As trade digitisation continues apace, blockchain – still best known as the system underlying the cryptocurrency bitcoin – has emerged as a clear enabler of the future of trade finance. However, a series of reports calling out the technology’s gargantuan electricity usage has some concerned about its implications for the environment. While banks pour time and money into green loans and sustainable trade finance practices, are they overlooking an energy-hungry elephant in the room? Eleanor Wragg reports.
The future of trade finance has arrived, and it has done so in the shape of blockchain. More than 20 consortia and industry initiatives are now diligently using the technology to solve for trade finance’s biggest issue – inefficiency – with increasingly convincing results.
The benefits of blockchain for trade are manifold and undisputed. A trade finance deal for a single commodities cargo by sea can require up to 36 original documents and 240 copies from as many as 27 parties, and can often take weeks, if not months, to complete. Replacing these cumbersome processes with blockchain technology could, according to consultancy firm Bain & Company, increase global trade volumes by US$1.1tn in the coming seven years, up from the current base of US$16tn.
So far, so good. But as the industry envisions how blockchain could change the face of trade for the better, have the drawbacks been fully considered? Recent research into the technology is raising doubts.
“We do not question the efficiency gains that blockchain technology could, in certain cases, provide. However, the current debate is focused on anticipated benefits, and more attention needs to be given to costs,” write researchers Christian Stoll, Lena Klaassen and Ulrich Gallersdörfer in The Carbon Footprint of Bitcoin, a paper recently published by the Technical University of Munich and the Massachusetts Institute of Technology.
These costs? Energy. The consensus mechanisms at the heart of blockchain, which make sure all nodes are synchronised with each other, agree on which entries are legitimate and are added to the blockchain, require computing power. For bitcoin, blockchain’s most famous use case, this power usage has become hugely problematic.
Alex de Vries, an analyst at PwC who tracks the unintended consequences of digital trends, recently calculated that the bitcoin network’s 2018 electrical energy consumption was equal to that of all of Hungary, and that it will only continue to rise. Meanwhile, Stoll, Klaassen and Gallersdörfer found that bitcoin was responsible for around 22 million tonnes of CO2 last year; approximately the same amount of emissions as Sri Lanka. Green it is not.
Trade finance banks, from HSBC to ING, Standard Chartered and BBVA, have been at pains of late to demonstrate their sustainable credentials. Halts on funding coal-fired electricity plants, new margin ratchets on loans to reward good supply chain actors, and increased financing for wind and solar power have been just some of the new developments in the industry. Speaking to GTR at the sidelines of the recent ICC Banking Commission annual meeting, Roberto Leva, an executive director at JP Morgan, said: “People want to know how their financial providers are operating and what they are financing. It is good for us to be able to prove that we have the right controls in place, and ultimately this reflects on the corporate clients.” But by hitching its wagon to blockchain, could the trade finance industry be at risk of undoing all its good work?
R3, the blockchain firm behind Corda, says not. “Corda’s peer-to-peer architecture means that consensus only involves parties to the transaction, as opposed to the entire network, as is the case with public blockchains. This avoids the high time and computing resources that public blockchain consensus requires, which serves as a serious impediment to scalability, not to mention wasted resources,” says Amy Fisher, the firm’s head of business development.
TradeIX, which jointly launched the Marco Polo trade finance initiative with R3, is also quick to point out the difference between blockchain as used for cryptocurrencies and blockchain as used for trade. “Proof-of-work blockchains, bitcoin chief among them, and other blockchains that use energy intensive consensus algorithms like scrypt mining can have a significant negative environmental impact,” says David Sutter, chief strategy officer at TradeIX.
“The enterprise blockchains underpinning trade digitisation initiatives are no more energy intensive than traditional software systems. This fact is not exclusive to enterprise blockchains; many public blockchains utilise consensus mechanisms that are not resource intensive such as Dash’s proof-of-stake consensus and Ripple’s XRP Ledger Consensus Protocol, among many others.”
While no calculations have yet been made as to the exact amount of electricity used by these blockchains, Sutter says: “I’d estimate that the cloud computing costs for supporting one bank’s trade activities would cost approximately tens of thousands of dollars per year on the low end and up to single digit millions of dollars on the high end.” He compares this favourably to online streaming service Netflix, which reportedly spends half a billion dollars a year on cloud computing, a figure that is likely artificially reduced as a result of deep discounts for bulk capacity purchases on long-term contracts.
Sustainable by design or by default
What makes open distributed ledgers such as bitcoin so power consumptive is the conventional process of mining and establishing consensus in order to establish an audit trail, which is negative from an environmental footprint perspective and also doesn’t lend itself to speed. But the comparatively lower energy usage of blockchain platforms for trade appears to be more of a function of the use case rather than any conscious, sustainability-focused decision.
“Within the trade finance blockchain platforms, we need to ensure control and authenticity; we need to ensure that the parties have been KYC-ed and customer due diligence completed and hence we operate what are known as permissioned ledgers where the identity of every party on the node is known and pre-checked. We cannot have open ledger systems,” explains Vinay Mendonca, global head of product, propositions and structuring, trade and receivables finance at HSBC, which is a member of the R3-backed Voltron blockchain consortium. This dramatically reduces the amount of computing resources needed. But as adoption of the solution increases, so too will its energy usage.
“The environmental impact of technology adoption is something we always need to keep our eye on,” says TradeIX’s Sutter. “Ultimately, banks should evaluate their environmental impact holistically. Looking at trade and transaction banking alone only tells a small part of the overall story. For both cost and environmental reasons it is important that banking industry, and the global trade industry at large, continue to invest in the adoption of technologies like cloud computing and modern DevOps software to ensure that they leave the smallest environmental footprint possible.”
Pros outweigh the cons
Like any new, hyped technology, blockchain evokes a variety of opinions and responses. But with the narrative dominated by bitcoin and its electricity usage, concerns about reputation are leading some banks to consider ramping up education efforts.
“Often when you talk about blockchain, people extrapolate that to cryptocurrency, which isn’t our focus in trade finance. It is not only the energy aspect, but also issues around financial crime. These are concerns in an open ledger and non-permissioned environment. There is more education to be done, and we will continue to invest in education as we get more scale,” says Mendonca.
For his part, he is entirely convinced that the benefits of using blockchain to digitise trade finance and the underlying processes far outweigh any downsides.
“Look at where we are today and where we are coming from in terms of the amount of paper. A single transaction can involve the equivalent of a big book in terms of the amount of paper used. If you take that away, I don’t think you can underestimate the green benefit,” he says. “Then you come to the carbon footprint of moving this paper around. These documents go from the seller to the shipper, to the port, the port reissues it to the seller, the seller sends it to their bank, the seller’s bank sends it to the buyer’s bank, which then is cross-border, the buyer’s bank then sends it to the buyer. This carbon footprint left by those legs of moving the paper around over and over again cannot be overlooked. When you go digital, you effectively eliminate all the associated paperwork. And this leads to a net green outcome.”
What’s more, besides the so-called green aspect, the wider sustainability agenda also stands to benefit from blockchain. “When you talk about sustainability it is also about providing trade finance to suppliers who are struggling to access it. And a lot of it comes to the fact that it is paper-based, cumbersome and manual.Through digitisation, you democratise and neutralise the process so more people can join in. From a sustainability standpoint, you are driving the agenda of trade as a force for good within society,” adds Mendonca.
As banks continue to adopt technology and become more digital, it is clear that they will require ever-increasing amounts of computing resources. Nevertheless, everyone in the industry seems convinced that the net impact will be one of greater efficiency and more environmentally friendly outcomes – a damning indicator of just how unsustainable trade has been for all these years.