THE FIRST BLOCKCHAIN APPLICATION IN TRADE FINANCE
We recently mentioned the world's first blockchain application in trade finance. Given the size of the industry and the huge potential for fraud it seemed logical to go into a bit more details on the actual solution.
In December 2015 Standard Chartered and DBS announced that they have successfully completed the Proof of Concept (PoC) of a new distributed ledger based solution in Trade Finance. The initiative supported by the Infocomm Development Authority of Singapore (IDA) is based on technology supplied by San Francisco-based Ripple and sees for other banks joining in 2016 and 2017. The $4 trillion trade finance industry is a prime candidate for the utilization of blockchain technology and it is no surprise that it is the focus of the traditional banking industry. In a typical invoice financing transaction a Bank agrees to release funding in case an agreed set of documents such as an invoice and Bill of Lading is presented as proof of a transaction. Furthermore the same set of documents can be used as proof of ownership in financing agreements requiring collateral.
Fraud in the industry is widespread with the most common issue being reusing the same collateral in separate agreements with different lenders. As recently as 2014 Standard Chartered itself had to write-off $193 million of commodity financing assets following a case of re-hypothecation of metals at Qingdao port by Chinese trading company Decheng Mining. Banks face great difficulties preventing such type of fraud due to the confidential nature of the individual deals. This is exactly where the blockchain technology comes in. In the SCB/DBS solution the invoice number and the Bill of Lading number are inputted into the hash function with the hash value then added to the distributed ledger. In addition to the invoice details the Bank receiving the invoice also adds an indication of the processing status of the invoice such as financed or rejected. Potentially other details like the amount or date of the invoice could also be added before the hash value is generated. If we imagine a fraud attempt, where the same invoice is presented to a different lender, the second Bank would get the same hash value, respectively upon querying the blockchain will be able to recognize the attempted fraud.
Future developments foresee independent third parties verifying the documents before they are added to the blockchain further limiting the potential for fraud. The success of the initiative will naturally depend on the degree of adoption among the market participants. The potential issues range from getting market participants to essentially use the same invoicing platform consistently across different geographies to trivial problems like ensuring uniform encoding of invoice numbers to avoid duplications.
Similar projects are underway at most big multinational lenders, like i.e. the Wave solution being tested at Barclays. Blockchain is already considered mainstream in VC circles and is currently one of the areas with relatively easy access to funding.