Trade finance has seen many breakthroughs powered by blockchain technology in the past 12 months, to an extent that scalable commercial production seems imminent.
But we’re still far from that, given the status of various projects initiated by HSBC, a leading trade bank, and Asian authorities.
HSBC made headlines last May when its blockchain platform, Voltron, built on R3’s Corda, launched the first live letter of credit for Cargill. Voltron then expanded to include supply-chain fintechs such as Bolero and essDOCS, which integrated electronic bills of lading.
This was a big showcase for blockchain’s ability to connect and leverage existing, centralized digital solutions.
More recently, two other trade-fin blockchains have begun to work on compatibility: Hong Kong’s eTradeConnect and Europe’s we.trade were linked in February in a proof-of-concept (PoC) test. This was in line with an agreement the two groups struck when eTradeConnect went live last October.
Hong Kong Monetary Authority, the key coordinator behind eTradeConnect, didn’t announce this PoC, however. This may be due to the fact that, according to several sources, there are few transactions being conducted.
HSBC is a founding bank of both eTradeConnect and we.trade. Ajay Sharma, HSBC’s regional head of global trade and receivables finance, told DigFin that eTradeConnect is still confined to Hong Kong at this moment.
People familiar with the project told DigFin that the technology is not the bottleneck. The actual transaction volume is so small that it won’t pose any challenge to the network’s speed now, or in near future.
Vinay Mendonca, HSBC’s global head of product and propositions, trade and receivables, told DigFin that none of the world’s blockchain trade platform has reached scalability.
“Scalability is between three to five years away, and probably beyond,” said Mendonca.
Naveen Mallela, J.P. Morgan’s Asia-Pacific head of digital, shared a similar view, and saying scalable commercial production will arrive around 2025.
“Not everything requires blockchain,” said Sharma.
Blockchain is useful for multi-layer trade financing, but a simple request from a buyer to finance a supplier doesn’t need blockchain. Centralized online processes can already change the paper-dominated global trade finance.
Sharma says customers can send him online information; he can then upload the info into the system.
“It’s far more easy,” he said. “I can give [clients] very late cut-offs, so they don’t have to rush to one o’clock or two o’clock deadline. They come to me at five o’clock, and we can still manage to process it.”
Nor is blockchain a must-have to track goods and documents electronically along the supply chain.
Recently, HSBC launched Trade Transaction Tracker in Malaysia, which makes its solution live in 24 markets with 5,000 frequent corporate users.
Customers can track transactions in real time through a mobile app, which marks the trade as issued, amended, accepted, or paid.
Scalability is between three to five years awayVinay Mendonca, HSBC
HSBC also works in collaboration with Bolero and essDOCs off-blockchain to support electronic bills of lading.
“To jump directly to blockchain might be much, ” said Mendonca. “ but you don’t need to send paper, you can go online, and we can get your instructions and process them.”
Because of paper’s dominance in global trade flows, Sharma told DigFin that most trade data is stored in unstructured paper documents.
For the last two years, Sharma’s team have experimented with artificial-intelligence tools to read and understand paper documents, and finding the technology becoming more accurate.
Such data can give the bank insight into client behavior, which opens new business possibilities.
“Whom do they sell to?” Sharma explained. “Who do they buy from? Can we do supply-chain financing for them? What other banking services do they need?”
These are opportunities that clients may not raise directly with their bankers, but the data can often speak for itself.
Such insight can also warn a bank when a customer’s business model changes. For example, if a client halts a regular pattern of transactions, the bank can be alerted, and try to find out why. Such alerts can go the other way, too, such as programming payment reminders to companies.
The power of collaboration
Banks and multinationals have been advancing all manner of proprietary digital solutions, yet trade finance and the activities around it has remained stubbornly paper-based.
There are simply too many actors in a transaction to make digital solutions work, particularly when they are proprietary. Banks are but one part of a chain including shippers, insurers, freight-forwarders, customs authorities, and the importers and exporters themselves.
So far no one has figured out how to get all of these entities on a common database, using common applications, based on common software.
“When banks tried to do this in the past, the shipping company would say that they don’t give data to banks,” Mendonca said.
This is why blockchain has actual value, because it allows all parties to maintain their own database, but one that is shared. If various blockchains achieve “interoperability”, then entities don’t even need to use the same software.
The advantages to this collaboration are clear, but adoption is a slow process, especially as the technology lacks business standards or a legal framework. Until those things are in place, these projects will remain dominated by a few big corporations willing to experiment. The majority of companies in the trade-finance space, however, are small, niche operators. The true power of the network can’t be realized without them, but a cultural change must happen first. Blockchain has to become boring.