BETTING ON BLOCKCHAIN: The evolution of networks for trade finance
As part of its series on blockchain in commodities, Fastmarkets takes a closer look at the evolution of blockchain networks for trade finance
One of the fastest growing trade and working capital finance networks in blockchain is the Marco Polo network, a joint venture with technology firm TradeIX and software firm R3, along with a number of major banks and their clients.
Designed to facilitate trade finance between banks, their corporate clients and the wider trade ecosystem, the network was officially launched this year and has the highest number of members of any similar blockchain ventures.
These include BNP Paribas, Commerzbank, ING, Standard Chartered Bank, SMBC, DNB, Anglo-Gulf Trade Bank, Landesbank Baden-Württemberg, OP Financial Group, Bangkok Bank, NatWest and Natixis. The International Trade and Forfaiting Association (ITFA), which has more than 170 members, is also part of Marco Polo, acting as an observer.
Although Marco Polo was officially launched at the beginning of the year, work started on it much earlier, TradeIX chief marketing officer Oliver Belin said.
“It’s a collaboration, a marketing construct – it’s not a legal entity or company. It is a consortium or network of members that share best practices, collaborate on projects, have weekly calls and meet at least every six months,” he told Fastmarkets.
“It works with Corda by R3 and our TradeIX platform. Corda provides an open and global trade network powered by its distributed ledger technology; TradeIX provides Trade Finance applications, APIs as well as rules and a workflow engine to arrange trade orchestrations,” he said.
The platform and Corda are then licensed to members of the Marco Polo consortium, he noted.
The platform has four different categories: Open account trade finance, traditional trade finance, structured trade finance and trade asset distribution.
A key rival to Marco Polo is we.trade, an initiative that completed the first commercial trades on its platform in June.
These seven transactions were completed by 10 companies using blockchain technology across five countries via four banks.
The initiative was started in January 2017 under the name of Digital Trade Chain but changed its name in October 2017 to we.trade.
The we.trade platform, which is built on the IBM Blockchain Platform and powered by Hyperledger Fabric, was established by Deutsche Bank, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Societe Generale and UniCredit.
In October, CaixaBank, Erste Group and UBS – which had been part of the Batavia consortium - joined we.trade as banking partners and shareholders, bringing the number of shareholders to 12. Meanwhile, UniCredit AG in Germany and Eurobank are licensee banks.
Batavia had been a smaller global trade finance platform established by UBS, Bank of Montreal, CaixaBank, Commerzbank and Erste Group, also built on the IBM Blockchain Platform and powered by Hyperledger Fabric. Batvaria had run its first live pilot in April, trading cars from Germany to Spain and raw textiles for furniture production from Austria to Spain.
There are plans to expand we.trade further. The initiative is keen to welcome banks, their customers and non-banks as additional partners “to share their visions and ideas for an open and interoperable platform in trade services,” Hubert Benoot, head of trade finance at KBC and chairman of the we.trade board, said.
“we.trade expects to continue expanding into additional markets in Europe and globally,” Benoot said.
The Voltron initiative was launched with the initial goal of using blockchain technology to make transacting letters of credit (LC) more efficient.
It has Bangkok Bank, BNP Paribas, CTBC Holding, HSBC, ING, NatWest, SEB and Standard Chartered as founding members, and uses R3’s Corda technology.
One of the most commonly used instruments in trade is an LC, a document that provides a written assurance to a seller by a bank - on behalf of a buyer - that it will make a payment as per an agreement in place.
Cargill used Voltron’s blockchain platform for a soybean shipment from Argentina to Malaysia in May 2018, creating a fully digitized LC transaction. HSBC Singapore acted as the issuing bank for Cargill Singapore and ING Geneva acted as the nominated bank for Cargill Switzerland.
The LC was created digitally in the same way it would traditionally be: Terms were agreed, application made, issuance completed, amendments and their approvals made, documents presented, discrepancies resolved and bill settlement instructions provided. In the Cargill instance, the documents used were a charter bill of lading, a packing list and an invoice.
Voltron said it took less than 24 hours to exchange documents and make checks instead of the more typical 5-10 days for a paper-based, manual process.
Another aim is to mnimize the likelihood of fraud in LCs.
“Previous trades conducted on Voltron have demonstrated banks can offer a commercially and operationally viable blockchain solution with significant customer benefit,” R3 chief executive officer David Rutter said.
Because it is an open platform, Voltron could potentially be leveraged via the Corda Network to be interoperable with other global trade initiatives, such as supply chain, cash, insurance and identity, Rutter added.
Finacle Trade Connect
Last year, software firm Infosys Finacle launched Finacle Trade Connect, a blockchain-based trade finance solution for banks.
Initially based on EdgeVerve Blockchain Framework technology, the platform partnered with R3’s Corda in October.
Its aim is to digitize the trade finance business process - including validation of ownership, certifying documents and making payments - while operating on a distributed, trusted and shared network. Functions include bill collection, LCs and invoice financing.
“Typically, trade finance processes involve complex documentary processes, high transaction costs, high settlement times and low authenticity rates with physical documents. As a result, a bank’s business customer is straddled with delays, high costs and risks,” Infosys Finacle chief business officer Sanat Rao said at the time of launch.
