Trade Finance Gets Blockchain Boost

Challenges for BM/Maersk Blockchain Initiative?

Readers of this space know that trade finance — which concerns both domestic and international B2B transactions — has been mired in paper.  Paper checks, letters, letters of credit … even fax transmissions (and yes, email of course).

The dependence on dead trees for finance wrought up and down supply chains may be lessening, at least a bit, if the hope beyond blockchain makes the leap from hype to reality.

But the question — as is always the case with new technologies — is, will nibbles translate into healthy appetites? The picture seems mixed, at least for now, because players are investing time and money into any number of competing offerings.

When it comes to blockchain, the idea of decentralized ledgers used in real world applications (that means beyond bitcoin) holds promise for all sorts of use-case adoption, at least according to its proponents. Everything from legal events to logistics, they argue, can be transformed by immutable record keeping, instantaneous knowledge disseminated across stakeholders, and of course all of it rendered across bits and bytes.

By way of example, a pact between Tricon Energy, based in Texas, and Reliance Energy, based in India, bypassed the usual channels of communication, as noted above, and completed an agreement via blockchain, and specifically a system known as Voltron. The activities spanned everything from negotiated terms on what was being bought and sold — in this case, polymers — and got letters of credit and even advice from ING Group and HSBC Bank, which acted as lenders to the energy firms. The transactions and agreements may offer a window into how the $16 trillion market for trade finance (that’s an annual amount) might change.

There’s value in the sea change, if — and it’s a big if — it comes to pass. The Financial Times noted that cutting down on the paper-based ways of old may unlock as much as $2 trillion in extra financing within the next eight years. More than a half dozen systems are likely to come live through 2019 and in some cases they focus on segmented parts of the trade finance process. In just two examples, Voltron focuses on documents tied to trade, while, say, Marco Polo (slated to debut later this year) is focused on receivables.

Not a Slam Dunk

Amid the headlines and the anticipation, as is expected with new technologies, the key is to get early adopters (and firms that follow the early adopters) on board, and there’s a challenge afoot. There are several competing platforms out there, gunning to streamline logistics and shipping and supply chain activity.

The spate of platforms — say, those developed by private firms and those developed by banks — may not be interoperable.

As always, too, there is no guarantee of return on investment, or a timeframe for ROI. Adoption (and returns) depend in part on which processes make the transition to blockchain.

“The question is how we enable them to connect together seamlessly over time — and they will become increasingly interoperable,” the FT quoted Michael Vrontamitis, head of trade in Europe and the Americas at StanChart, as saying. “And there will be a few that survive.”

To hedge at least some bets, some banks are backing multiple blockchain systems. HSBC has linked up with four trade finance platforms. And in one sign that thinking blockchain=slam dunk is maybe not the best mindset, news came at the end of last month that IBM and Maersk are, according to some reports “struggling” to get other companies to adopt TradeLens, which is the duo’s blockchain-driven platform geared toward supply chains. At the end of October only one other carrier, Pacific International Lines, had joined on to the platform. At issue here, note media outlets like Forbes, is who owns what when it comes to intellectual property (especially of concern, perhaps, in this case where a competitor is the one that owns the platform itself).

Amid the jockeying across different platforms and groups signing onto those platforms, blockchain demands that trading partners agree to use the same DLT.  We seem to be some ways away from standardization — and widespread adoption — with a market as fragmented as this one.