The potential uses of blockchain have been well documented, but when it comes to trade, the technology is coming into its own. Mirka Skrzypczak, head of working capital and trade products, and Jim Bidwell, head of trade services, both from NatWest, have been intimately involved with two ground-breaking projects that may revolutionise international trade.
Q: There has been a lot of talk about blockchain and its effects on banking. Where are we in 2018, and what real-world deployments of the technology are we seeing?
Skrzypczak: The banking world has been keen to use blockchain and distributed ledger technology, but is also aware that some of the early types of this technology have not been suitable. For example Bitcoin has a single, rigid data format and can hold very little data. Ethereum allows far greater complexity but transactions/contracts are replicated and maintained by every participating node. Hence the fact that all transactions are open for participants to see is a bit of a no-go for banks.
So where we are in 2018 is that a number of banks have come together via the R3 consortium to develop Corda, a core FI-enabled blockchain platform that will support applications for specific tasks, such as trade finance. So far, Corda has been through a number of tests for stability and resilience. In contrast to most existing distributed ledger and blockchain platforms today, Corda was built with the explicit purpose of recording and enforcing business agreements among registered financial institutions. As such, it takes a unique approach to data distribution and transaction semantics while maintaining the features of distributed ledgers, namely the reliable execution of financial agreements in an automatable and enforceable fashion where participants can only see transactions they are party to.
Bidwell: As with any new technology, participants and sponsors fall into two categories: those that rush to market to get something out quickly and can lay claim to early involvement; and then there are the more serious participants who want to develop a solution for the long term. So what you are seeing in 2018 and 2019 is that a lot of the longer-term projects are starting to come together, and banks specifically are starting to roll-out applications for customers.
Q: What exciting projects have you been involved with in this area?
Skrzypczak: Using Corda, the R3 banks and partners have developed Marco Polo and Voltron, which, respectively, are digital, distributed ledger applications for open account trade and the documentation processes of trade finance.
Marco Polo started just over a year ago, some of our corporate clients tend to be the early movers and they also allow us to create critical mass, as their large supply chains support a large number of players that can use the technology and see its benefits. Marco Polo has a reputation for being purely for large corporates, but broadly this isn’t true as the platform is aimed at all business sizes; however corporates do tend to have the internal skills and capabilities to integrate with this new technology.
In a nutshell, it gives an open account trade option when there is no trust between parties that haven’t previously transacted and where letters of credit or documentary collections would have to suffice. It’s great in that it diminishes barriers to trade and eliminates the question of trust among counterparties.
Bidwell: Since early 2017 I’ve been more closely involved with Voltron, which puts the process of providing and transacting letters of credit on the blockchain. With a paper-based system, a letter of credit between two transacting parties and their respective banks can take up to two days to issue and document presentation and payment anywhere between three and 10 days. But when the first live Voltron transaction happened earlier this year, involving ING and HSBC, the letter of credit took a matter of minutes to issue.
And it doesn’t stop there. Voltron can support other related processes such as electronic presentation of documents, electronic bills of lading and title transfer of goods. The ultimate end game is a digitised letter of credit and related activities that make transacting by letter of credit easy and simple, supporting global economic growth.
Q: What are the real-world opportunities that these technologies offer?
Skrzypczak: I’d list efficiency as key, as blockchain allows transactions to be digitised with few intermediaries and supports smart contracts that trigger commercial actions. This reduces the time and cost of transacting. The technology is also durable as transactions remain on the blockchain forever, and therefore provide an audit trail for physical assets or a provided service. There is better veriﬁcation of authenticity, and therefore delivers a huge reduction of fraud and compliance costs. Traceability, transparency and security are also key benefits.
Q: And for financial institutions?
Skrzypczak: Costs, primarily. We expect the high costs of traditional, ageing IT systems to be something of the past, as combined with APIs and cloud, blockchain allows us to create light IT infrastructure with low maintenance costs and that can easily adapt to future needs.
It is important to keep in mind as innovation can be an attractor or detractor in any market. We are less focused on using these technologies to increase market share than we are in being able to inject money early on into the trade cycle and be there at the right time for our customers – such as by financing as early as purchase order.
Q: How does the process work within R3?
Bidwell: The nuts and bolts of the process are fairly straightforward. You start with a problem statement that could be solved by using distributed ledger technology. That suggestion is then socialised among R3 members, who decide whether they are interested in joining a collaborative group that will analyse the opportunity and decide whether it is viable to take forward. Using Voltron as an example, the group of banks have moved through multiple stages including initial analysis, a proof of concept using simple wire frames, prototype build, pilot and ultimately in 2019 into full production. On average about 10 to 20 banks will form a global collaborative group of typically banks and fintechs that work through the solution together.
From a trade perspective, having multiple banks working collectively means a far more powerful solution that leads us toward an industry standard. Of course, individual banks can still differentiate themselves by the propositions they build and take to customers based on that standard. But collaboration is essential and we mustn’t be afraid of it.
Q: What has been the customer response to Marco Polo and Voltron?
Bidwell: After Voltron’s first live transaction, which happened in the summer, customer feedback was extremely positive and since then the market is very enthusiastic. It’s still early days, but we’ll continue to see momentum as we move into production in 2019.
Skrzypczak: Customers are also enthusiastic about Marco Polo. It does require a level of engagement among customers as it is not yet a plug-and-play technology but even those that are not yet ready to take it up are observing it with interest as it is quite revolutionary.
Q: What needs to happen next?
Bidwell: We’re looking to develop the Universal Trade Network, an internet for trade to underpin all the developments for global standards, which will drive commerce across the global trade spectrum. Our customers are interested in the physical supply chain, and UTN will underpin how this is married with the financial supply chain. For instance, bottlenecks and delays often occur at customs borders, owing to paper-based systems. But as the industry starts to build solutions there, the UTN will act to prevent the emergence of digital islands that don’t speak to one another.
Skrzypczak: And we need systems that are interoperable with platforms that are not built on blockchain to ensure that people remain engaged. Cloud adoption, for example, was so successful because it was easy to connect to cloud and people saw the benefits. We do need to educate people about what the technology is, which is not that easy, but it’s important not to operate in just our own bubble.