Trade finance industry keeps hope on blockchain despite failed projects
Banks and fintech firms remain optimistic that blockchain technology can help transform the paper-heavy industry of trade finance, despite a recent flurry of news of canceled projects and shifting to other technologies.
When Barclays PLC issued the world’s first blockchain-based letter of credit in 2016, it spoke of an upcoming “blockchain revolution in trade finance”. A transaction that would normally take up to 20 days has been reduced to less than four hours.
In the years since, trade finance players have aligned themselves behind countless proofs of concept, pilots, and industry consortia to realize the promise of blockchain. Banking collaborations such as we.trade, Marco Polo Network, Contour, Komgo, Batavia and CordaKYC have sought to create industry-wide platforms, while fintech companies have embraced technology for everything from from letter of credit and bill of lading to fraud detection, cross-border payments, asset distribution and know-your-customer utilities.
In 2018, the World Trade Organization called blockchain “the biggest disruptor to the shipping industry and international trade since the invention of the container.”
Trade finance is a paper-heavy business involving document exchanges between a large number of entities, such as exporters and importers, banks, insurers, transport and logistics companies, and government authorities. The intrinsic characteristics of blockchain – the ability to connect multiple parties in a decentralized network while providing a permanent, tamper-proof, distributed digital record of transactions – have made it the ideal technology to power the global trade finance ecosystem of 5, $2 trillion more efficient, transparent and secure.
Fast forward to 2022, and blockchain has yet to deliver on its trade finance promise. We.trade, a platform owned by 11 European banks, announced in May that it would cease operations, and Marco Polo Network suspended its blockchain-based payment commitment this year. Originally, blockchain-focused companies such as Komgo and MonetaGo favored other technologies. Many other initiatives never made it past the proof-of-concept or pilot stage.
For bank-led projects, business model challenges and low enterprise adoption were among the biggest hurdles.
“The technology wasn’t the problem. It was basically the business model,” said David Sutter, chief product officer at Marco Polo Network, which developed an open-account trade finance platform with an extensive network of banks. , including Bank of America Corp. , BNP Paribas SA, The Bank of New York Mellon Corp. and SMBC. The company still uses blockchain-based infrastructure, but shelved its payment escrow product in order to focus its investments elsewhere.
“The product was developed with banks, to meet bank requirements and solve banking problems. And it didn’t translate into business demand,” Sutter said.
Marco Polo Network was unable to onboard enough corporate clients to make it a sustainable business model, Sutter said. The company is now focusing its investments on its supply chain automation solution, which is sold directly to enterprises and targets the pain points of buyers and suppliers. This has led to more traction among enterprise users, Sutter added.
We.trade seems to have suffered similar business model challenges. Like Marco Polo Network, we.trade sought to help businesses and banks facilitate and finance open account trade, focusing on small and medium-sized businesses in Europe. The blockchain-based platform had attracted investments from IBM and European banks including CaixaBank SA, Deutsche Bank AG, Erste Group Bank AG, HSBC Holdings PLC, KBC Group NV, Nordea Bank Abp, Rabobank, Banco Santander SA , Societe Generale SA, UBS Group AG and UniCredit SpA, but corporate adoption has lagged.
“The monthly transaction growth rate confirmed the value of the platform but was not fast enough to provide the network effect needed to sustain the business,” we.trade said in a statement on Tuesday. May 30. Existing shareholders could not reach an agreement on financing the necessary new investments, he added.
Most bank blockchain projects fail either because they don’t solve the problem they were supposed to solve, or because the problem doesn’t exist, said Chris Sunderman, independent consultant and until the start of this year responsible for innovation in trade finance at ING. “Or the market doesn’t want it,” he said.
However, external events such as the coronavirus pandemic and the war in Ukraine also played a role, as banks had to prioritize the most pressing operational and compliance issues, Sunderman said.
Switch to other technologies
In other parts of the trade finance market, blockchain consortia and solution providers recognized that what they were trying to achieve did not require blockchain technology at all.
