Trade finance: The latest industry to boost DLT adoption amid COVID-19

As the coronavirus pandemic continues to push more people out of their offices, many companies across the globe are adopting decentralized ledger technology to mitigate its effects and remain operational. 

Emmanuelle Ganne, senior analyst at the World Trade Organization, told Cointelegraph that “The current pandemic, which has a devastating impact on small businesses, is an opportunity to accelerate trade digitalization, to the benefit of SMEs in particular.” Ganne added: “DLTs have the potential to remove many of the inefficiencies that hinder international trade and to slash trade costs, which weigh more heavily on small firms, a fortiori in times of crisis."

Deepesh Patel, editorial director at Trade Finance Global — a financial broker — believes that “A fully digitalised global trade ecosystem will be seamless and interconnected and probably open source.”

The trade finance gap

As the global economy continues to be shaken by the pandemic, it’s clear that the most affected businesses are small- and medium-sized enterprises facing the “trade finance gap,” which is a deficit that keeps businesses from performing due to a lack of adequate funding necessary to run operations.

What’s more profound is the fact that the trade finance gap was estimated to be $1.5 trillion U.S. dollars prior to the COVID-19 pandemic, and that number is expected to go up to about $3 trillion or $4 trillion. Göran Almgren, CEO of Enigio — a DLT solutions provider — told Cointelegraph: “The reason for the huge gap in financing is that it is considered too expensive (and too much risk) to finance SMEs especially in emerging markets.”

The pandemic makes it even worse, as more investors are holding back financing due to economic uncertainty. However, DLT seems to be dramatically mitigating these risks thanks to its capacity to reduce fraud and cut the cost of financing and operating businesses.

The current state of DLT adoption

A recent study published by Trade Finance Global and the WTO shows that the pandemic has not only sparked further overall adoption of DLT but also triggered the increased implementation of DLT platforms, especially in the world of trade and finance.

Although DLT only began to increase in popularity after the advent of Bitcoin’s blockchain, the concept has actually been around for some time and goes beyond blockchain, which is a more recent development to the technology. At its core, a DLT is a decentralized network of computers with a common consensus protocol that allows for seamless communication without a central entity. DLT makes it possible to achieve immutability, security, dynamism and decentralization on digital networks.

Trade finance options

Financing both traditional and domestic trade requires a great deal of transparency and efficiency. Given the ubiquity of financial institutions embracing DLT for its accounting efficiency, the trade finance industry seems best suited to benefit from it.

Contour

Contour is one of the major players in the sector, providing a platform that allows for the creation, exchange, issuance and approval of letters of credit. Contour’s DLT platform, Corda, is set to allow participants to host their own nodes on the network, co-draft applications for letters of credit, and issue and amend these letters, all in a complete end-to-end workflow. The platform is also designed to enable the resolution and settlement of discrepancies in an autonomous fashion while protecting the documents with bank-compliant security measures.

Unlike a centralized public ledger, transactional data on the Corda platform is only shared with entities involved in the transaction, allowing for a high level of privacy, as sensitive data will be shared on a need-to-know basis.

Skuchain

Skuchain uses DLT to enable collaborative commerce across the supply chain of global trade. Skuchain is the producer of EC3, or Empowered Collaborative Commerce Cloud, which is a blockchain-based platform that offers end-to-end solutions for the trade finance industry. Through EC3, participants can share trade documents and other electronic data with other members in the supply chain ecosystem while maintaining control and data privacy.

The platform uses the Distributed Ledger Payment Commitment, a global standard for payment commitments on a blockchain network, to provide access to financing. The EC3 framework is built on Hyperledger Fabric, which is an open-source blockchain that is fully interoperable with other networks.

eTradeConnect

Through a partnership with Ping An Technology in Shenzhen, China, eTradeConnect has developed a Hyperledger Fabric-based framework for trade finance. This Hong Kong-based company is a trade finance consortium with a DLT platform that offers a range of trade finance solutions such as duplicated financing checks, payment status updates, preshipment trade finance and invoice creation, to mention a few.

With plans to release a fully interoperable DLT trade platform, the current eTradeConnect technology is currently available in Australia and China, with participants such as the Bank of East Asia, Hang Seng Bank, and the Industrial and Commercial Bank of China.

