Blockchain and trade finance: a great promise

Blockchain and trade finance: a great promise

Blockchain and distributed technology have been hot topics at Sibos this year, with a raft of announcements from banks and fintechs alike. One of the areas identified as of most promise is trade finance – an area of banking that is rife with paper-based processes.

Yesterday, Microsoft and Bank of America Merrill Lynch announced a collaboration on blockchain technology for trade finance. As part of this collaboration, the two companies will build and test technology, create frameworks and establish best practices for blockchain-powered exchanges between businesses and their customers and banks. Microsoft treasury experts will serve as advisors and initial test clients, establishing the first Microsoft Azure-powered blockchain transaction between a major corporate treasury and financial institution.

“By working with Bank of America Merrill Lynch on cloud-based blockchain technology, we aim to increase efficiency and reduce risk in our own treasury operations,” said Amy Hood, executive vice-president and chief financial officer at Microsoft. “Businesses across the globe – including Microsoft – are undergoing digital transformation to grow, compete and be more agile, and we see significant potential for blockchain to drive this transformation.”

Blockchain will enable trade finance processes to be digitised and automated, transaction settlement times shortened and business logic applied to related data. This will create a host of potential benefits for businesses and financial institutions including: more predictable working capital, reduced counterparty risk, improved operational efficiency and enhanced audit transparency, among other benefits. Development and testing of the initial application, built to optimise the letter of credit (LC) process, is in progress.

“The potential benefits of blockchain will help drive meaningful supply chain efficiencies to the clients of both Microsoft and the bank,” said Ather Williams, head of Global Transaction Services at Bank of America Merrill Lynch. His colleague, Percy Batliwalla, head of global trade and supply chain finance, added: “This is a ground-breaking blockchain proof of concept that has the potential to help redefine, digitise and improve how trade finance instruments are executed today.”

Microsoft’s Azure blockchain as a service (Baas) was introduced in November 2015. Marley Gray, principal architect, Microsoft, Azure Blockchain Engineering, came up with the idea of Baas and describes it as a “less painful place to play” for large banks. The service initially started out as an “a la carte menu” for companies to try different blockchains; banks could choose the parts they liked. It was easy for Microsoft to talk to the big banks, he said, because “they were willing to talk to us as there are so many smaller players around and it is hard to go through 40 different blockchains”.

Existing letters of credit processes involve 15 steps, five banks, very manual processes and different time zones and costs. Combined, a conservative estimate of costs, according to Grey, is $1500 per LC. Grey believes with blockchain, four steps will be involved, it will take minutes, no people are required and low costs can be invoked.

Michael Vrontamitis, global head of trade, product management at Standard Chartered Bank, has a “fundamental belief” in blockchain, but said it is not the ultimate solution to issues within the trade finance space.

While the bank has invested an undisclosed sum in Ripple and its distributed ledger network, it has also undertaken a “trade safe” project using blockchain.

This involved matching invoices against those of DBS Bank in Singapore to show specific use cases to solve a problem. Vrontamitis said Standard Chartered was “looking to make this commercially available early next year”. In terms of blockchain as a whole, it is “just one part” of Standard Chartered’s strategy to provide banking as a service. He is keen to not just think about the supply chain, but also look at other commercial opportunities, such as lending or the digitisation of documents.

While there is a certain amount of optimism around blockchain’s potential in trade finance, the financial industry is still feeling its way in other areas.

Justin Chapman, senior vice-president at Northern Trust, told Sibos delegates on Monday that blockchain has a “case to do most things” due to its efficiency, but it won’t work for fixed income as it’s “not mature yet” (more on this here).

Northern Trust has been deliberately focusing on smaller ecosystems in its use of blockchain. Vivek Ramachandran, who is involved in global trade and receivables finance for HSBC, said distributed ledger technology “lends itself nicely” to shipping and trade finance.

However, Brian Behlendorf, executive director of the Hyperledger Project, asked if the industry would be “stuck in ‘pilotville’”. He had a good point as people were talking about blockchain at last year’s Sibos and some will want to see some real action soon.

For Ashwin Kumar, group head of business and product development at Clearstream, “apps will appear in the next 12 months”. No specifics were given, but “where there is a chain that can be controlled, that could lead to apps”.

Over at Innotribe, the group’s Industry Challenge was focused on blockchain. Three start-ups won the challenge to introduce blockchain to the securities sector: SmartContract, Rise and Coin Sciences.

The three companies will combine their expertise and resources with those of Swift to bring blockchain to the lifecycle of a bond and eventually deliver to market an enhancement to an existing commercial approach.

The next step is a series of proofs of concept (POC), which will involve three parties – the start-ups, Swift and potential customers.