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Trade finance for corporates is getting a major upgrade as the banks back initiative to deliver letters of credit over blockchain

October 23, 2018

By: Aaron Seabrook, Director at R3, to find out more, please contact Voltron@R3.com

 

Backed by eight major banks, with the potential to unleash USD 1 trillion in trade, the Voltron project is being heralded as a major leap forward for the trade finance process.

 As blockchain for business moves into production, corporates must now make the decision now whether to be a leader or a follower.

 R3’s Aaron Seabrook explores how blockchain is simplifying letters of credit and outlines how Voltron is set to revolutionise trade finance, delivering anopen industry platform for letters or credit, enabling exchange documents and value across an open network.

 

Letters of credit are changing for the first time in centuries. This presents wide-ranging implications for the businesses that use them: shorter settlement times, instant discrepancy resolution, simplified sanctions screening. Firms must make the strategic choice now to lead the innovation or follow the crowd and risk being left behind.

Every growing global business needs finance. In 2017 alone, USD 15.5 trillion of merchandise exports were transported around the world across sea, air, rail and road, and as much as 80% of this global trade required financing.

Traditional technology required corporates to log into multiple portals, and juggle relationships and documentation for each shipment. In addition, businesses must navigate the growing threat of cyber-attacks, regulatory burdens, increasingly sophisticated fraudsters and ever-changing sanctions lists. Despite this complexity, cumbersome and time-consuming paper-based processes are still commonplace.

Many in the industry were convinced that digitisation would be a silver bullet for some of the major challenges in trade financing. And while it is true that digitisation has changed the way individual businesses in trade finance process information, these benefits have not scaled into a globally connected network.

In today’s environment, each party still maintains its own proprietary source of information, and so digital documentation needs to be checked and re-entered at every step of the process. This is not an easy problem to fix. Trade finance is inherently decentralised and trying to force centralised architecture upon it is akin to trying to fit a square peg into a round hole. Having many different centralised digital systems globally has simply created localised data centers that do not interoperate with a broader network.

It is clear that digital improvements to non-digital infrastructure can only go so far. Fundamental reorganisation of the entire system is required to change trade finance enough to address the challenges shared by businesses across the globe. This is where blockchain comes in.

 

Blockchain: a gamechanger for trade finance  

In February 2018, R3’s blockchain platform, Corda, was used to issue a letter of credit on behalf of US food and agriculture firm Cargill, facilitating a bulk shipment of soybean meal from Argentina to Malaysia. The blockchain-based transaction was performed in 24 hours. This is an enormous leap in efficiency over the usual five-to-10 days it takes to complete such exchanges through existing systems. This dramatic improvement in turnaround time could unlock significant liquidity for businesses.

This was the first public live transaction of the Voltron app for letters of credit. Most importantly, it demonstrated that blockchain could create a streamlined system for letters of credit. Blockchain-based LCs are building a future where each business has a single channel to connect to their trading partners across multiple networks and different technology solutions.

The transaction illustrated two important features of the Corda platform. First, the need for reconciliation of paper or digital records is completely removed by Corda because all parties are linked on the platform and updates are instantaneous. Second, privacy is locked in. Unlike public blockchain platforms, Corda only sends data to those who have a “need to know.” This unique feature emerged from the requirements of financial institutions which need to ensure the confidentiality of trades and agreements while also capturing the benefits of a shared distributed ledger infrastructure.

This approach to data privacy and reconciliation is groundbreaking in the blockchain space, and has been a major driver for Corda’s increasingly widespread adoption in trade finance. Building upon the live transaction with Cargill, the Voltron initiative has now launched open industry platform, corporate customer pilot programme and technology partner programme on the Corda Network.  Furthermore, the ecosystem of partners connected to the Voltron app on Corda continues to grow, and we are rapidly moving ahead with taking the solution to market.

 

Building a diverse ecosystem

 The Voltron ecosystem is growing as leading technology providers within the trade finance space connect into it. These firms bring with them their existing networks of carriers, freight forwarders and other trade facilitators to the app. This new model provides legal enforceability and greater digitisation across business networks on Corda, addressing the challenge of today’s digital islands bridged by paper-based processes.

By deploying Corda, corporates gain access to a single, simplified channel to connect with their trade partners across multiple networks and different technology solutions. Legally enforceable title documents can flow across organizations, technology platforms and business networks, reducing the time for documents in transit, without the need for all parties to be on a single platform. This allows for faster presentations and shortens the working capital cycles for corporates to a greater degree than existing solutions.

Technology providers are also getting involved. Cost and ease of integration remains critical for corporates and banks. Recognising this, Voltron is piloting a program with a number of corporates, trade platform vendors, ERP suppliers and other ecosystem participants, who will embed Voltron functionality and network connectivity into their existing solutions.

Reducing adoption cost and complexity is fundamental to our strategy, and our goal is to ensure the adoption of Voltron on Corda is as easy as a simple product upgrade and is complementary to existing solutions.

 

Don’t be left behind

The emergence of blockchain technology is a watershed moment for trade finance, offering an innovative solution uniquely equipped to tackle the nuances and complexities of the industry.

But why should corporates care?

It’s simple. Corporates invariably rely on a combination of paper, fax, email and multiple digital solutions, creating complicated processes with any number of opportunities for errors to be introduced. Blockchain can reduce inefficiencies in trade and supply chains enabling faster verification and reconciliation of records, and the mutualisation of costs to automate trade finance workflows through smart contracts.

Blockchain technology is quickly becoming a reality in trade finance, and businesses must act now to ensure they’re not left behind. For corporates using open industry platforms like Voltron, trade finance will become safer, faster and more secure.

R3’s Corda has been leading the pack in trade finance since its inception and we firmly believe that this technology will ultimately make trade finance more inclusive and available to businesses of all sizes and in all regions. Firms must act now to embrace this once in a generation opportunity to lead the trade finance blockchain revolution.

Welcome to the future of trade finance. Be part of it.