Global trade of goods has been growing at double-digit rates since the early 2000s. Digitzation had its time; but still we have manual paper based work exsisitng in most of the Trade finance activities. Now is the time to see value addition from Blockchain based platforms and how they can make this process faster, reliable and paperless.

1. Owner: Aurobindo Nayak
Blockchain in Trade Finance
Prepared by: Aurobindo Nayak

2. Owner: Aurobindo Nayak
Table of Content
Trade Finance - Letter of Credit
How is LOC in Trade Finance undergoing a radical change. Judging
the present process, the pain points in them and Blockchain may fit
the gap.
The next wave of disruption - Blockchain
The future of economy reimagined by Blockchain solutions & how can we use
it to build new applications to deliver better value in a shared economy
Path Forward in a Digital Age
Leveraging cutting edge technology to advance Trade Finance and the
evolving role of Banks in a the new disruptive market
Winds of Change
Changing dynamics in banking & the fundamentals of trust. A brief look into
the current wave of disruptions.

3. Owner: Aurobindo Nayak
Winds of change

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Trust – The core of what the economy is today
Trust was once an expensive pursuit. Banks were built from
luxurious materials in bold architectural forms, with sturdy marble
pillars and adornments to provide the most powerful declarations
of solidity, tradition and trustworthiness — and to project a sense
of enduring history.
This trust which we have started seeing in our daily lives had
started far earlier in the Financial world. We have always needed an
trusted third party to conduct any sort of transaction and we will
always need one.
Fast forward to 21st century and we are getting into cars with
complete strangers, staying in the homes of people we’ve never
met and are lending money to people on the other side of the
world; a powerful new currency is emerging — and it’s based on
trust.
The world is increasingly using shared economy model to think of
new ways in getting the age old things done more effectively.
Digitization was the first step. Adding Value to the Digitization
process is the next frontier.

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Changing Dynamics of Trade Finance
Global trade of goods has been growing at double-digit rates since the early 2000s, outpacing the growth in nominal world Gross Domestic Product. This
growth is even stronger in emerging markets. Banks play a fundamental role in the enablement of these cross-border trade flows through the payment
execution, risk mitigation and financing.
Technological innovation in the form of digitization of channels and products, switches in corporate behaviour and expectations, regulatory changes and
increasing market competition are today fundamentally changing the trade finance market space.
What is driving the changes?
Switches in corporate behaviour and expectations - Corporates
are getting more selective in the use of trade finance instruments due to the
relatively high fees of trade finance instruments and the complexity and time
delays connected to their reliance on paper documents.
Increasing Digitization - Corporates increasingly rely on electronic
channels to interact with their banks. This is also the case for trade finance.
Increasing competition - Recent events have shown the emergence and
success of logistics companies, supplier networks and specialized niche trade
finance companies focusing on commodity trade finance or SME trade finance.
Regulation – Increasing cost of compliance globally.

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Current use of Fintech in Trade
However only around 20% of all reporting firms have used digital finance
platforms according to 2017 ADB report. Among those firms, peer-to-peer
(P2P) lending continues to be the type of fintech that was most used. This is in
line with global trends. Though fintech credit is growing rapidly, low usage likely
reflects the small size of fintech markets outside of the United States, the
United Kingdom, and the PRC. P2P targets small business, and has expanded
quickly from concentration in North America and Europe to a broader range of
developing countries.
Trade finance is becoming a tough business for banks. And it will only get
tougher for those that do not embrace the digital revolution. They will find
themselves offering services that are more expensive, slower, and less secure
than those of their tech-savvy rivals.
According to a report on Trade Finance by Boston Consulting Group they
strongly believe that banks have the opportunity to increase their revenues
from trade finance by 10% and reduce operational and compliance costs by
15% to 25% if they embrace digital technology in trade finance. They cannot
afford to take a back seat in this journey.

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Results of present Digitization

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DLT Trends in Trade Finance
As trade wars intensify, banks are looking to blockchain as a way to streamline international trade transactions. Historically inundated with paper
trails and inefficiencies, banks and regulators worldwide are teaming up to digitize the trade financing process.
A lot of banks like HSBC, Standard Chartered, and others belong to a range of consortia that have had successful pilots using distributed ledger
technologies (DLT) to process live trade finance transactions. However, before any of these pilots can move from initial test to full-scale production,
broader questions around regulations, scalability, and security need to be addressed.

