Bloomberg: Australian bank blockchain trial spans 7,000 miles of ocean

Rage Review : The blockchain trade trial of the Commonwealth Bank of Australia, Wells Fargo Bank and Australian cotton trader Brighann Cotton has attracted great attention from the industry. This is because it is the first time that two large banks have cooperated in a trade finance blockchain technology application experiment. This is a special existence for the blockchain technology field, which is more researched than actually applied. In particular, this field concentrates on many core issues in the trade finance industry. In the case of the interweaving of regulatory and legal issues, this test is particularly important.

Translation: Annie_Xu

When Marie Schulte rounds the Qingdao port breakwater in early November, bankers on both continents will get nervous.

The 88 bales of cotton were worth about $35,000 and were shipped by sea; however, what made them nervous was not the cargo itself, but the new technology behind it.

Once the shipment reaches its destination, after a 7,000-mile journey from Houston, it will mark the end of a partnership between Commonwealth Bank of Australia, Wells Fargo & Co and Australian cotton trader Brighann Cotton, and a sign that blockchain and smart contract technology can bring real benefits.

When customs officers inspect the goods, the electronic contract is triggered to update, transferring ownership of the goods and authorizing payment. The digital ledger encrypts and stores the contract content, ensuring that all participants follow the same version of the contract and that the content cannot be modified unilaterally. This process sounds simple, but it is not.

The trial demonstrates a new way to manage transactions in the $4 trillion trade finance sector, which has been the focus of global businesses in recent years due to high-profile fraud cases.

Scott Farrell, a Sydney partner at law firm King & Wood Mallesons who works on the Australian government's financial technology advisory body, said: "This is real innovation and this trial has accelerated change."

While other banks are investigating blockchain solutions for trade finance, CBA and Wells Fargo are the only ones to publicly announce real-world testing of the most complex processes in the sector: large volumes of paper documents, faxed documents, and contracts that move around the world with goods from exporter to freight company to importer, and all of which must be synchronized.

In addition to human error, this process also carries a huge risk of fraud. The goods were scheduled to arrive in Qingdao, where a multi-billion dollar trade fraud case occurred in 2014. The investigation found that the fraud was caused by the inefficiency of the paper-based filing system.

Michael Eidel, head of trading at Commonwealth Bank, said: "Trade finance is one of the most cumbersome processes and it's time for change."

Eidel said it will take a long time for the technology to mature and impact trade finance. Further research is needed on the “scalability and interoperability of different blockchains.” Chris Lewis, director of global transaction services at Wells Fargo, said there are “outstanding regulatory, legal and other issues” that need to be addressed.

As for future technological breakthroughs, the Commonwealth Bank hopes to increase the number of project participants and attract insurance companies and banks; however, he did not propose a specific time frame.

CBA and Wells Fargo aren’t the only institutions active in the space. Greenwich Associates estimates that global blockchain project budgets will reach $1 billion this year.

The two banks are part of the R3CEV blockchain consortium, which is working together to develop blockchain applications for financial services. Earlier this year, Barclays, a member of the consortium, announced that it was testing the role of R3’s distributed ledger in the development of a smart contract prototype to simplify legal documents.

Two other R3 members, Bank of America Corp. and HSBC Holdings Plc, are currently working with the Singapore government on a distributed ledger project to develop a paperless letter of credit system for trade finance.

The number of banks working on blockchain projects highlights the difficulty of widespread adoption of new internet financial technologies. This field is full of competition and attaches great importance to confidentiality. It is of course a big challenge to get practitioners in this field to unify platforms and standards.

“Trade finance is definitely going in this direction, the key question is when we can reach an industry-wide consensus,” said Jonathan Perkinson, who leads Deloitte’s payments advisory services in Sydney.