Trade Finance Industry To Consider DLT Adoption Amid COVID-19
Since the coronavirus outbreak has attacked the world economy, it keeps bounding people to work from home instead of offices and therefore many companies worldwide are now considering decentralized ledger technology to reduce its global effects and stay operational.
The senior analyst at the World Trade Organization, Emmanuelle Ganne said, “The current pandemic, which has a devastating impact on small businesses, is an opportunity to accelerate trade digitalization, to the benefit of SMEs in particular.” Ganne added, “DLTs have the potential to remove many of the inefficiencies that hinder international trade and to slash trade costs, which weigh more heavily on small firms, a fortiori in times of crisis.”
The editorial director at Trade Finance Global, a financial broker, Deepesh Patel said, “A fully digitalized global trade ecosystem will be seamless and interconnected and probably open source.”
Mitigating The Trade Finance Gap
Since the worldwide economy continues to be affected by the coronavirus outbreak, it has revealed the fact that small and medium-sized businesses are the most affected enterprises struggling through the “trade finance gap”, which is a shortfall that prevents organizations from performing because of the insufficient funding required to operate.
What is more significant is the fact that the business finance gap was accessed to be $1.5 trillion U.S. dollars before the COVID-19 pandemic, and this number is predicted to go higher up to around $3 trillion or $4 trillion. As per Göran Almgren, CEO of Enigio, a DLT solutions provider, “The reason for the huge gap in financing is that it is considered too expensive (and too much risk) to finance SMEs especially in emerging markets.”
The situation is getting even worse as more investors are taking financing back because of the economical vulnerability. However, DLT is expected to dramatically decrease these risks due to its ability to mitigate fraud and eliminate the cost of financing and working businesses.
Present State Of DLT Adoption
As per the recent study published by Trade Finance Global and the WTO, the global pandemic has not only started further overall DLT adoption but also enabled the improved implementation of DLT platforms, particularly in the trade and finance area.
Even though DLT gained popularity after the introduction of Bitcoin’s blockchain, the idea has been around for a while and goes beyond blockchain, which is considered the latest development in the technology world. at its core, a DLT is a safe and improved decentralized network of computers equipped with a common consensus protocol to enable smooth communication without a central entity. DLT helps in achieving security, constancy, dynamism, and decentralization on digital networks.
Trade Finance Alternatives
The process of funding both traditional and domestic trade requires a huge amount of transparency and capability. Given the universality of the financial institutions grasping DLT for its accounting capabilities, the trade finance industry looks appropriately suited to advantage from it.
Contour is one of the primary keen players in the trade finance sector as it facilitates the creation, exchange, issuance, and approval of letters of credit. The DLT platform of Contour known as Corda, is all prepared to permit participants to have their own nodes on the network, co-draft applications for letters of credit, and issue and correct these letters, all in a end-to-end workflow. The platform is additionally intended to empower the resolution and settlements of errors in a self-sufficient manner while ensuring the document’s protection with bank-compliant safety efforts.
In contrast to the decentralized public ledger, the transactional information on the Corda platform can only be shared with entities engaged with the transactions, enabling a standard level of privacy, as the sensitive information can easily be shared on a need-to-know basis.
Skuchain utilizes DLT to empower collaborative business across the supply chain of overseas trade. Skuchain is the maker of EC3 (Empowered Collaborative Commerce Cloud). It is an efficient blockchain-based platform providing end-to-end solutions for the business finance industry. With the help of EC3, the members are allowed to share transaction documents and other electronic data with other members in the supply chain ecosystem while keeping control and data security.
This efficient platform utilizes the Distributed Ledger Payment Commitment. It is a worldwide standard for the payment adjustments on a blockchain network for allowing access to give admittance to financing. The EC3 framework is based on Hyperledger Fabric - an open-source blockchain that is completely interoperable with other networks.
A Hyperledger Fabric-based framework has been developed by the eTradeConnect for trade finance with the help of a partnership with Ping An technology in Shenzhen, China. This Hong Kong based company provides a range of trade finance solutions from duplicated financing checks, payment status updates to pre-shipment trade finance and invoice creation, and many more. The company is a trade finance consortium with a DLT platform.
eTradeConnect has strategies to deliver a completely interoperable DLT trade platform while the technology is available in Australia and China along with the members that include, the Bank of East Asia, Hang Seng Bank, and the Industrial and Commercial Bank of China.
