The history of trade financing is twinned with the history of fraud and forgery in commerce. In 2014 for example, Standard Chartered Plc reportedly wrote down US $193 million after a Chinese-based metal-trading company allegedly pledged commodities multiple times as collateral for loans. Blockchain technology is vaunted as the new hope to weed out fraud in trade financing.
What is blockchain?
Simply put, a blockchain acts as a record ledger shared and accessible by various participants. Instead of requiring each participant to submit information to a central intermediary for consolidation and processing, each participant has the ability to submit new information directly onto the blockchain. The blockchain then picks out inconsistencies in information submitted by the participants and resolves the inconsistencies based on pre-agreed algorithms to present a set of internally consistent information.
Blockchain technology is famously applied in the world of Bitcoins, where each Bitcoin transaction is recorded by users on a blockchain network.
Advantages of using blockchain in trade financing
However, blockchain technology lends itself easily to trade financing. Take, for example, invoice financing, which involves a group of participants (lenders, suppliers, customers, etc.) involved in a series of inter-linked and interdependent transactions. A submission by a supplier onto the network for a sale of a receivable can only follow a sale of goods from the supplier to a customer, which may only be authenticated by submissions from both the supplier and the customer. Blockchain technology does away with easily forged paper documentation and automatizes the cross-checking of information which increases the speed and efficiency in which fraud is detected.
Examples of using blockchain in trade financing
It is therefore no surprise that Standard Chartered Plc, DBS Group Holdings Ltd and the Infocomm Development Authority of Singapore (IDA) have collaborated to develop a blockchain-based invoice trading platform (code-named TradeSafe), touted to be a first of its kind. The platform adopts a distributed ledger technology developed by Ripple, a US-based fintech startup. Invoices and bills of ladings are allocated unique identifiers and stored on a distributed ledger. The use of unique identifiers enables users to view the status of a particular invoice/bill, but also reduces the risk of duplicate financing of the same invoice/bill. Further, to maintain confidentiality, users are allocated encrypted identities. In December 2015, the three entities announced the successful completion of a proof of concept and indicated that other banks based in Singapore will be invited to collaborate on the development of the platform as well. Standard Chartered and DBS are not alone in this - Barclays Bank for example, announced in October 2015 its collaboration with Wave, a blockchain-focused start up to digitalize bills of lading documents.
Challenges to using blockchain technology in trade financing
There are challenges to the application of blockchain technology in trade financing. For one, as participants to a trade finance arrangement may rely on different banks, for the information shared on the blockchain to be meaningful, the different banks must agree on a common platform. Client confidentiality and data security, is another obvious concern for a network which is accessible and editable by various participants. From a regulatory perspective therefore, banks must review their customer agreements to ensure that the sharing of information with other participants is permissible, and ensure that the technology is sufficiently robust for compliance with applicable data security and other risk management requirements.
For the brave however, there are fruits to be reaped beyond fraud detection. Potentially, business transactions can be executed directly on the platform itself through the use of "smart contracts" embedded in the platform and the platform could be further connected to payment systems and distribution networks for smoother flow of payments, goods and services. Further developments in the use of blockchain technology in trade finance should therefore be expected.
Contributors: Stephanie Magnus, Serene Chew