When central banks connect trade finance platforms, what questions do we need to raise?

A blog based on the paper, “Networks in trade finance: Balancing the options”

In October 2017, the central banks of Hong Kong and Singapore  link up their respective blockchain-based trade finance platforms. This is the first time that two governments have discussed a linkage at such a high level.

This raises questions regarding connectivity. There are two possible options for platform connectivity: either have both platforms plug into a single network (a global network), or have each platform operate a discrete network and then link the networks (multiple networks).

Asia is best served by a multiple network model

The dynamics of trade finance in Asia lead us to conclude that the best option is for each regulator to run its platform on its own network and link those jurisdiction-based networks together.

The model of multiple interoperable business networks align more closely with the existing diverse regulatory environment. Unlike the European Union or the USA, there is no overarching organization that is capable of bringing forward common regulation and standards across the continent. However, a single global network may still succeed if regulators of different countries are able to agree on common legal and regulatory standards.

Balancing the options

Bringing every trade finance market participant onto the same global network is akin to a global government with one set of laws. This arrangement is simple in concept, but as regional integration efforts around the world have shown us, very difficult in practice.

Having multiple business networks would be similar to the world we live in today. Networks are akin to countries. Passports allow people to move between countries in the same way as a Compatibility Zone allows networks to share information. It is governed by a set of common rules and standards that every country or network recognises, and adheres to. This allows for globalization, and in the case of business networks, interoperability. This option has its disadvantages, but is logistically straightforward.

We believe that the design of the Compatibility Zone will evolve as market players seek the best solution to maximize their commercial benefits. You can read more about this concept here .

Difficulty of harmonizing standards for multiple jurisdictions

The implementation of a global network requires all the regulators to agree on a set of common regulations covering the management of trade finance networks. In today’s fragmented regulatory environment, achieving harmonization or even a single standard for all would be difficult.

Recognizing this, we focus on a “two tier” concept of a Compatibility Zone that links multiple business networks. This directly addresses the challenge of regulatory harmonization. Each regulator maintains oversight over business networks in its jurisdiction. This would reduce the influence of any single operator.  Furthermore, a number of other legal issues around cross border networks would also be resolved. For instance, disputes on a national network could be resolved using national legal procedures.

Figure 1: Network model with 2 interoperable business networks connect by a Compatibility Zone

Source: Networks in trade finance: Balancing the options (Dec 2017)

Choice for simplicity

Ultimately, institutions and regulators have to weigh the considerations of both options, and decide on the one that best suits the needs of the trade finance industry.

Stay ahead of the curve! Download our public papers now to learn more!