As banks and fintech players gather for this year’s Money20/20 conference in Copenhagen, a consortium of seven of Europe’s largest financial institutions reveals details on its new blockchain trade finance platform for SMEs. Going live later this year, Digital Trade Chain will be built and hosted by IBM and powered by Hyperledger Fabric 1.0.
As such, the platform will be one of the first bank-led blockchain platforms to go into production in the trade finance space.
“This isn’t a proof of concept, this is real business,” Keith Bear, vice-resident of financial markets at IBM, tells GTR ahead of Tuesday’s announcement. “The fact that it’s an implementation, not another proof of concept, in part answers the implicit questions that’s out there: When is the value going to get delivered? I think this is a really indicative example of the answer to that.”
Digital Trade Chain is a result of a memorandum of understanding (MoU) signed in January between seven major European banks – Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale and UniCredit – to collaborate on the development and commercialisation of the platform.
Utilising blockchain technology, it is designed to simplify and facilitate domestic and cross-border trade for European SMEs, while increasing trade transaction transparency. It will connect parties involved in a trade deal in one place, help SMEs initiate new trading relationships as well as provide easy access to financing.
The initiative originally grew out of a proof of concept conducted last year by KBC on Ethereum, one in which IBM was not involved. Now, five months after the MoU was signed, the consortium has announced it has selected IBM through “a global competitive bidding process” in which seven vendors were invited to make a proposal to develop the platform.
Hyperledger vs Corda
Ultimately, the decision between vendors came down to a choice between Hyperledger and Corda, as all bids were based on either of the two, Hubert Benoot, KBC’s general manager of trade finance, tells GTR.
Corda is a shared ledger platform developed by a consortium of more than 70 leading financial institutions, brought together by fintech company R3. It was developed specifically for transaction banking to provide smart contracts that will allow parties to better manage agreements, and to reduce costs and risk in trade.
Meanwhile, Hyperledger, which is not sector specific, provides the platform on which much of the blockchain pilots and solutions in trade finance to date have been developed. And although most of the banks in the Digital Trade Chain consortium are also members of R3, they will now be developing their own project on Hyperledger simultaneously.
Benoot says that while the technologies are “very close”, the consortium decided to go for the one which they thought was “more mature”.
“The main reason we went for Hyperledger and IBM is that IBM already had some live projects with customers in other domains than trade finance, so it is a proven technology. We have seen live things on the basis of Hyperledger while for Corda we haven’t, and that has made the difference. This is quite an expensive exercise for the banks, so we wanted to chose a technology which already has a proven track record,” he says.
The platform will be one of the first across industries to be powered by Hyperledger Fabric 1.0, a version that is still in beta, but which will soon be made generally available.
“We’re still on a roadmap going from beta into general availability,” says IBM’s Bear. “We have done around 400 blockchain projects globally across all industries and countries. The vast majority of blockchain projects we’ve been starting in the last few weeks have been version 1.0-based, which I think is reflective of the confidence in the platform.”
According to Bear, the key advantage of the 1.0 version is that it meets the banks’ requirements of segregating the transactions between each other, and not exposing them to any third party.
“A key element of it is around the ability that Hyperledger Fabric 1.0 has to create channels,” he says. “So if KBC are doing a transaction with Rabobank, for example, then other banks in the consortium don’t have access to that. You get the advantages of blockchain in terms of trust and transparency, but unlike the bitcoin environment you don’t have everything exposed.”
This channel environment may be more appropriate for ﬁnancial services, where transactional data privacy is key. “The previous release of Hyperledger Fabric, the 0.6, which was what we were working with last year, we took that to many financial institutions, and this point came out very strongly. That was a strong incentive for the design work that kicked off in the middle of last year to create that segregation,” Bear says.
Development of the platform has now started, with the first version expected to go live in December. At this point it will be ready for piloting and a gradual onboarding of the banks’ clients.
The first edition will include the main functionalities: buyer and seller will be able to agree on their transaction in a smart contract that triggers payments upon certain events. SMEs will be able to obtain financing via the platform, as well as follow the physical flow of the goods through a track and trace system with transport companies.
The consortium is already looking into new functionalities that would be added to version two in 2018. For example, the platform could be expanded to include third parties, such as credit insurers.
The future could also involve more banks, but not for now, Benoot at KBC explains: “We have a long list of banks knocking on the door. We have started talking to these banks, but until delivery of the first version, we would like to not take additional banks onboard, because of complexity. It would become difficult to manage. It’s already quite challenging to agree amongst seven banks on the architecture, functionalities, etc. But once that is done and the functionality is live, we will aggressively start taking new banks onboard,” he says.
However, he adds that a few exceptions could be made to improve the geographical footprint of the consortium, although it would still be limited to Europe. He believes the limited geographical scope may give Digital Trade Chain a better chance of succeeding.
“One of the logics behind starting in Europe is that it’s simple trade: there’s a buyer, a seller, two banks, one transport company. We don’t have the complexity of bills of lading and intercontinental transport. As soon as you go outside Europe the complexities add up,” Benoot ends.