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Impact of Technology on Trade Finance

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The next wave of disruption- Blockchain

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Defining Blockchain
• Blockchain is simply a data structure where each block is linked to another block in a time-stamped
chronological order.
• It is an immutable public record of transactions on a digital ledger which is distributed in nature.
• Every new transaction is validated by the participants before they are added to the chain.
• All data on the ledger is verifiable and auditable but not editable. Each block has its own unique cryptographic
hash as its differentiator and is linked to the previous block in the chain.

12. Owner: Aurobindo Nayak
The evolution of Blockchain
The first application of blockchain is money.
For the first time it is possible for two parties
to transfer money directly to each other:
secure, worldwide and without third-party
intervention. The blockchain transfers
ownership and records the transaction..
This blockchain generation facilitates crowd
ownership: shared property on a small scale
with control for the owners via voting and
distribution of profits via dividends. This fits
perfectly in the current trends of crowd
funding and the sharing economy.
In addition to money and assets, agreements
can also be registered on the blockchain. Such
a digital contract enforces the participants to
keep their promise. The capabilities of
blockchain contracts are unprecedented.

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The age of decentralized applications
What is a smart contract?
A smart contract is a cryptographic computer protocol that is designed to facilitate,
monitor, verify or enforce the performance of an agreement in an immutable and
exact manner. It does so without the burden of third parties like lawyers, auditors,
witnesses, banks, governments or trustees.
In smart contracts, we see a sharp improvement of existing pen and paper
contractual agreements by bringing contracts under the dominion of a cryptographic
protocol to sharpen the expectation of outcomes of agreements.
When does a smart contract become a decentralized application?
We can, therefore, say that decentralized applications are computer software
programs that are deployed on a blockchain to perform more complex tasks than
smart contracts. They are groups of smart contracts working in harmony.
dApps, as they are commonly known, are programs that are designed to do for
‘everything’ what bitcoin did for money. Currently on smart contracts, we are just
scrapping the surface. We just know that they are programs that are deployed on a
blockchain to execute immutable and exact agreements.

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Reasons why Blockchain will be a major disruptive technology

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Types of Blockchain

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Letter of Credit

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Typical process flow of an Letter of Credit

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Pain points in Letter of Credit

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Automation through DLT for cost savings
A report by a major global management consultancy firm Bain & Company, says that “transaction banking revenues tend to be less volatile than
other types of banking revenues, and bankers can cross-sell products, which is critical for client loyalty.” Bain concludes in its study that this
particular area of banking will change substantially in the future through the use of Distributed Ledger Technologies (DLT), like blockchain
• According to the consultancy firm’s study,
trade finance operating costs could be
reduced by up to 50 to 80 percent by
blockchain tech “if adopted in the right way
by participants in the trade ecosystem.” The
cost cuts would arise from significant
increases in processing speed –– Bain
calculates three or even four times faster
settlement, billing, and payment.
• Bain partner and bank expert Dr. Christian
Graf noted that overall, banks are facing a
similar upheaval as the telecommunications
industry over the last decade. He predicts
that "small-scale, purely transaction-driven
fee structures will be replaced in the future
by flat fees for the provision of
comprehensive solutions."

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Blockchain Advantages

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Blockchain based dApps – (decentralized Applications)

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Path forward in the Digital Age

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Why is there no linked-centralized solution yet ?
When banks were surveyed on their reasons for rejecting trade finance proposals,
their responses fell into three main categories: lack of information, low profit, and
KYC concerns. The single undercurrent to all of these causes is lack of visibility
into the trade or the client, leading to a “perceived risk” that is higher than what
the bank is willing to accept.
Even as digitalization has sought to address parts of the problem, it has also
exacerbated its causes in other ways. As banks have implemented new digital
solutions, there has been an explosion of destination platforms. That is, the
platforms do not interoperate with each other. Digital solutions work as long as all
parts of the trade are on the same platform.
Enterprise blockchains aim to resolve these difficulties with interoperation. There
are two features of enterprise blockchains that allow them to retain the benefits
of decentralized systems, while addressing the shortcomings of public blockchains
for this use case. Enterprise implementations of blockchain technology are better
able to meet the data privacy requirements of international trade & also based on
architecture, they can address the scalability limitations of public blockchain
systems