“Besides, most small business customers worldwide experience challenges accessing trade credit, with a significant majority of applications for trade finance unable to go through. Finacle Trade Connect holds much promise to help banks ease pressing concerns internally, as well as those faced by their business customers, with advantages increasing exponentially with more banks collaborating,” he added.
Infosys Finacle has also launched India Trade Connect, a blockchain-based trade network backed by Axis Bank, ICICI Bank, IndusInd Bank, Kotak Mahindra Bank, RBL Bank, South Indian Bank and Yes Bank. The network is being used by the banks to run a pilot of Finacle Trade Connect.
Blockchain is set to redefine trade finance practices in India, marking the “biggest ever collaborative technology available to date,” Yes Bank group president and global head of its Transaction Banking Group Asit Oberoi said.
“I believe we are on the threshold of a paradigm shift in the trade finance digitalization landscape in India... We are looking forward to witnessing intensive usage of this asset domestically and also connecting with global networks in due course,” he added.
In September, 15 companies formed komgo SA, a new venture designed to digitalize the trade and commodities finance sector through a blockchain-based open platform.
Banks ABN Amro, BNP Paribas, Citi, Crédit Agricole, ING, Macquarie, MUFG Bank, Natixis, Rabobank, Societe Generale, inspection firm SGS, trading houses Gunvor, Koch Supply & Trading and Mercuria, plus oil major Shell, are the founding partners of the new platform.
The venture is the result of two successful blockchain-based proof of concepts previously tested in energy and soft commodities trading on the Easy Trading Connect (ETC) platform. The core team of ETC has joined komgo, with the aim of developing a decentralized Ethereum blockchain-based platform.
Geneva, Switzerland-based komgo plans to start with two products, expected to launch before year end. The first one will standardize and facilitate the know-your-customer process without using a central database: The exchange of documents will be executed in an encrypted way over the blockchain on a need-to-know basis.
The second product will be digital LCs, allowing commodity houses or other platforms to submit digital trade data and documents to komgo SA customer banks of choice.
Due to a strong overlap of shareholders between komgo SA and VAKT, incorporated in 2017 to develop a blockchain-based post-trade processing platform for commodities, the two companies will explore synergies between both platforms moving forward.
Common shareholders are Shell, Gunvor, Koch, Mercuria, ABN Amro, ING and Societe Generale, with additional participants in VAKT being energy majors BP and Equinor. All VAKT shareholders contributed capital with the purpose of developing an industry-wide solution in post-trade processing for commodities.
Independent firm VAKT is planning to focus first on energy. The platform, which went live in November, is being sequentially introduced in three markets – first in North Sea crude oil and then US crude oil pipelines and northern Europe refined product barges, with additional markets to be added in 2019.
At the same time, the two ETC experiments that led to the formation of komgo were extremely interesting in their own right.
ETC was designed to digitalize and standardize commodity transactions. Its first proof of concept was an oil cargo transaction in February 2017, which in turn led to the creation of an energy consortium in November 2017 aiming to offer blockchain services to that sector.
The founding partners of the energy consortium were energy majors BP, Shell and the former Statoil (now Equinor); trading houses Gunvor, Koch Supply & Trading and Mercuria; and banks ABN Amro, ING and Societe Generale.
The technology then turned its sights on agriculture, with Louis Dreyfus Co, Shandong Bohi Industry Co Ltd, ING, Societe Generale and ABN Amro successfully completing a full agricultural commodity transaction using blockchain on ETC in January 2018. Louis Dreyfus was the seller of soybeans from the United States to Bohi in China, with the banks issuing and confirming the letter of credit.
Russell Marine Group and Blue Water Shipping also participated in the process, issuing all required certificates, while the US Department of Agriculture got involved, advising how to include phytosanitary certificates in the process.
The potential that distributed ledger technologies have in transforming the commodities sector is clear, as evidenced with the success of the ETC experiments, komgo chief technology officer Toon Leijtens said.
“We can now achieve a long-term ambition to improve security and operational efficiency in the commodity trade finance sector,” he added.
The Hong Kong Monetary Authority (HKMA) led a proof of trial concept with the Hong Kong Trade Finance Platform in 2016, which in turn led to the commercialization of a trade finance project in October 2017.
That project was backed initially by seven major banks: Australia and New Zealand Banking Group Ltd, Bank of China (Hong Kong) Ltd, Bank of East Asia Ltd, DBS Bank (Hong Kong) Ltd, Hang Seng Bank Ltd, Hongkong and Shanghai Banking Corp Ltd and Standard Chartered Bank (Hong Kong) Ltd.
Agricultural Bank of China Ltd, Bank of Communications Co Ltd, BNP Paribas, Industrial and Commercial Bank of China (Asia) Ltd and Shanghai Commercial Bank Ltd later joined the project, taking the total to 12 banks.
Although initially very focused on Hong Kong, the HKMA looked for ways to facilitate cross-border trade and connect with trade platforms in other regions. The result was a memorandum of understanding signed in October with we.trade to conduct a proof of concept to connect the two platforms within 12 months.
“The connection between eTradeConnect and we.trade platform paves the way for the digitalization of cross-border trades in the Asia and Europe trade corridor, and will serve as a good reference for the future connection of eTradeConnect to other trade finance platforms,” HKMA deputy chief executive Howard Lee said.
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