Why does trade finance become the most promising application area of ​​blockchain?

Rage Review : Trade finance is being shaped into one of the most promising early application areas of blockchain technology, because blockchain can digitize the economy and thus reduce financial risks. Many world-class large banks and various start-ups have invested funds in blockchain research and development. Last week, an expert discussion meeting hosted by the Commonwealth Bank of Australia (CBA) - Emerging Digital Functions: Global Trade, predicted that within three years, it will be possible for smart contracts that execute transactions on the blockchain to support transactions of physical products. Combining trust engine distributed ledger technology with Internet of Things technology will not only make banks more efficient, but also bring convenience to bank consumers.

Translation: Nicole

Trade finance is shaping up to be one of the most promising early application areas for blockchain technology.

The advent of blockchain technology can prompt banks to search for similar processes in the global economy, and by digitizing the global economy, financial risks can be reduced. The current economic process is very cumbersome, as participants using various paper settlement contracts usually take weeks to reach an agreement. In the next few years, the $4 trillion trade finance industry will be disrupted by distributed ledger technology.

Many world-class large banks and various start-ups have invested funds in blockchain research and development. Blockchain technology has stepped out of the laboratory and used practice to explain to users the opportunities brought by blockchain.

In trade finance, that means importers, exporters, government agencies, shipping lines, logistics and transport operators and insurance companies – all of which need a new system to get on board. Blockchain can digitize sales and legal contracts, monitor the location of goods and enable real-time payments.

For R3 CEV, among 51 global banks that are researching blockchain applications, trade finance has risen to become the most promising blockchain application area and a major focus area for the R3 group.

Niki Ariyasinghe, R3’s vice president of product strategy for Asia Pacific, said that in the next 12 to 18 months, various trade finance pilot projects will be tested in the market, and within three years, smart contracts that execute transactions on blockchain can support the trading of physical products.

Niki Ariyasinghe

"I think you could see a real active blockchain market in two to three years," Ariyasinghe said at a panel discussion 'Emerging Digital Capabilities: Global Trade' hosted by Commonwealth Bank of Australia (CBA) last week.

Bank launches pilot project

R3 is working with its members – which include Commonwealth Bank of Australia (CBA), Westpac, National Australia Bank and Macquarie Bank – to build a blockchain-based

Group) – thereby creating a standard that banks and their users need to abide by.

The CBA has completed 25 blockchain-related experiments over the past year and now speculates that trade finance will be one of the most promising application areas for blockchain technology, which refers to a network of computers that holds synchronized copies of information.

CBA is currently working with global banks and expert clients on three projects, one of which involves shipping cotton abroad. In this experiment, a moisture detector is placed in the cotton shipping box, and its GPS positioning technology is connected to the Internet of Things, so that cargo insurers and buyers can understand the physical status of the goods in real time.

Ariyasinghe said there is a similar pilot project led by Singapore startup Hellosent to monitor the status of French wine exported to Singapore. Insurers can know in real time whether the temperature at the back of the container and the sea conditions will affect the quality of the wine.

According to Bloomberg, Standard Chartered, HSBC, Bank of America and Singapore's DSB Group are all looking into blockchain trade finance applications. The banks believe that blockchain technology can reduce the incidence of fraud in trade-related documents.

R3 is a blockchain consortium formed 18 months ago to help banks understand blockchain and develop protocols for use. The consortium has explored areas such as trading and commercial paper, as well as trade finance, and is currently testing how blockchain can be used to verify identity information.

Ariyasinghe said R3 is trying to solve big challenges in financial services and related fields.

“R3’s fundamental principle is to solve challenges that are global in nature and it is necessary to work with many providers, which can be banks, of course, but also insurance providers, regulators and other players that work regionally and globally, not just in the financial services sector.”

Sowing wheat

Startups are also working to bring a variety of participants into transactions. Full Profile, an Australian blockchain startup, is preparing a commercial pilot project, expected to begin during the wheat harvest season in October, which will see wheat buyers pay growers via blockchain, eliminating settlement risk for farmers.

Typically, it takes grain growers 30 days to complete payment and delivery. In 2014, due to the bankruptcy of grain trading, growers in New South Wales and Victoria alone lost $70 million, which directly led to a loss of $200 million in economic activities in regional Australia. Full Profile's technology can automate the transfer of ownership or payment of grain delivery, freeing grain buyers from bankruptcy or payment risks.

Full Profile founder Emma Weston, a former lawyer at the Australian Wheat Board, said trade finance “is emerging as a very good use case for blockchain and is a natural evolution from financial services to the broader market.”

In June, Full Profile won the 2016 Westpac Bank (Australia’s second-largest bank) blockchain hackathon and the Blockchain Summit (blockchain summit) blockchain startup lobbying event held by fintech venture capital firm Sapien Ventures. The company will present the agribusiness blockchain to the world at the FinovateFall event in New York in September.

Once the technology is tested and operational in a domestic setting, Weston said Full Profile will look into applications for foreign trade. The main challenge she faces is getting all parties to agree on standards for payment transactions powered by smart contracts, but she is optimistic.

The federal government’s Grains Research and Development Corporation is a beneficiary of the experiment, and Weston said she has found “real appetite from various regulators, state and federal governments to work with the private sector on blockchain.”

“We have a responsibility to bring blockchain technology to production, help governments understand its potential, and address regulatory issues.”

An attractive field

King & Wood Mallesons partner Scott Farrell, blockchain co-ordinator for the federal government’s fintech advisory group set up by treasurer Scott Morrison earlier this year, agrees that trade finance is an attractive area for blockchain technology to be applied.

Farrell said governments have an important role to play in bringing blockchain technology to life, and another area where governments can play a big role is in identity verification.

Scott Farrell

“The whole point of blockchain technology is to verify everything you put in from the entry point,” Farrell said. “The most important entry point is your identity, but most identity verification agencies only have their sources in the public sector, not in the private sector.”

Treasury and CSIRO are investigating blockchain applications for the Australian economy, including real-world pilot projects of blockchain technology in yet-to-be-determined areas.

Shaken confidence

Confidence in blockchain and smart contracts was shaken in June when the Decentralized Autonomous Organization (DAO), which had raised $150 million from 11,000 members to run an investment vehicle, was hacked, resulting in $50 million being diverted to another account.

Farrell said the DAO incident taught important lessons to all parties involved in building smart contracts on the blockchain, but it does not mean that blockchain technology has failed. He said: "It means that we need to pay special attention to the contract automation function on the blockchain, but the platform itself is developing as expected."

Australia should position itself as a start-up in developing blockchain applications and development, and as blockchain technology is used in pilot projects around the world, Farrell said it makes sense to develop blockchain applications that are in line with our economic and social conditions.

“Combining trust engine distributed ledger technology with IoT technology will not only make banks more efficient, but also bring convenience to bank consumers. People who use funds will care about this very much.”