MonetaGo, for its part, offers a data repository that allows banks to detect duplicate funding by verifying information in invoices and trade finance documents against other participants in the network. The fintech company has already built a solution in India using blockchain, but decided the technology was not appropriate for a global platform as it would slow down the speed at which transactions could be undertaken and increase the cost, according to Michael Hogan, Managing Director. for the UK at MonetaGo.
“Our primary goal is to protect the privacy of our customers’ data, and we achieve this through security best practices and confidential computing technology,” hogan said.
Komgo, a platform that digitizes commodity trade finance workflows, also no longer offers blockchain-based letters of credit, citing cost and scalability issues among the reasons. The platform is owned by banks such as ABN Amro Bank NV, BNP Paribas SA Citigroup Inc., Credit Suisse Group AG, ING, MUFG, Natixis SA, SMBC and Société Générale as well as major commodity traders.
The company is focused on reducing complexity, managing volatility, increasing margins and increasing transaction security for trade finance players, said Guy de Pourtales, CTO of Komgo. “Many of these problems don’t require a complicated and expensive technical architecture to solve,” he said.
Going from paper documents, emails, Excel sheets and PDFs to smart contracts running on a decentralized blockchain is “like going from a horse and carriage to flying cars”. said de Pourtales. “It sounds good on paper, but in practice it’s a lot more complicated.” Komgo still has blockchain at its disposal, but its deployment will depend on specific business needs and desired outcomes, he said.
Blockchain may not have revolutionized trade finance the way it would, but the technology is indeed still relevant to the industry, and the last six years of testing and trials have not been a loss. , according to industry players speaking to S&P Global Market Intelligence on the sidelines of the International Trade and Forfaiting Association’s annual conference in Porto on September 8.
“We sometimes missed the mark, but we learned a lot about the technology,” said Patrik Zekkar, CEO of Enigio, a fintech company using blockchain to digitize trade finance documents, and previously a board member of we.trade. Banks have become more accustomed to and accepting blockchain and other new technologies, Zekkar said.
The industry has also come a long way in overcoming legal hurdles to implementing digital trading instruments, said Daniel Cotti, independent trade financial technology consultant and former managing director of Marco Polo Network.
Earlier this month, the UK introduced an Electronic Trade Documents Bill to Parliament, part of a G-7 commitment to reform trade documents. It will modernize the 1982 and 1992 legislation to put digital business documents on the same legal footing as their paper equivalents.
The International Chamber of Commerce released the Uniform Rules for Digital Business Transactions last year, which serve to standardize digital business transactions and promote the use of electronic documents.
Blockchain still provides key benefits such as data privacy and security as well as data immutability, Cotti said. “Technology will prevail, it will gain ground over the next decade, of course, in the financial services sector, but also in other sectors,” he said.
But there’s a greater appreciation in the trade ecosystem that while blockchain might be good for some use cases, it’s not the most essential part of digitizing trade finance.
“To be successful, the solution must provide value or solve a problem for the customer. Then, if it’s blockchain-based, that’s just part of the technical due diligence,” Zekkar said.
“When you start cutting through the hype, blockchain has some really good uses. But it won’t solve everything. It depends on the problem you’re trying to solve,” Hogan said.
The trade finance industry is far from abandoning blockchain, with companies such as Tradeteq, Enigio and Contour, to name a few, continuing to advance with the technology for their specific applications.
HSBC, one of the world’s largest trade finance banks, also continues to see an opportunity for blockchain technology to accelerate the digitalization of trade, said Shehan Silva, global head of digital solutions at the business. trade finance from the bank, by e-mail.
“We see the greatest potential in use cases where networks use distributed ledger technology to connect and collaborate,” such as transactions based on letters of credit or title deeds, and, at the future, with the tokenization of commercial assets, silva said. HSBC, like the rest of we.trade shareholders, would not elaborate further on why the blockchain initiative fell through.