On August 29, 2018, Standard Chartered Bank announced a trial program, in a partnership with Siemens Financial Services and blockchain startup TradeIX, to create an end-to-end blockchain-based bank guarantees solution to facilitate the trade finance process. The trial’s goal is to create “smart bank guarantees” that can replace the existing paper document-intensive bank guarantee business.
The Role of Bank Guarantees in Trade Finance
A bank guarantee is a promise from a financial institution to pay the liabilities of a debtor should the debtor default on a loan. In other words, they guarantee payment if a party in a transactions fails to meet it their payment obligation for whatever reason.
Bank guarantees are very commonly used in the trade finance sector when a third-party requests a “guarantee” of payment for delivered goods upon dispatch to ensure that the company does not send its product without receiving payment in return. Bank guarantees are thus a tool to mitigate credit risk for parties involved in a transaction.
Due to the international nature of the trade finance business, bank guarantees are used as they are easily adaptable to foreign legal systems.
Bank Guarantees on the Blockchain
According to FinExtra, the trial began in March 2018 and will run until the end of the year. The solution is being built on blockchain consortium R3’s Corda Ledger with an application layer that is being developed by TradeIX and involves the utilization of self-executed smart contracts.
TradeIX was launched in 2015 by CEO Robert Barnes and CTO Andrew Berti to develop an open platform for global trade finance powered by blockchain technology. The London-based company provides banks, business, and tech companies with a secure blockchain-powered platform to facilitate the movements of goods, assets, and credit in support of global trade finance.
“We believe that global trade is at the cusp of multi-level digital transformation which will revolutionize the entire business and operating model. As the platform provider, we are excited to be involved with Standard Chartered and Siemens Financial Services to help script this journey and bring the power of the distributed ledger to solve the challenges facing today’s trade ecosystem,” said Barnes.
Standard Chartered Bank and Siemens Financial Services, the financial arm of Siemens AG, are confident that this pilot program will lead to an improvement of trade finance funding.
“This is an industry-defining solution which we believe will transform the way guarantees are issued and processed in the UAE. Siemens Financial Services has been a key partner for us to build and develop this pilot on the distributed ledger,” said Motasim Iqbal, Head of Transaction Banking UAE at Standard Chartered. Samuel Mathew, Global Head of Trade Products at Standard Chartered, added:
“The future of trade is going to be all about data. To this end, we are excited to be the first in the industry to co-create this solution with Siemens Financial Services and explore innovative ways on how we can digitize trade and leverage real-time data to deliver efficiency gains and transform the way trade finance is conducted.”
Michael Bueker, Chief Financial Officer of Siemens LLC, added that “while digitalization is revolutionizing whole industries, incorporating digital trade finance solution into our daily operations is an important step. Especially at Siemens, as a digitalization pioneer, this move is part of our strategic mission of going digital in all areas. This will streamline our processes and make our trade finance operations smoother, faster and more efficient. We are delighted to partner with Standard Chartered in leading such game-changing transformation which will help our customers go digital in their guarantee and claim processes and achieve higher efficiency.
Blockchain Disruption in Trade Finance
Many blockchain experts believe that the trade finance sector is one of the industries most primed for blockchain disruption. Trade finance is mired in paper-based transactions, operational inefficiencies, and a lack of transparency, which leads to fraud and corruption. Hence, it is a perfect use case for the blockchain.
According to TradeIX, the adoption of a blockchain-based network in the trade finance process brings six key benefits to industry stakeholders: efficiency, security, traceability, transparency, audibility, and collaboration.
The efficiency of financial transactions can be increased following the digitization of documents combined with involved parties being able to deal and communicate with one another directly. Additionally, the use of smart contracts can reduce operational inefficiencies by auto-executing specific commercial actions.
Security in the trade finance process would be substantially increased due to cryptographic verification of the authenticity of information. This dramatically reduces the potential for fraud.
By sharing information among permissioned parties, complete transparency can be achieved using a blockchain based solution, which can lead to more commerce in the future.
Through the immutable recordkeeping that the blockchain provides, auditability is another benefit for trade finance transaction stakeholders. This provides an audit trail for the life of the asset, which reduces fraud and corruption, and facilitates reporting to industry regulators.
The blockchain can also bring traceability, which enables stakeholders to track all goods in real-time as they are traveling from A to B.
Finally, a widely adopted blockchain-based solution for the trade finance sector would also help to foster collaboration among industry players. Trade finance data could be shared among stakeholders to build deeper relationships and improve the trade finance industry.