A group of seven large European banks has signed a memorandum of understanding (MoU) to develop a blockchain-powered cross-border trade finance platform for small and medium-sized companies in Europe.
The participating banks are UK-based banking giant HSBC, Dutch institution Rabobank, French financial institutions Société Générale and Natixis, Italian banking group UniCredit and Belgium-based KBC.
Aimed at bettering domestic and cross-border commerce cross-border commerce for companies in Europe, the newly form banking group will come together to develop, deploy and push for adoption of the ‘Digital Trade Chain’ (DTC).
Based on a prototype solution developed by one of participating Belgium-based bank KBC, the original proof-of-concept was developed as a trade finance and supply chain solution.
The Blockchain Solution
With an intent to simplify trade finance, the Digital Trade Chain will look toward the efficient management and securement of domestic and international trade transactions in Europe among small and medium enterprises (SMEs). In essence, the distributed ledger will record, track and secure transactions by connecting all participants – the buyer and seller, their individual banks and the logistics transporter, among others – digitally via an online interface and mobile applications.
The focus on SMEs is due to their preference of a more straightforward trading process of open account solutions wherein the product is shipped and delivered before a payment is due. Payment in this form of trade finance is typically in a one-, two- or three-month period. This is in contrast to larger companies that use documentary credit, or a letter of credit process, wherein a bank guarantees a buyer’s payment to a seller on an agreed date.
The DTC will help enable end-to-end transparency, the banking group claims while significantly reducing administrative duties including paperwork while hastening the order-to-settlement process. The new consortium also believes that SMEs will benefit from trade with new partners over a seamless, transparent and secure platform, contributing to a better trade ecosystem regionally and beyond borders in Europe.
Trade Finance and the Blockchain Tide
While proponents of blockchain technology see the innovation triggering a systemic upheaval of the financial industry, the trade finance sector, in particular, could become one of the earliest benefactors of the disruptive technology. Current industry processes are plagued by inefficiencies due to a significant manual element of oversight that can be erroneous and time-consuming. Automated manual processes and near-instant settlement times are the immediate advantages of blockchain technology.
Globally, reduced counterparty risk, improved operational efficiency with enhanced transparency will prove beneficial for global trade as well as auditors, looking into transactions that make for the $4 trillion trade-finance industry.
In September 2016, the export of a $100,000 shipment of cheese and butter from Ireland to the Seychelles laid claim for the first global trade finance transaction using blockchain technology. The same month saw tech giant Microsoft reveal its intention to “fuel transformation of trade finance transacting” in collaboration with Bank of America, with blockchain technology.
Earlier, the R3 banking consortium revealed its development of two blockchain prototypes to enhance the global trade finance industry. 15 member banks participated, with trade finance described as “a crucial income stream for banks” by R3 CEO David Rutter.
Blockchain-based trade finance solutions will also help in reducing and even prevent fraud risk, a common occurance in global trade as evidenced in a $200 million loss in fraud for Standard Chartered at Qingdao port in China two years ago. The bank is now developing an electronic invoice ledger with Singapore-based bank DBS.
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