24. Owner: Aurobindo Nayak
Where can a Blockchain solution help in this gap?

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Leveraging Technology to advance Trade Finance
The legal and financial processes involved in trade are still predominantly paper based, requiring a large, inflexible, and expensive operational footprint.
Digitally documented trade promises to increase agility and reduce costs. Furthermore, technology may well solve the issue of trust deficit involved in the
cross border transaction.
The trade marketplace is ever changing, increasingly global and increasingly getting competitive. The global banking and financial services industries (BFSI)
has witnessed significant disruptions, prompting players to use technology and technology enabled platforms as pillars of their strategies.
Components of Next Trade Finance
• Blockchain – Distributed ledgers built on block chain technology can validate ownership, certify documents and make payments. Adding a
mathematical layer of Trust and Immutability in the records will enable greater transparency.
• Optical character recognition (OCR) – Involves processing scanned documents, which can automatically convert a scanned image of a paper
document into a searchable, editable file from which information can easily be extracted and automated in Trade Finance workflow.
• AI and Machine Learning - Machine Learning aims to establish relationships between inputs and outputs without explicit programming of
the intermediate steps. Natural Language Processing plays a key role in simplifying two way communication between machines and human.
• Robotic Process Automation (RPA) – It is the use of software with artificial intelligence (AI) and machine learning capabilities to handle high-
volume, repeatable tasks that previously required humans to perform.

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Comparison of the most popular platforms in use

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The DCS Triangle
The DCS (Decentralized-Consistent-Scale) triangle as a way to compare tradeoffs among some of today’s popular decentralized systems,
including Bitcoin, Ethereum, IPFS, and BigchainDB. Each system has its own complementary uses. You can have any 2 but not all 3 with the
current technical scenario. This is an engineering statement of technology today, not of fundamental boundaries.

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Challenges in adoption
• The biggest hurdle is to make it easy for developers to built on top of Blockchain technology. We're talking about a nascent technology here and it may
take over 2-3 years more until standardization is achieved.
• Blockchain technology in its current form is very difficult to use. The user must know how public/private keys work, then go through dozens of steps to
actually get a transaction done in cryptocurrency.
• Currently only public chains guarantee the properties that make Blockchains different from standard databases. Namely immutability and resistance to
collusion thanks to consensus at scale. Unfortunately, said public chains have severe drawbacks in terms of both privacy and scalability.
• The balance to achieve between scalability, privacy, and P2P settlement (Decentralization) is still a work in progress.
• The innovation in blockchain tech is happening fast, and is outpacing regulators’ ability to keep up. Regulatory hurdles will remain and enterprises need
to work within the regulatory framework which currently lacks understanding & knowledge.
• Integration of different Blockchain platforms is also a challenge.
• The user interaction needs to be much better than it is currently.
• Shortage of trained resources with the know how.
• Public perception must change towards cryptocurrencies for mainstream adoption.
While blockchain technology would become a huge cost saver for banks in the years to come, challenges for its adoption also need
to be looked upon before they become a fully-integrated part of the financial services industry.

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Trade Finance Blockchain consortia

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Blockchain consortia – A detailed view
• If you look at most of the Consortia formed in the
community for development of Enterprise grade
applications on Blockchain, you can see a pattern
repeat.
• Banks are increasingly partnering with Fintech
companies to leverage their positions.
• On one hand is one or more banks who bring in the
domain knowledge and years of field knowledge;
On the other hand the technology expertise is
being bought by the Tech consultant in this space.
Most of the companies in this space are just a few
years old but have immense potential for the
future.
• Some others like IBM after careful evaluation have
come up with their own products but even they are
part of tech alliances. The reason is simple; It’s a
growing space and tech enterprises need to
collaborate to further technological progress.

31. Owner: Aurobindo Nayak
Blockchain consortia – A detailed view - Continued

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Stronger Together
Growing Together
• Although Fintechs are a major site of innovation in this area, banks should see them not as a
threat but as potential partners. Banks have the experience and deeply embedded relationships;
Fintechs have the technological innovations. By working together, they can revolutionize trade
finance, making it faster, safer, and cheaper for everyone involved.
• Financial institutions should ideally partner with technological firms with a strong expertise in
deploying systems in their domain area of expertise. Domain expertise of a firm combined with
technological research can be a huge catalyst in propelling banks to new heights.
• Banks that explore and experiment in the space while collaborating with technology partners will
stay ahead of the technology curve.
We are the cusp of a new technical revolution that would fundamentally reshape the world in the way the internet had. The Pioneers of Internet
built an entirely new world from the open web. The web fundamentally changed people’s perception of the world and re-imagined the way
business were run. The internet age has become the synonym for the age of information.
Similarly Blockchain will become synonymous for the age of value. Just as the web enabled people to share information, blockchain will enable
them to share value. We will have people sharing all kinds of value adding entities over Blockchains from real world asset transfers to virtualization
of resources like energy and water and perhaps even new currencies.