Bankers Beat the Drum for Blockchain
A number of bankers have touted the beauty of the blockchain in a recent conference in London.
Many of them have expressed their enthusiasm about trade finance as the next ‘tourist’ destination for the distributed shared ledger. During last week’s conference, they discussed the digital trade finance platforms they are currently developing and the potential cost reduction from utilizing the online system.
Trade finance is a business amounting to more than $9 trillion across the globe, based on l a report by the International Chamber of Commerce.
“We expect to see a reduction of 70 percent to 80 percent in costs on supply chain management by using blockchain,” Amit Varma, chief technology officer of Citibank, told attendees of the Blockchain Summit, noting their expected savings from utilizing the technology in all aspects of the supply chain management.
“Blockchain is good for areas that have resisted digitization,” Xavier Laurent, head of blockchain community at French financial institution Credit Agricole, said. Despite the situation, he noted some governments are pressing the brakes and opting to stick with the paper process of managing the supply.
“We will have some jurisdictions where all transactions are going on the blockchain. But there are other geographic regions where the legal and regulatory risk means you will still use paper,” Laurent said.
Varma talked about the fully automated platform being developed by Citi, which, according to him, would integrate the blockchain technology into artificial intelligence and internet of things.
With the platform, Varma said the AI would bolster the trigger points in the system which include requirements to be fulfilled before making any payment and the issuance of a contract. Conversely, IoT sensors could assume the verification process usually done by humans.
“Shipments monitored using IoT devices can give everyone on the blockchain an idea of where the shipment is. We are moving towards real time, to a point where the blockchain platform will trigger a payment when goods are received,” Varma explained. But he did not divulge other details related to the Citi system they are designing.
Meanwhile, other bankers touched on the likelihood of tokenization in trade finance.
The utilization of tokens to represent assets on a blockchain could free up liquidity, giving the example of invoices, “which are not very liquid assets, so this could make them more liquid and distribute them better,” Laurent said.
The tokenization of trade finance can be implemented so that financial institutions are no longer pressed to tap fundings in using invoices, Lee Pruitt, chief executive officer of ethereum-based startup InstaSupply, said. “An approved invoice is an asset from an accounting standpoint. A token means anyone, not just banks, can participate in the purchase of this asset,” he added.
Despite the promotion of blockchain in trade finance, others have noticed room for improvement.
There is another $1.5 trillion of potential trade finance business which is not being maximized at the moment in some places such as parts of Asia and Africa, according to Sean Edwards, head of legal at Sumitomo Mitsui Banking Corp.
Placing an efficient know-your-customer (KYC) scheme is necessary,” Edwards, who also heads the International Trade Finance Association (ITFA), said.
“Trade finance is event-driven, punctuated with invoices, purchase orders etc. What you find is the pre-shipment stages are very poorly served; banks are bad at providing finance to early-stage small suppliers,” he said.
The association’s focus as of date is to clear certain hurdles including the work being done by IBM with shipping company Maersk. “It’s a document of title so understanding the process, it helps to be a lawyer,” he noted.
Aside from that, Edwards has also been collaborating with Marco Polo, the trade finance network designed by R3 and TradeIX, that includes BNP Paribas, Commerzbank, ING, and Standard Chartered Bank, among others.