Blockchain or blocked chain?

Despite being hyped as a potential security and cost-saving solution to many of the problems dogging the trade finance market, a plethora of high profile blockchain-based proofs of concept (PoC) and prototypes appear to have made little tangible headway from experimentation to roll-out.

Under the blockchain concept the chain is made up of a growing list of un-erasable blocks, which secure transaction data on a public or private network, lending itself to quicken supply chain efficiency and bank transfers. Letters of Credit (L/C) and Bills of Lading (B/L) can all be digitised on the platform, speeding up the process and reducing costs.

But while blockchain theory is relatively simple – blockchain delivery is not. Other digital cloud-based solutions can achieve the same results, and the technology can only generate major efficiencies by being scaled up and used in an open market. Given those caveats, many of the PoCs launched to date have disappeared from the financial tech headlines as quickly as they appeared – and very few have gone into actual production.

Where have all the PoCs gone?

The first blockchain-based invoicing trading platform in the trade finance space was piloted in 2015 as a PoC in Singapore. Standard Chartered Bank, DBS Bank, Infocomm Development Authority of Singapore (IDA) and business, technology and business outsourcing provider, CGI, developed a platform using Ripple’s distributed ledger technology (DLT), which allowed banks to digitise invoices to combat fraud.

The aim was to develop a secure ecosystem where neutral third parties could participate and verify the authenticity of the trade documents being financed. According to Jerry Norton, CGI vice-president of financial services, the PoC worked, but “what happened after was what usually happens in these scenarios. It needed to be taken to the next level of production, and it wasn’t. It is still sitting there. Very few PoC and pilots have entered the next stage and switched to production on a wider scale.”

San Francisco based blockchain developer Ripple Labs has also tested a variety of blockchain PoC over the past couple of years. In 2014 Ripple joined with Rabobank to explore potential use cases of the technology. Last year it also teamed with ANZ bank for the same purpose. Neither initiative has amounted to a developed product.

The prospects of other PoCs going into production look better – albeit by no means certain. Last year Societe Generale, ING Bank and Mercuria announced the first trade and commodity DLT platform – Easy Trade Connect. The platform was developed in less than two months and tested via an oil deal transporting African crude to China three times.

Easy Trade Connect acts as a downloadable app onto any device with internet, allowing those on the supply chain to access e-documents from buyer, shipper and seller. It has completed its first test run on the Ethereum ledger and is planned to go live next year.

According to Souleima Baddi, deputy head of commodity trade finance Switzerland at Societe Generale: “We are still working with ING on the platform. The key to the success of this technology is to have it open to the market. The more people who participate, the more it will bring additional efficiency and security. The idea is to develop it further and go live next year if possible.”

The platform was born partly out of experimentation by ING Bank, which has been exploring blockchain technology for the past three years. The Dutch bank has experimented with 30-plus PoCs in six areas, one of which was trade finance, and only a few are being developed further – Easy Trading Connect being one of them.

Progress to production still slow

Global head of ING’s blockchain programme, Mariana Gomez de la Villa, views the huge amount of security, compliance and risk assessment processes that banks have to undergo as a contributing factor to blockchain’s slow progress in ensuring enterprise software is deployed into production. “The technology itself is evolving, so we need to constantly assess its current state with the regulatory requirements. It takes time.”

Others believe the real issue with blockchain production progress is that the concept is based on a flawed argument. According to Alexander Goulandris, CEO at paperless trade solutions provider essDOCS, “the benefits people talk about are the benefits of digitisation. But you don’t need to use a distributed ledger technology to get them, you can use a digital database solution.”

Although essDOCS has started to integrate blockchain into some of its products – essDOCS’ lead electronic Bill of Lading (eB/L) product, CargoDocs, will be extended to enable clients to have a bill of lading via blockchain – Goulandris is yet to be convinced blockchain will provide additional benefits and cost saving. “essDOCS is early in its blockchain development. The problem everyone is having with it is that PoCs prove, at a basic level, that the technology works, but the PoCs do not prove that there is a huge advantage using blockchain over a cloud-based digital database solution. We haven’t got any validation of that, which is an important dilemma still faced by anyone looking to adopt blockchain for trade."

Associate director at R3, Henry Roxas, highlights another issue dogging development. “The problem today, as noted by a recent International Chamber of Commerce (ICC) survey, is that you have these digital islands that work well when everyone is on the same network, but when there is a lack of connectivity and some participants are not on a particular solution, things revert to paper.”

R3 leads a consortium of more than 100 of the world’s biggest financial institutions in the research and development of blockchain, with its own platform, Corda. At the beginning of this month, R3 announced it had recently developed a prototype with eleven member banks.

The prototype application has the potential to significantly reduce the time and cost of trade financing, by streamlining the processing of letters of credit on the Corda platform. Bangkok Bank, BBVA, BNP Paribas, HSBC, ING, Intesa Sanpaolo, Mizuho, RBS, Scotiabank, SEB and US Bank have been collaborating with R3 and technology partner CGI over the past year testing numerous applications. Several R3 member institutions intend to pilot the platform, and make it available in 2018, but Roxas says it will not achieve widespread adoption for another five to six years.

CGI’s Norton claims the platform is a breakthrough, but adds a hint of caution: “What does it mean for this to be successful? It proves the technology can actually deliver and it was able to complete the transaction between the participants. Does it mean it is going to be carried out further as an independent model – well that depends on the banks involved. Does it mean they are going to roll it out as a working product? Not necessarily.”