Countries in the Asia Pacific, including Singapore and China, are leading the way when it comes to the digitalisation of trade. Progress is being made on defining the standards and legal protocols needed for digital trade – an imperative if the region is to make its tradetech interoperable and see trade digitalisation reach a meaningful scale, writes Maddy White.
Covid-19 has accelerated the pace of digitalisation in Asia and around the world. Travel restrictions and port closures forced those involved in global trade to work remotely and use virtual methods to sign deals and exchange trade documents.
“The advances that have happened in the last five months or so would be the equivalent of what would have happened over the course of a few years,” Steven Beck, head of trade and supply chain at the Asian Development Bank (ADB), tells GTR. “In the midst of this crisis, it has become even more painfully obvious that digitalisation of trade is critical.”
But even before Covid-19 broke out in January, global and local banks, governments and tech consortia in Asia were making good progress on the digital trade front.
Trade finance network Voltron rebranded as Contour, chose Singapore as its base and began to commercialise; the International Chamber of Commerce (ICC) continued development of the Digital Standards Initiative (DSI); Standard Chartered invested in Linklogis, a blockchain-enabled supply chain platform in China; nine global and local banks backed the CamelONE trade finance portal on Singapore’s digital trade platform; and Incomlend unveiled a new platform to provide trade finance services to clients of shipping and logistics group CMA CGM. All of these developments were in the pipeline before the pandemic was declared in March and came to fruition between the end of 2019 and the beginning of 2020.
“There certainly is cognisance and a lot of effort at the industry level – by that I mean banks, fintechs and government agencies – to push towards digitalising trade and trade finance,” Samuel Mathew, global head of documentary trade at Standard Chartered, tells GTR.
“Almost every country in Asia has a digital agenda and a plethora of initiatives and platforms, and many of them, such as Contour, or marketplaces such as SAP Ariba or Trusple [a trade and financial service platform], are global in nature,” he says.
As well as this, Mathew adds, banks in Asia are enhancing their own proprietary platforms, embracing open API-based banking, integrating services from third-party platforms, and collaborating to create platforms that could potentially solve common problems.
Countries in Asia are making swift progress on the digitalisation of trade. But now they, together with their counterparts around the world, must turn their attention to defining standards and legal protocols for digital trade.
Without these standards and protocols, digitalisation is “disjointed”, says Beck, adding that as digital systems were scaled quickly at the start of the pandemic so trade could continue, growth was “not as co-ordinated” as it should have been.
The fragmentation lies in both the technology and the legal framework. Platforms that make use of new technology, such as blockchain, often cannot connect to one another, or integrate with banks’ existing systems, and many digital trade tools, such as electronic bills of lading (eBLs), are not legally valid in most jurisdictions. Instead, they rely on using contract law, meaning all parties in a transaction that handle a certain digital instrument like an eBL must be onboarded to the platform.
Mathew says: “Without legal and digital standards in trade, there will be limitations to the number of digital islands participants can practically join given the effort and investments required. This in turn results in a low overall adoption rate which then acts as a further deterrent for companies deliberating whether to go digital.”
He explains that Standard Chartered has, however, observed “the increasing evolution of digital and legal standards driven by governments in Asia, such as Singapore and India”, putting the continent in a league of its own.
Taking the example of Singapore, he says the government is working on enhancing its Electronic Transactions Act to allow for the digital transfer of documents. This, alongside other public initiatives such as the Infocomm Media Development Authority’s (IMDA’s) TradeTrust, which supports the exchange of electronic trade documents through a public blockchain offering connecting governments and businesses, sets solid foundations for the country to build on.
As part of efforts being made in Asia to develop standards and protocols enabling the next digital era in global trade, the DSI was formalised in March as an independent entity overseen by the ICC and with seed funding from the ADB and the government of Singapore.
It aims to create open trade standards to facilitate interoperability among the various blockchain-based networks and technology platforms that have emerged in the trade arena over the past few years. In September, Oswald Kuyler joined the initiative as managing director, and at the same time, the ICC also revealed the “operational launch” of the DSI.
Kuyler tells GTR that the DSI has ambitious long-term goals to put in place the legal infrastructure required, as well as short-term plans that focus on “identifying standard requirements, setting them, testing the impact and scaling as required”.
Having defined protocols in place for digital trade would be a game-changer, says Beck. “If we can develop the protocols and standards that enable trade to be conducted seamlessly throughout the whole ecosystem, the efficiency gains, the lower barriers to entry, including for SMEs, and the metadata that would be created would be transformational.”
Other pieces to the puzzle
In order to achieve legal harmonisation, the ICC, the DSI and the ADB believe it is important for governments to adopt the United Nations Commission on International Trade Law’s (UNCITRAL’s) Model Law on Electronic Transfer Records (MLETR), which will enable the legal use of electronic transferable documents, including bills of lading, bills of exchange, promissory notes and warehouse receipts, both domestically and across borders.
The only country so far to integrate the model law into its national legislation is Bahrain, but Singapore’s IMDA is also in the process of adopting it as part of its TradeTrust project. Work on integrating the model law started in November 2019 and is in its initial phase of draft development, reveals a Q2 newsletter by IMDA.
