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Bankers Tout Trade Finance as the Sweet Spot for Blockchain

Even if blockchain fatigue may have set in among bankers, there’s at least one use case they’re still clearly excited about: trade finance.

At least, that was the impression given at the Blockchain Summit in London this week, where a range of bankers talked enthusiastically about the digital trade finance platforms they are building and the cost reductions they believe will result.

Perhaps most notably, Amit Varma, the CTO of Citibank, was unusually vocal and specific in describing the savings his institution expects the technology to bring to the chain of players involved in each stage of global trade, from manufacturing to shipping to distribution.

He told attendees:

“We expect to see a reduction of 70 percent to 80 percent in costs on supply chain management by using blockchain.”

By contrast, in other business lines, bankers have their heads down these days, trying to live up to the hyped promise of blockchain optimization, all while having to deal with the thorny business of integration with their legacy systems. But one refreshing aspect of a largely paper-based system like trade finance is that there’s less in the way of creaking architecture.

“Blockchain is good for areas that have resisted digitization,” said Xavier Laurent, the head of blockchain community at the French financial institution Credit Agricole.

And the ultimate example of this may be trade finance.

The flip side is that in some parts of the world, the process may continue to resist digitization. Laurent said that while trade finance is global, some governments slow things down and are stuck in the paper trail.

“We will have some jurisdictions where all transactions are going on the blockchain,” Laurent said. “But there are other geographic regions where the legal and regulatory risk means you will still use paper.”

Platforms and tokens

Still, underscoring the energy around this use case, Varma described, in general terms, a new, fully automated trade platform Citi is building, which he said would combine blockchain with artificial intelligence (AI) and the internet of things (IoT).

The AI will drive trigger points in the system (i.e. the conditions that have to be met before a payment is made), Varma said, adding that an AI-enhanced platform could go as far as issuing a contract. In addition, IoT sensors could be used to do verifications normally done by humans.

“Shipments monitored using IoT devices can give everyone on the blockchain an idea of where the shipment is,” he said, adding:

“We are moving towards real time, to a point where the blockchain platform will trigger a payment when goods are received.”

However, Varma kept other details close to the vest. He did not say how close the platform was to being completed, much less tested or put into use, and when asked by CoinDesk he would not even give the project’s name.

Others talked about the possibilities for tokenization – one aspect of blockchain that enterprises have only recently begun to embrace – in trade finance.

Laurent said using tokens to represent assets on a blockchain could free up liquidity, giving the example of invoices, “which are not very liquid assets, so this could make them more liquid and distribute them better.”

Taking the tokenization of trade finance to its logical conclusion, Lee Pruitt, the CEO of ethereum-based startup InstaSupply, said the whole process can be opened up so that banks are no longer required to loan money against invoices.

“An approved invoice is an asset from an accounting standpoint. A token means anyone, not just banks, can participate in the purchase of this asset,” Pruitt said.

Pain points

Stepping back, trade finance is big business, worth some $9 trillion worldwide, according to a recent report by the International Chamber of Commerce.

Yet bankers see room for improvement, which helps explain their search for efficiencies through digitization via blockchain. For example, Sean Edwards, the head of legal at Sumitomo Mitsui Banking Corporation, posited that there is an additional $1.5 trillion of potential trade finance business that isn’t being done, in places like Africa and parts of Asia.

Edwards, who is also chairman of the International Trade Finance Association (ITFA), said one the things that’s needed to get those places on board is an efficient know-your-customer (KYC) system to onboard what he called “long tail suppliers,” those most in need of finance.

“Trade finance is event-driven, punctuated with invoices, purchase orders etc. What you find is the pre-shipment stages are very poorly served; banks are bad at providing finance to early-stage small suppliers,” he said.

The ITFA’s focus has been on clearing certain pain points, including assisting the work that IBM is doing with shipping giant Maersk to digitize bills of lading.

“It’s a document of title,” said Edwards, “so understanding the process, it helps to be a lawyer.”

Edwards has also been working closely with Marco Polo, the trade finance network built by R3 and TradeIX, which includes the likes of BNP Paribas, Commerzbank, ING and Standard Chartered Bank.

“Things like promissory notes are very easily digitized,” said Edwards, adding:

“R3 wrote a program to do this in an afternoon.”

Container image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Banks Are Trying to Launch Crypto Assets with R3 Blockchain Tech

It may have seemed unthinkable four years ago, but crypto tokens might be coming to R3’s Corda.

Revealed exclusively to CoinDesk, Cordite, an open-source community that’s independent from R3, but building solely on the code it pioneered, is about to come out of stealth mode. Cordite promises to do for enterprise blockchains what the ERC-20 standard did for ethereum: allow the creation of different tokens representing various kinds of assets on the same network.

The difference is that Cordite is designed specifically for use by the banking industry. Indeed, the main contributor and community leader of the project is one of the world’s 30 largest financial institutions, the Royal Bank of Scotland (RBS).

So whereas ERC-20s unleashed the initial coin offering (ICO) boom, enabling startups across the globe to bypass the usual fundraising hurdles and raise billions from the public by creating exotic new tokens, Cordite will allow digital representation of mryiad assets traditionally held and traded by highly regulated institutions.

