraudsters might print out the same invoice again and again, taking it to several banks to get financing, and there’s no way we could keep track,” she said.
Hong Kong story
So far the dealmaking has been restricted to Hong Kong. Upon launch, eTradeConnect completed a batch of live pilot transactions. These include, for example, Pricerite Home, a local furniture retailer, using it to buy goods from its suppler, Pro Logic International, and obtain a trade loan from HSBC. The bank says the platform cut the time between application and approval of the loan from one and a half days to four hours.
But Hong Kong is an international hub of trade, and it’s not proven that eTradeConnect will make a dent in this market.
A treasurer from a Hong Kong-based utility company said it has its own purchase system that allows it to already onboard its international suppliers; a Hong Kong platform, as eTradeConnect is now, won’t help. For one thing, there aren’t any actual manufacturers in the city.
The problem for the platform isn’t technological: it’s legal, says Paul Sin, leader of Deloitte’s Asia Pacific blockchain lab. Hong Kong-based banks can only validate customer identities using eTradeConnect if they’re already in the city.
For eTradeConnect to become an important platform, and not just an innovation-marketing tick-the-boxes exercise, it has to extend to international trade networks and connect to corporates’ existing systems.
How to connect
Ping An’s Lu says both needs are being addressed.
Last year, HKMA signed an agreement with the Monetary Authority of Singapore to jointly develop a blockchain-based trade connectivity network (although that deal hasn’t yet involved eTradeConnect).
Earlier this year, eTradeConnect signed an MOU with We.trade, a blockchain trade-finance network operating in Europe, to engage in a proof of concept around compatibility. Both networks use IBM’s Hyperledger Fabric protocol, so it should be straightforward to connect them using an API, says Biswajyoti Upadhyay, regional head of trade at Standard Chartered Bank.
“The way we created the architecture is that you can have any third party platform to come in like a node,” he said. “You can think of it as like an app store.”
Lu says the tech-connectivity issues are not a problem, whether it’s to another blockchain network, or to proprietary digital systems: Ping An Technology will link its newly launched blockchain trade finance platform— OneCorporate Chain—to eTradeConnect as well.
But what isn’t known is how individual corporations will want to connect to the platform: through ERP or their own supply-chain platform? (The latter is more typical in mainland China.)
A HKMA official told DigFin: “Various task forces have been set up by the participating banks to enhance the eTradeConnect platform. One of the enhancements is to allow corporates to connect to the platform using Open API instead of the platform’s web user interface. The enhancement is still in the planning phase.”
When will it happen? It depends on the readiness of open API initiatives, according to Deloitte’s Sin. However, the full ledger encryption of eTradeConnect might accelerate the process because the platform doesn’t require data sharing.
Beyond that, the next phases of eTradeConnect will be to attract shippers, customs, and insurance companies, and to build “an internet of trade”, according to StanChart’s Upadhyay.