Can distributed ledgers be the next big thing in the trade finance industry? A group of major international banks and their partners in the blockchain ecosystem clearly think so, as they begin pilot operations for their Marco Polo trade finance initiative.
The State of Trade Finance
To understand why the Marco Polo initiative was created, it’s worth assessing the current state of the trade finance industry.
The trade finance industry provides financing and financial safeguards for the large-scale exchange of goods and services, usually between countries. When products or services cross borders, banks, insurers, credit guarantors and other types of companies ensure that importers and exporters have access to the financing and guarantees that they need to do business.
Trade finance is as old as international commerce. However, as the global economy has changed in recent years due to new technologies, and with the fallout of the 2008 economic crash and other forces, the trade finance industry has been beset by new challenges.
These include increased regulatory pressure, the threat of disruption within the industry posed by digital startups to traditional banks, and the inability of existing trade finance technology to keep pace with the demand for real-time, low-margin trading.
Large stakeholders in the trade finance industry are looking at the health of the entire supply chain and are seeking new solutions that holistically address the finance needs of large companies responsible for large supply chains as well as up- and downstream buyers and suppliers.
The Marco Polo Initiative
With these sorts of challenges in mind, the Marco Polo initiative uses distributed ledger technology to manage data and enable smart contracts, with the goal of making trade finance more secure, efficient and transparent.
Marco Polo provides trade finance software applications, application programming interfaces (APIs) for building connections between applications, and data management via a distributed ledger. The Marco Polo platform, which is open-source, “enables real-time, seamless connectivity between trade networks, systems and entities through an open, standard technology infrastructure for banks, credit insurers, shipping and logistic providers, B2B networks and other technology providers,” a representative told Distributed.com.
The initiative was launched in September 2017, and it was announced on February 21, 2018, that Marco Polo was ready to enter into a pilot phase, following the successful completion of proof-of-concept operations.
TradeIX’s TIX platform, a blockchain-based system of applications and tools for trade finance, provides the software that will enable Marco Polo’s services. The underlying blockchain is provided by R3’s Corda distributed ledger, which is designed for the finance industry. Microsoft is a part of the initiative, too, providing the cloud infrastructure that powers the services.
Banks involved in the initiative include BNP Paribas, Commerzbank, ING, Standard Chartered, DNB and OP Financial Group.
For now, the Marco Polo project’s focus is on risk mitigation, payables finance and receivables finance, according to a statement from the group. However, the initiative hopes to expand during the current calendar year to “include additional banks and third-party service providers, such as credit insurers, ERP and logistics providers,” the statement said.
The banks participating in the Marco Polo initiative see important opportunities for making trade finance more efficient and reliable using blockchains and distributed ledgers. Lasse Meholm, head of blockchain and distributed ledger strategy at DNB, said in an interview that blockchain technology offers “a wide range of advantages over traditional technology” for trade finance, including more stability as a result of the distributed nature of nodes and data, as well as the security provided by having a single source of truth in the blockchain.
He added that, using the blockchain, “money becomes programmable, as smart contracts can program payments depending on a large number of dependencies.” Smart contracts enable banks “to create new services for our customers and improve the customer journey,” he said.
Several of the companies involved in the Marco Polo initiative already have significant experience using blockchain technology to address other challenges in the finance industry. Michael Vrontamitis, head of trade, Europe and Americas, at Standard Chartered, told Distributed.com that “we are involved in a number” of blockchain initiatives, adding that “our focus is on solving problems for our clients rather than the technology itself. We worked with one client, for example, with TradeIX and AIG to deliver a receivables solution leveraging blockchain [technology], API and cloud technologies.”
Meholm said that DNB is also involved in several blockchain-related projects, though not all of them have been publicly disclosed to date. He also said that the bank has “increased our focus and budget on blockchains and distributed ledgers over the past six or eight months.”
Michael Spitz, a blockchain specialist and CEO of the Main Incubator at Commerzbank, said that his bank is active in Hyperledger, Ethereum and other blockchain projects.
“Our blockchain projects focus on different parts of the bank value chain,” he said, “from securities issuance over cash on ledger/payments to trade finance.”
Spitz added that in working with Marco Polo, Commerzbank’s “main objective is to explore the benefits of distributed ledger technology for our trade finance offer, so that we can create more sophisticated trade finance solutions with focus on the open account market by connecting the physical and the financial supply chains of our clients.”
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