BETTING ON BLOCKCHAIN: Standardized approach needed, ICC working group chair says
Blockchain isn’t just about technology; it requires a set of common standards and rules. Fastmarkets talked to the chair of the International Chamber of Commerce (ICC) Banking Commission’s digitalization working group, set up to coordinate all work relating to the digitalization of trade finance.
The transformation of the trade finance industry - from paper-heavy, manual processes to automation and digitalization - is underway with blockchain.
Critical to ensuring its success is ensuring the practices, standards and rules surrounding the new trade finance world move with it, according to Michael Vrontamitis, Standard Chartered’s head of trade, Europe & Americas.
“The standard for trade isn’t about writing it down, which is relatively easy - it’s the adoption of the standard by all the parties in the process,” Vrontamitis told Fastmarkets in an interview.
“Three years ago, bankers didn’t talk to each other about this stuff - today we are. There are various consortiums talking, with the obvious issue being that there isn’t a protocol for trade, it doesn’t exist today,” he said. “You also can’t imagine a big player coming in and changing that because there are so many different stakeholders, where do they start?”
Vrontamitis said blockchain can only reach critical mass and its benefits be fully realized in the trade finance industry when there is an established framework and digital ecosystem to enable connectivity and collaboration between stakeholders, in turn speeding up wider adoption.
“You need to have people sit around the table and agree to a standard, and then agree to adopt it. Once it’s adopted then it becomes a standard and interoperable,” he noted.
According to Vrontamitis, the other key factor around the digitalization piece that technology will struggle to solve is the acceptability of electronic documents or data over physical paper.
“We can test what we like on the technology front but if I have an electronic bill of lading and can’t trade it as security because the court won’t accept it, then that technology is irrelevant,” he said.
“What’s tended to happen is you end up with companies setting up a rulebook governed by UK law, which means all participants in that rule book agree the electronic bill of lading is equivalent to the paper bill of lading. As long as all participants are working from the same rulebook, it works. But that isn’t going to digitize trade in a hurry and is probably one of the reasons why we haven’t seen a lot of uptake,” he added.
Work to recognize the legal status of electronic documents, provide more certainty over standards and ensure that clearer legal and regulatory frameworks exist is ongoing. Vrontamitis is the chair of the digitalization working group of the ICC Banking Commission, the goal of which is to identify strategies to overcome the constraints of digitalizing trade finance.
The United Nations has created a set of rules that the ICC is lobbying to have governments adopt, which would effectively enable digital data to be accepted instead of physical documents. Vrontamitis believes this change would be very important, but is realistically unlikely to happen overnight.
“It takes time, which is why in the short term I believe we’ll get a network of networks, a series of aggregators across different participants that will connect to each other and agree on how they’re going to exchange data and the rules of that exchange,” he said.
In a recent survey by the ICC, 60% of over 250 surveyed banks in 90 countries said they are moving toward greater digitalization, although 30% of respondents said their banks remain one to two years away from implementing technology solutions and 7% said digitalization is not on their agenda at all.
The key, Vrontamitis said, is to ensure the data standards used by the World Customs Organization are the same as those used in the banking industry.
“It’ll continue to be incremental – I can’t imagine any big bang shift – but you will see significant digitization in different silos and within it different problems being addressed,” he said.
Work is underway on yet-to-be announced initiatives to help solve specific problems, he noted, such as how to enable small-to-medium enterprises to be financed more easily, and how to enable a reduction in double financing in cross-border transactions across multiple markets.
Are you involved in a blockchain project? Get in touch with Andrea Hotter on firstname.lastname@example.org.