While the world speeds ahead towards a world of futuristic automation, the trade finance world remains firmly stuck in the 20th century, with some fundamental processes still resembling those of medieval times. “It is widely acknowledged that trade finance is reliant on archaic, paper-based processes that have no place in the 21st century,” says Christoph Gugelmann, CEO of trade technology platform Tradeteq. Compared to the near instantaneous trades on the New York Stock Exchange, trade financing transactions could take weeks to clear.
According to The Economist, processing trade credit needs the exchange of 36 original documents and 240 copies, on average, with each of the 27 parties involved spending hours fact-finding and form-filling. Shockingly, less than a quarter of banks make use of digitised documentation. Aside from being extremely painful for the highly-paid peons tasked with filing this information, such a byzantine process is a waste of time and money as well as prone to human error that could incur further losses in time and money.
Blockchain’s provision of an automated and reliable method of record-keeping, however, promises to bring a much-needed shake-up to the process. Hailed as the most crucial accounting innovation since the invention of double-entry bookkeeping, the openness and immutability of the blockchain could potentially do away with some of the tedious compliance mechanisms and record-keeping involved in trade financing, while automation promises to greatly reduce the amount of time needed to process a transaction.
“Blockchain and distributed ledger technology have tremendous potential to make trade finance more efficient and less costly for all parties involved. The inherent characteristics of blockchain, with a single, golden source of information with an immutable audit trail, where consensual decision-making can be achieved in parallel and real time, can solve many of the pain points in trade finance,” says James Gan, managing director at Accenture Singapore. Blockchain, he believes, could eliminate paper from processing trades, make transactions perfectly transparent and even automate cumbersome trade financing processes through smart contracts.
Securing the future of trade
Pinsent Mason’s attorney Bryan Tan notes that trade financing used to work using paper documents transferred between banks. These include bills of lading which are issued by a carrier to acknowledge receipt of cargo for shipment. Such documents are extremely important — possession is proof of ownership for a given cargo. Consequently, some of these documents can be worth in the tens of millions for large or valuable shipments.
Naturally, the high value of such documents can often be a temptation for fraudsters, who may counterfeit or steal such documents to enter into possession of the precious cargo they guarantee. Additionally, having to store and secure such documents requires firms to incur extra costs as well. The lack of a central registry to keep an independent account of international trade records also makes proving fraud an inefficient and time-consuming process.
By introducing an immutable ledger into the process, it becomes quicker and easier to authenticate international finance records. Every piece of cargo will have its own blockchain without a duplicate, with records within them unable to be modified once entered. Consequently, it becomes much more convenient and reliable for different actors across the supply chain to verify that a certain transaction had indeed taken place.
Thus, it becomes significantly more difficult to steal, counterfeit or otherwise defraud trade transactions should they use blockchains as a document of title. Firms are spared the costs of having to secure and verify transaction records, which promises to make international trade a far smoother and efficient process.
“Because it provides a trusted and auditable source of information, it reduces the overall risk of transactions, so companies can borrow at lower interest rates for trade finance loans,” agrees Gan. A blockchain-based trade finance system, he says, also reduces the need for collateral. Gan further anticipates that when adoption becomes more widespread, parties involved in these platforms would be able to benefit from the larger pools of information on clients, potential clients and transaction data, which would allow them to perform better overall risk analytics.
Such initiatives will likely be beneficial to smaller businesses as well, since it reduces cost barriers to participating in international commerce. By allowing them to compete globally, this helps the entire Asia Pacific region compete economically on a more level playing field — especially in emerging markets where businesses have yet to achieve large economies of scale.
“Several countries in Asia Pacific are already making use of the technology already, as many corporates and regulators see the benefits it can bring to their businesses and economies, so they’re well prepared, for the most part,” Gan observes. Introducing such policies could also further catalyse the digitalisation of regional economies within Asia Pacific, ensuring their readiness for an economy that will increasingly be defined by digital technology.
The finer points of the law
International law is already changing to introduce blockchain technology into the legal framework of international trade. Tan explains that according to the UNCITRAL Model Law on Electronic Transferable Records passed in 2017, distributed ledgers (of which blockchain is one) are now recognised as documents of title for purposes of global trade.
Unfortunately, only Bahrain has ratified the legislation, with Tan predicting that Singapore is likely to soon follow suit. Still, the new provision remains far from an international norm, with a critical mass of countries having to ratify the legislation to kickstart the blockchain revolution in international trade finance.
“Financial hubs are more likely to be interested in this legislation,” says Tan, with trading hubs like Hong Kong and Singapore probably first in line to accept this new innovation. Most countries, meanwhile, are likely to take more time to pass the legislation as they work to consider the wider implications such an innovation could have on their economies and legal systems, since such a move could see a significant redefinition of what can be legally considered a commercial contract.
But Gan does not see regulatory gaps as a long-running problem. “There are already a number of trade finance networks using blockchain technology to facilitate transactions in many countries, including the Marco Polo Network and Contour, for example. You also have central banks and other government agencies experimenting with the technology for cross-border payments, so the key here is not just the technology itself, but building, developing and expanding partnerships...to better address those issues,” he says. Global bodies like the Financial Stability Board (FSB) and CPM-IOSCO have already begun refining regulatory gaps.
Indeed, Hong Kong launched the Hong Kong Trade Finance Platform in 2018 to digitise documents and automate trade processes using blockchain. “We believe this new platform will help spur the digitisation of both physical and financial trade supply chains, making the process more safe and efficient for our clients,” said Ivy Au Yeung, CEO Hong Kong, ANZ, at the launch.
Thailand has also begun using blockchain to trade with Singapore, notes Gan, and CIMB Singapore has launched the city-state’s first blockchain trade finance platform with the iTrust Centre for Research in Cybersecurity at the Singapore University of Technology and Design.
The biggest challenge lies more with putting this law into practice than the finer points of international law. The global slowdown in trade and the onset of Covid-19 have unfortunately seen a weakening of political will to expedite trade, especially with the worldwide backlash against globalisation. Supply chains must grapple with different trade and shipping companies using different blockchain providers, creating compatibility issues across different legs.
Nevertheless, Accenture’s Gan remains bullish that the efficiency gains of introducing blockchain into the trade finance process will prove too hard for governments and firms to resist. “Blockchain makes the whole process much more efficient, cost-effective, reliable and speedier, and governments around the world are looking to expand the use of this technology to strengthen regional and bilateral trade collaboration,” he tells The Edge Singapore.
