Last week, Belgian export credit agency Credendo announced the launch of a blockchain-powered platform for surety bonds through its innovation arm, Area42. Speaking to Jon Holvoet, customer centre of expertise manager of Credendo and leader of its blockchain efforts, GTR takes a closer look at the use case for the technology in this market.
Surety bonds are a form of guarantee in which a third party – usually an insurer – guarantees to pay the direct loss suffered by one party in a contract if the other party breaches their contractual or legal obligations. However, like all paper documents, they can be forged, and any fraudulent manipulation of information such as the amount covered, the validity date or the emitting party could drastically impact the underlying trade transaction, which depends on mutual trust and reputation.
With this latest platform, Area42, launched by Credendo earlier this year as part of efforts to “recode” trade credit insurance and related products for the digital era, says it has come up with the answer.
Taking as the starting point Credendo’s current surety business, which is delivered online via the Credendo Surety Booster platform, Area42 has come up with a way of creating an extra layer of security by using a decentralised network to register surety bonds to a blockchain. Credendo says this provides immutability, superior authenticity and integrity for principals, beneficiaries and brokers alike.
“The issue in the Credendo Booster platform is that the beneficiary that receives the guarantee has no means of validating the authenticity of this document except by contacting Credendo,” says Holvoet. “This is where we have decided to add an additional layer of trust under this already running application, using blockchain technology. The moment we issue a bond, as an additional step we save a hash of the generated bond on the blockchain network. Then, the ownership of the bond, which is represented as a token on the blockchain network, is transferred to the principal. All this is time stamped and immutably written through the blockchain, while of course, the data itself never enters the blockchain.”
Cognisant of the fact that not everybody wants to – or has the technological knowhow to – become a node on a network, Area42 has also included in the application a means of manually checking the authenticity of documents. “Our solution, of course, is very nice, but a constructor in Germany, for example, does not care about blockchain. Therefore we also needed to make sure that we have an easy means to verify the bond for the beneficiary.” To do this, the company has added an additional QR code to the bond document that is both clickable and scannable on a mobile, tablet or laptop. “Using the QR code, you can verify that the bond document is authentic, that it has been issued by Credendo, and, importantly, that it is still valid and the latest version,” says Holvoet.
The system runs on a private Ethereum network, provided by Antwerp-based tech firm T-Mining. Filip Heremans, chief product officer of T-Mining, explains that the company used its “secure document workflow solution” to connect the existing Credendo application with the blockchain, providing a document notary service for every Credendo surety bond.
When questioned about the choice to partner with a relatively unknown firm as opposed to exploring collaboration with some of the consortia in the market, Holvoet explains: “The blockchain market is still new, and it is difficult to put a safe bet on the future of the technology. We have implemented this solution on a private Ethereum network because we believe this both gives a good chance of interoperability and portability in the future and stands a good chance to be at least one of the remaining solutions in the blockchain world for the coming five to 10 years.” He adds that many of the consortia in the market weren’t the right fit for the application because of the way they are structured.
“I am not a huge fan of the classical consortiums because they often have a governance that means that one sole party is the master of the network. That circumvents everything around blockchain for me,” says Holvoet. “We can easily add more nodes and participants in this network without us wanting or having to control them. I would like to have as many nodes as possible, and as few under our control as possible, because that is indeed for me the power behind a real blockchain implementation, that it is really decentralised, with a governance adapted to the needs of your ecosystem.”
This is not the first time that blockchain technology has been applied to the surety bond market. Last year, Zurich, a founding member of the Blockchain Insurance Industry Initiative (B3i), teamed up with Accenture to integrate a blockchain-based system with its existing surety management back-end, creating a dashboard that enables customers to quickly check the status of their bonds, get detailed bond history records, complete new bond requests and view bond forecasts.
With the Area42 solution, Credendo now becomes the first export credit agency to leverage the technology in this way. But, although he is clear about the benefits of blockchain, Holvoet cautions that Credendo doesn’t intend to promote it as some sort of panacea. “Blockchain to me is like TCP/IP. You use the internet every day. You don’t care about what version of TCP/IP is enabling it; you don’t need to know that. You just want to receive your mails and browse the web, and whatever technology is underneath, you just want to be reassured that it is safe and you can trust it without hassle. That is the result that we want to achieve.”
Despite the ongoing hype about the many pain points it can solve in international trade, blockchain technology remains in its infancy. Because of this, Holvoet is also clear about the need for a potential exit strategy from the technology in any application, in case of security, regulatory or other issues in the future that prevent its use. “We implemented this solution as an additional layer underneath an existing product. What is important for us is that if in the future blockchain is decided by the market not to be the best answer to increase trust, we can deactivate it without any risk on the running application or on the issued bonds, and we can just continue our business like before,” he says. “You do have to play it safe. You have to make sure that blockchain remains loosely coupled, that you use it for its benefits but that you also remain risk aware. Things can go wrong. You have to be sure that this technology that has not yet reached full maturity is not completely entangled into your core systems.”
For now, the project remains in a pilot phase with 10 unnamed broker clients in Germany, which Credendo has been incentivising to participate as additional validator nodes on the network. Credendo plans to open the platform to the entire German market by the end of the year, with more countries to follow. The export credit agency also says that surety bonds won’t be the only products on the blockchain, and that it is currently in internal discussions about what services to add on next to the same implementation.