DLT-based trading processes in practice
There exist already several consortia currently using Distributed-Ledger-Technology in trade finance e.g., we.trade, Marco Polo and Contour. We.trade, of which UBS is a member, uses the Blockchain Hyperledger Fabric with IBM as a technology partner. At the same time, Marco Polo and Contour both emerged from the DLT consortium R3 and are thus based on the DLT platform Corda.
However, despite their common background as participants in R3, they deal with different commercial transactions: While Contour has set itself the goal of digitizing the above Letters of Credit, which in a pilot project has already reduced the processing time from 5-10 days to one day, Marco Polo focuses on open account transactions, where payment is often due one to three months after receipt of the goods, and the exporter, therefore, bears most of the risk associated with the transaction. However, there are thematic overlaps between Marco Polo and we.trade, which also largely focuses on open account transactions. Both still address different market participants; Marco Polo’s ambitions with members from Europe, Asia, America, and the Middle East tend to take on a global dimension, while we.trade is mainly aimed at European SMEs. However, future overlapping of the activities of both consortia cannot be excluded.
Distributed-Ledger-Technology is characterised in particular by increasing the efficiency of transactions between interdisciplinary players along the value chain, which can quickly lead to widespread use of the technology in transaction banking, where a commercial transaction can involve 30 parties with more than 100 people involved and more than 200 document transfers. Absolute transparency, security and integrity of the data are basic requirements for commercial transactions within a network, which only DLT as a technology can provide to this extent.
In contrast to many centralised and interoperable systems, it can also fully exploit its ability as a scalable platform by promoting collaboration in the complex supply chain with decentralised access. Interaction is possible in real time and many practical projects are already showing developments as to how letters of credit, merchandise insurance and other financing instruments can be implemented via DLT in a next step. Due to its European orientation, the we.trade platform is a very interesting project for the local trading area, which has already passed the beta phase. After numerous individual initiatives by individual banks or consortia in this area, we.trade has now bundled its resources and implemented the first step towards mapping the entire value chain with logistics service providers, insurers and trading companies with 16 major European banks. The rollout as part of a private block chain initiative in Switzerland was in October 2019. Based on the blockchain framework of Hyperledger Fabric, it has already been shown that the duration for end-to-end transactions has been minimised from 2 weeks to 48 hours and the costs for Letters of Credit across the board have been reduced by 90%. Although the advantages of DLT-based application systems in the area of trade finance are obvious, the biggest challenge in such an ecosystem is still the network effect, where attractiveness and benefits increase the more companies and participants join the platform at the end.
- Hofmann, E., Heines, R. & Omran, Y. (2019). Foundational premises and value drivers of blockchain-driven supply chains: The trade finance experience. In W. L. Tate, L. Bals & L. Ellram (2019). Supply Chain Finance: Risk management, resilience and supplier management (S. 225-253). London: Kogan Page.
- World Economic Forum (2016). The future of financial infrastructure: An ambitious look at how blockchain can reshape financial services. http://www3.weforum.org/docs/WEF_The_future_of_financial.pdf
- A Trade Finance Initiative. (n.d.). https://www.marcopolo.finance/
- Bermingham, F. (2018, November 01). R3 and eight banks launch Voltron blockchain platform for trade finance. https://www.gtreview.com/news/fintech/blockchain-project-voltron-launches-open-testing-phase
- Morris, N. (2018, October 02). Trade finance blockchain consortia: How they differ. https://www.ledgerinsights.com/trade-finance-blockchain-consortium/
- Morris, N. (2018, June 11). HSBC executes live trade credit using blockchain. https://www.ledgerinsights.com/hsbc-ing-blockchain-trade-finance/
- Morris, N. (2018, May 09). Maersk outlines IBM joint venture. https://www.ledgerinsights.com/maersk-outlines-ibm-joint-venture/
- Wass, S. (2018, October 04). We.trade and Batavia merge blockchain platforms for trade finance. https://www.gtreview.com/news/fintech/we-trade-and-batavia-merge-blockchain-platforms-for-trade-finance/
- Wass, S. (2018, September 25). Marco Polo blockchain platform for trade finance released. https://www.gtreview.com/news/fintech/marco-polo-blockchain-platform-for-trade-finance-released/