India Trade Connect

Based in India with an aim of achieving a global footprint, India Trade Connect is another DLT-based trade finance initiative that is providing a comprehensive set of end-to-end trade and supply chain business solutions on the blockchain.

India Trade Connect is built on an interoperable platform that allows for the digitization of letters of credit, collection bills, consumer-to-consumer and business-to-business transactions, bank guarantees and invoice financing. Platform participants are able to simplify Know Your Customer processes with a unified and digitized national identity repository.

Komgo

Built on the Quorum blockchain infrastructure, Komgo is a fully decentralized commodity trade finance network. Quorum is an enterprise blockchain solution built on the Ethereum protocol with the aim of offering a permissioned, enterprise-grade blockchain with privacy controls suited for financial enterprises.

One of the main features that Komgo offers on its DLT platform is a certification feature that allows users and non-users to verify authenticity by stamping their documents on the network. The platform also has a KYC solution that standardizes the identification process while maintaining user privacy on a need-to-know basis. As well, it enables users to directly submit digital trade data and documents to financing institutions.

Marco Polo Network

Marco Polo Network is a DLT platform built to facilitate working capital finance solutions such as receivables financing and payment commitments for enterprises in trade finance. Powered by the Corda DLT platform, Marco Polo also offers its users secure distributed data storage, bookkeeping and identity management, to mention a few things.

So far, Marco Polo Network consists of about 30 banks along with other institutions such as Microsoft, Mastercard and Pole Star. The platform is a legacy system and an application programming interface that allows banks to ease communications with enterprise clients by integrating corporate clients with enterprise resource planning.

We.Trade

This Europe-based finance consortium offers automation of payments based on preagreed conditions, bank payment undertaking and invoice financing on a Hyperledger-based blockchain network. We.Trade is also set to include an insurance and logistics servicer as well as an additional payments trigger and multipayments solutions in the future.

The We.Trade platform is built in partnership with IBM and now has stakeholders across the globe, including CaixaBank, Deutsche Bank, Belgium’s CBC and Eurobank in Greece, to mention a few.

TradeWaltz

With a plan to create a DLT network that offers security to international trade, TradeWaltz’s platform features an international trade ecosystem that enables electronic document sharing with guaranteed authenticity of transactions. So far, the platform has attracted a number of participants including Mitsubishi Corporation, as well as banks and a number of Japan-based insurance companies.

UAE Trade Connect

UAE Trade Connect is a permissioned DLT project set to launch in December. So far, the pilot tests for the Hyperledger Fabric-based project have attracted up to eight banks that are set to participate in the launch. The UAE Trade Connect platform will include solutions that enable banks to solve issues of fraudulent invoicing.

The platform is set to digitize physical data using a combination of machine learning and optical character recognition while keeping confidential data private throughout the process. Therefore, member banks will be able to check for duplicate and fraudulent invoices on the blockchain.

The People’s Bank of China Blockchain Trade Finance Platform

This China-focused project is the result of a collection of four blockchain applications that originally comprised the Bay Area Trade Finance Blockchain Platform. With 48 banks on board, the platform consists of trade information collection and bill rediscount features, not to mention a tax filing and accounts receivable financing solution.

Despite having representatives such as the People’s Bank of China and China Construction Bank, this platform runs on a nonprofit business model, enabling a deeper focus on offering the best trade finance solutions on the blockchain. The platform also covers accounts receivable solutions for supply chains as well as automated tax filing.

The future: A fully digitized, DLT-based global trade ecosystem

If the current pandemic has accelerated digitalization, what stands in the way of realizing a fully digital global trade ecosystem? Despite the optimism shared by those in the industry, Trade Finance Global’s Patel noted that there are still a number of bottlenecks:

“There is a lack of legal clarity and enabling regulatory framework that firms face when it comes to deploying DLT solutions across the industry. Most banks have not yet seen meaningful support from authorities to facilitate trade on digital terms.”

The WTO’s Ganne pointed out that there are two key challenges that slow down digitalization: The first is “a lack of global standards on data models and processes,” and the “second is a lack of legal clarity enabling a regulatory framework.” He added:

“The ICC that was launched a couple of months ago and in which the WTO participates aims at tackling the first issue. The second issue will require a global dialogue among regulators and some push from the private sector.”

So, it seems that realizing the full adoption of DLT will require some push from the private sector and a global dialogue among regulators.