India Trade Connect
India Trade Connect is another DLT-based trade finance measure situated in India with an agenda of getting a worldwide impression. Currently, it is providing a broad range of end-to-end trade and supply chain business services on the blockchain.
The company is based on the interoperable platform that takes into account the digitization of letters of credit, collection bills, consumer-to-consumer, and business-to-business transactions, bank guarantees, and invoice financing. The members are allowed to be aware of the Know Your Customer Processes with a merge and digitized country identity repository.
The fully decentralized commodity trade finance network is based on the Quorum blockchain infrastructure. Quorum is an enterprise blockchain solution which is based on the Ethereum protocol with an agenda of providing an allowed, enterprise-grade blockchain along with the superior privacy measures appropriate for the trade enterprises.
One of the primary highlights that are being offered by Komgo on its DLT platform is a certification ability that enables users and also non-users to check the reliability through stamping their trade documents on the network. The platform also provides a KYC solution that simplifies the verification process while controlling user privacy on a need-to-know basis. In addition to this, it also allows users to submit the digital trade data directly along with the documents to financing institutions.
Marco Polo Network
It is a DLT platform which is based on encouraging working capital finance services, for example, receivables financing and payment handling for enterprises in trade finance. The network is powered by the Corda DLT Platform and it additionally offers its participants safe and secure dispersed data storage, bookkeeping, and identity management to mention a couple of things.
Apart from this, the network comprises around 30 banks along with other institutions including Microsoft, Mastercard, and Pole Star. The platform is a heritage system and an application programming interface to encourage banks easier communication with the trade clients by coordinating corporate clients with enterprise resource planning.
This is the Europe-based finance consortium facilitating automation of payments dependent on the pre-described conditions, bank payment undertaking, and invoice financing on a Hyperledger-based blockchain network. We.Trade is planning to incorporate an insurance and logistics servicer as well as an additional payments trigger and multi-payment services later on.
The We.Trade platform is based on the IBM Partnership and currently, it has stakeholders across the world, including CaixaBank, Deutsche Bank, Belgium’s CBC, and Eurobank in Greece, are some of them.
With an arrangement to make a DLT network that provides more security to global trade, TradeWaltz is an efficient platform that consists of an overseas business ecosystem. It allows the sharing of electronic documents along with the standardized reliability of the transactions. So far, this platform has got successful in inviting plenty of participants. Some of them are Mitsubishi Corporation, and banks, and several Japan-based insurance companies.
UAE Trade Connect
It is a permission DLT project prepared to be introduced in December. So far, due to the pilot tests for the Hyperledger Fabric-based project, there are up to eight banks that are planning to participate in the launch. The UAE Trade Connect platform will also take the solutions that allow banks to handle problems of false invoicing.
By considering a combination of machine learning and optical character recognition while maintaining confidential data privacy throughout the process. Through this way, the participating banks will be able to verify the duplicate and false errors in invoices on the blockchain.
The People’s Bank of China Blockchain Business Finance Platform
This is the China-focused project that is the consequence of a collection of four blockchain applications that initially included the Bay Area Trade Finance Blockchain Platform. With 48 banks on board, the platform comprises business data collection along with the bill rediscount features, also tax filing, and accounts receivable financing solutions.
Notwithstanding having representatives, for example, the People’s Bank of China and China Construction Bank. The platform is based on a nonprofit business plan allowing an improved concentration on providing the most suitable trade finance solutions on the blockchain. The efficient platform also deals with accounts receivable services for supply chains and automated tax filing.
The Future: A Completely Digitized, DLT-based Worldwide Trade Ecosystem
If the ongoing COVID-19 pandemic has quickened digitalization, what disrupts the general flow of accepting a completely digital worldwide trade ecosystem? Notwithstanding the expectations are shared by those in the business, Trade Finance Global’s Patel noticed that there are several obstructions yet:
“There is a lack of legal clarity and enabling regulatory framework that firms face when it comes to deploying DLT solutions across the industry. Most banks have not yet seen meaningful support from authorities to facilitate trade on digital terms.”
The WTO’s Ganne highlighted the fact that there are primarily two major challenges that restrict digitalization: The first one is “a lack of global standards on data models and processes,” and the “second is a lack of legal clarity enabling a regulatory framework.”
“The ICC that was launched a couple of months ago and in which the WTO participates aims at tackling the first issue. The second issue will require a global dialogue among regulators and some push from the private sector.”
In this way, it appears that the acceptance of the complete adoption of DLT will demand some support from the private sector and a worldwide dialogue among regulators.