In this way, blockchain networks could become more useful to these large companies, since they could track both sides of a trade – cash for securities, for example, or one type of foreign exchange for another – on the same ledger, rather than having one leg of the transaction occurring off-chain.

Richard Crook, the head of emerging technology at RBS, told CoinDesk:

“As we move to the next level of building distributed apps in the enterprise space, there is going to be a need for tokens and units of value on these ledgers.”

For example, Crook said, “if I am building an invoice platform for trade finance, when the invoice goes one way, I need a digital asset that you and I agree is worth something coming back.”

Nevertheless, there’s a certain irony here.

Founded in 2014, R3 was designed to be the regulation-friendly shared-ledger provider, one that drew a contrast to cryptocurrency chains and their “anarchic” approach to governance.

Now, with this new project, it will technically become possible to run an ICO on R3’s flagship Corda software, albeit unlikely. Rather, Cordite is being positioned as an answer to a range of challenges facing the developers of distributed ledger technology (DLT) inside banks and corporate entities.

Corda community

The arrival of enterprise tokens on Corda comes at a stressful time for R3, which has been the subject of varying degrees of speculation of late regarding its financial health.

But whatever the truth may be about the privately held firm’s cash position, the emergence of initiatives like Cordite suggests that there’s a vibrant open-source community growing around the technology R3 developed. According to R3, Cordite is just one of many “CorDapps” about to be released.

“Cordite is not something that R3 invented, it’s something that the community itself saw a need for and went to build,” said Richard Gendal Brown, R3’s CTO.

He added:

“People building stuff on Corda that didn’t have to ask permission tells me we are succeeding and that Corda is developing as a genuine platform.”

Indeed, Crook at RBS said Cordite was underway before he got involved. He happened upon the project about six months ago and found there the answers to many of the challenges facing firms building enterprise DLT projects.

“I won’t name them, but it’s the same sort of companies that are members of R3 who are contributing to Cordite,” he said, adding that the project remained in private alpha mode for the last six months as everyone involved wanted to get the testing right.

Enterprise tokens

Stepping back, Cordite is also one of several examples of corporate technologists experimenting with fiat cash on distributed ledgers in one form or another. Also, some very large firms are looking at internal tokens as a way to connect their treasuries or move money across the world without doing currency conversions.

Yet, beyond such potential efficiency gains, Crook sees tokenization as key to making the economics of shared ledgers workable.

The RBS banker believes that firstly the token will provide a way of distributing fees among participants in the incipient world of enterprise blockchains.

“In the DLT projects that are going live, some of the participants are providing services, some of them are consuming services,” he said. “The people that are providing services need to be paid for providing those services and the people who are using them need to pay them.”

That said, broader applications overlap with the traditional banking world, such as potentially a standard way to represent a bank’s deposits in the form of digital tokens.

“So if NatWest [a subsidiary of RBS] were to issue a token that said we would promise to pay the bearer – a promissory note – I’m pretty sure that most of our customers and clients would find that very useful; it’s analogous to an ATM, a digital cash machine,” said Crook.

And of course, introducing an ERC-20 equivalent within Corda would presumably mean you could conduct a token sale.

“Technically you could if you wanted to,” said Crook, adding that the way this is done in the public arena is not something he’s interested in.

However, a token does have some lapel-grabbing possibilities for capital raising within a bank.

For example, the equity and debt trading desks of banks could start to look at the issuance of debt or equity in the form of digital assets.

“That’s not dissimilar to the ICO market, but could bring the ICO market into a very regulated space,” noted Crook.

“You now have capabilities to do what you are doing with an ICO – i.e., create digital assets that flow back and forth all over the world with no paperwork and everything else – but you are doing it out of a regulated entity.”

Digital mutuals

One more use case for Cordite tokens that RBS and NatWest are interested in exploring is the concept of what Crook called digital mutuals.

In a recent blog post titled “The Return of the DAO,” Crook compared decentralized autonomous organizations to mutuals, member-owned entities whose profits are usually re-invested to help improve the organization. Historical examples include building societies in the U.K. and savings and loans in the U.S., as well as mutual insurance companies.

Cordite, he told CoinDesk, “can bring membership, proposals and voting and can create mutual societies, to use the legal term, on the blockchain.”

Digital mutuals, in Crook’s conception, may require a new form of legal structure in which ownership, management and control become encapsulated in code, while some aspects of the existing rulebook become redundant (annual shareholder meetings, for example, would be unnecessary).

But they may also map directly on to the existing legal structures — co-operative societies, building societies and credit unions to name a few – and regulatory framework, requiring no legislative changes.

And speaking of regulation, it’s notable that Crook and his team at RBS were behind a Corda-based mortgage reporting prototype developed in the U.K. Financial Conduct Authority’s (FCA) “sandbox,” which allows for the testing of financial products and services in a limited setting.

Crook hinted that the new bee in his bonnet could get similarly favorable regulatory treatment, saying:

“The FCA may also be interested in the concept of digital mutuals. But that’s another story.”

RBS branch image via Shutterstock.

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.