Sunday, 22nd January, 2017
| Shifting trends in trade
We look at a blockchain application for trade finance with an unusual focus, the underlying trend it highlights, and how it could (if successful) help small businesses adapt and grow in a changing financial environment. (Find out more in THE TAKEAWAY below.)
TOP 5 STORIES ON COINDESK
**TAKE OUR SURVEY ON ICOs** Token sales, or initial coin offerings (ICOs), raised over $100m in funding for blockchain startups in 2016. As interest grows, so do the questions. Will they end up replacing venture funding? Are they even legal? Give us your input by taking a new survey ahead of our State of Blockchain 2016 report. You can take the survey here. (And thanks!) So that makes three. Cryptocurrency exchange Coinbase has been granted a BitLicense by the New York State Department of Financial Services, making it the third US company to receive one. While the firm had been operating in the state under a “safe harbour” provision, the license solidifies the firm’s regulatory status. It remains to be seen whether this will have any impact on its battle with the IRS over access to customer transactions. Read more.
Collaboration on collateral. A group of central securities depositories (CSDs) from Canada, Norway and South Africa, as well as international CSD Clearstream and stock exchange company Deutsche Börse, is working on a prototype called “LA Ledger” that will apply blockchain technology to cross-border mobilisation of security collateral. Given the increasing role of collateral in a regulation-heavy financial environment, making this crucial step work more efficiently could boost market liquidity. Read more.
Margin suspense. After BTCC’s similar announcement last week, Huobi and OKCoin – two of the world's largest bitcoin exchange businesses by volume – have formally confirmed that they have halted margin trading services, in response to requests from the People’s Bank of China (PBoC). According to exchange representatives, the PBoC has yet to declare margin trading “illegal”. Time will tell if this will have an impact on market liquidity. Read more.
Alternative consensus. Ethereum's work to incorporate proof-of-stake (PoS) is progressing slowly but surely. Incentive and security issues are proving to be tough problems to solve, and ethereum’s planned switch to Casper, its proprietary PoS system, could end up delayed beyond the initial forecast of end-2017. Read more.
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QUOTE OF THE WEEK |
THE TAKEAWAY
In the application of blockchain technology to supply chain management, we finally have a step in a different direction, one that highlights an often-overlooked trend.
Earlier this week CoinDesk wrote about a piece of news that, at first glance, seemed pretty ordinary: a group of European banks are getting together to develop a blockchain-based trade finance solution.
This one, though, is unusual. Rather than tackle large-scale global transactions that cross oceans, the project focuses on intra-European trade, and, more importantly, on small and medium-sized enterprises (SMEs).
Why is this interesting? It’s not because SMEs make up the vast majority of the world’s businesses (although that certainly does make for a compelling use case). It’s because of what it says about the evolving nature of trade finance.
We have seen many blockchain projects take a run at the subject, and the application seems obvious. Transactions across borders generally involve significant amounts related documentation, generating numerous errors and gross inefficiencies. Reducing the burden associated with getting goods from one place to another has to be a good thing, right?
Most of the projects have focused on large international corporations, which is understandable, given that over two-thirds of world trade originates with global enterprises.
Where both the pain and potential promise are most acutely felt, however, is not in conglomerates, but in SMEs. In part, it's because of their sheer number, but mainly, it's due to financial trends.
Approximately 80% of global trade is now conducted through open account transactions, not via traditional channels using letters of credit. This means that there is no bank guarantee of payment. The buyer pays when it’s time to pay – usually well after the product has been delivered.
For many large corporations, this shift reflects tighter restrictions many banks are facing on lending and guarantees, as well as a desire to improve working capital and reduce administration and financing costs. For most SMEs, open account is their only option, since over half of SME trade finance applications are declined.
In open account transactions, trust becomes a huge factor. This is a problem when initiating a new commercial relationship, especially for SMEs with patchy or non-existent credit histories.
Without going into the details of how the new platform will work, the ability to see, in real-time, the status of the transaction at each step should make trust more transparent. Accelerating the process from order to settlement will increase liquidity. The incorporation of the management of the respective banking functions (payment, factoring, etc.) aims to facilitate the procedure even further, and could increase margins for both the banks and their participating clients.
Seen from the exporting SME’s point of view, the project could be a way to overcome obstacles created by the shifting sands of finance and politics.
And from the banks’ point of view, not only will it help to retain and support SME customers, it is also an effective way for banks to re-intermediate themselves into the trade finance process.
Starting within the relatively “safe” confines of the European Union gives the project a chance to test the process of cross-border trade before venturing into more complicated territory.
If things go according to plan, we shouldn’t have to wait long to see how it fares in the hands of its target users. It is already a working proof-of-concept, developed last year by Belgian bank KBC. Opening it up to six other European institutions is an obvious step towards scalability, presenting a way to test cross-border relationships within a manageable group before it's taken global. The team will start to seek regulatory approval within the next few months, with a view to going “live” before year end.
Looking forward, the compelling advantage of lower transaction costs and stronger commercial relationships could help to partially offset the uncertainty and potential price of rising interest rates and shifting trade barriers. It’s not hard to see how projects like this could help to prepare businesses around the world for the changes ahead, and to adapt to not only current trends, but future ones as well.
– Noelle
More background:
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OTHERS ARE TALKING ABOUT...
It was a relatively quiet week in the mainstream media for bitcoin coverage, perhaps because most are either trying to keep warm at Davos, or steeling themselves for the US transition.
The Guardian offers a good introduction into the concept and application of the blockchain. And Observer explains how bitcoin will change money like the internet changed video – just as we now have “streaming video”, soon we will have “streaming money”.
Bloomberg went deep into the world of Chinese bitcoin trading, contrasting the irresistible combination of low (or zero) fees, imperfect price discovery and a fragmented market, with growing concern over a regulatory crackdown. It also carried an interesting report on the potentially huge impact of the blockchain on cybersecurity.
ZDNet bucks the trend and does its best to pull blockchain off its pedestal by pointing out that all it can really do, without third party interference, is reach consensus about the order of transactions.
UPCOMING EVENTS
SECTOR REPORTS
- Strong Federations: An Interoperable Blockchain Solution to Centralized Third Party Risks – Blockstream
- Banking on Blockchain – Accenture
- Distributed Ledger Technology: Implications of Blockchain for the Securities Industry – FINRA
WHAT WE’VE BEEN UP TO We’re hard at work on our State of Blockchain 2016 report, and we need your help.
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