“Without having this legal framework in place, we are only going to be able to move so far on the digital agenda,” says the ADB’s Beck.
As well as updates to trade law, Beck also points to the Legal Entity Identifier (LEI) as another piece of the puzzle when it comes to seamless trade digitalisation.
The LEI is a unique, electronic, 20-digit standard code for financial institutions, corporations, governments, companies and other entities. Established in 2014 by the G20, the LEI can be used to connect to key reference information, enabling the clear and unique identification of legal entities participating in financial transactions.
The ADB says that the LEI presents an opportunity to transform trade. It believes that by easing the flow of information about companies, the LEI could help banks conduct know-your-customer (KYC) due diligence. It could also mitigate the risk of correspondent bank relationships being cut, while increasing access to finance for SMEs in emerging markets by making information about them more readily available, giving the banks financing these companies greater confidence.
However, the LEI is yet to be widely adopted, with only just over 1.7 million LEIs issued at present. Most of these have been in Western countries, including the US, the UK, Germany and Italy, according to the Global Legal Entity Identifier Foundation (GLEIF). In some jurisdictions, the use of LEIs is mandatory for certain entities such as those involved in derivatives and other financial transactions.
The ADB had raised concerns that obtaining an LEI could be challenging for SMEs located in developing countries. That led to the bank’s trade finance programme designing a survey in mid-2019 to see whether large and small companies in developing countries could acquire an LEI relatively easily and at a reasonable cost. Of those surveyed, 87% rated the LEI registration process very easy, easy, or average. Of the entities surveyed, 65% had paid US$75 or less to acquire an LEI. Given the positive survey results, the ADB now hopes to see greater take-up of the LEI around Asia.
A digital agenda
- In Singapore, Contour left beta in October, bringing the digital trade finance platform into full production. Owned by eight shareholder banks – Bangkok Bank, BNP Paribas, CTBC, HSBC, ING, Standard Chartered, SEB and Citi – the platform focuses on letters of credit (LCs), allowing parties to transact and view information securely over a distributed ledger network.
- Elsewhere, the government inked a Digital Economy Agreement (DEA) with Australia in August, mapping out how digital trade will work between the two states, and how the barriers to digital trade can be reduced. A similar deal was also agreed between Singapore, Chile and New Zealand.
- In an attempt to tackle fraudulent practices in Singapore, a blockchain-based registry of trade finance transactions is being developed by banks. Led by Standard Chartered and DBS Bank, the registry brings together 14 financial institutions and is a secure central database for the banking industry to access records of trade transactions financed by banks in Singapore.
- Meanwhile, China is developing its Greater Bay Area trade finance blockchain platform, which aims to provide smaller businesses with easier access to trade finance in the Guangdong, Hong Kong and Macau areas. Led by the People’s Bank of China’s (PBOC) digital currency research lab, the project received Rmb32.4mn (US$4.7mn) in funding from the Chinese government in March to further develop over the next few years.
- In Hong Kong, blockchain-based trade finance platform eTradeConnect continues to progress. Launched in October 2018 by 12 banks and based on Hyperledger Fabric, the solution is run by Hong Kong Trade Finance Company, a unit set up by the Hong Kong Monetary Authority (HKMA). At the end of 2019, eTradeConnect revealed the successful completion of two new proofs of concepts with CargoSmart and PwC.
- HKMA and the innovation hub of the Bank for International Settlements (BIS) also unveiled a TechChallenge in August, offering financial sponsorship to firms that can deploy technology to improve access to trade finance, particularly for SMEs and companies in emerging markets.
- There have also been efforts to link up trade finance blockchain platforms in Asia. In November 2019, a deal was signed between Hong Kong and China to trial connecting eTradeConnect and PBOC’s trade finance platform. Before this, in 2017, HKMA inked a deal with the Monetary Authority of Singapore to jointly develop the Global Trade Connectivity Network (GTCN), a cross-border open trade finance network between eTradeConnect and the Networked Trade Platform (NTP), Singapore’s national trade platform.
- Elsewhere, a blockchain transaction was completed over Contour in September by the ADB, Standard Chartered and the Bank for Investment and Development of Vietnam (BIDV). The letter of credit involved a US$50,000 shipment of plastics from Thailand’s SCG Plastics Co Ltd to Vietnam’s Opec Plastics Joint Stock Company. It was the first credit guarantee transaction using distributed ledger technology by the ADB.
- Thailand’s Joint Standing Committee of Commerce, Industry and Banking (JSCCIB) also revealed the successful conclusion of a blockchain technology trial with NTT Data for its national trade platform at the end of 2019.
- The Tradetech Showcase at GTR Asia 2020 Virtual by GTR Ventures, a venture-building and investment platform specialised in trade and supply chain, gave innovative trade finance tech companies in Asia the chance to pitch their businesses to a group of expert judges at the trade finance event in September. This year’s participants included MineHub, Carma, Tramés and CargoChain.