If corporations start working on blockchain projects, it will be for mission-critical (i.e., niche) applications, while waiting for the “big thing” to occur. Banks, in fact, may not have any role to play in their future plans for the technology.

Why are corporations showing little interest in blockchain?

Corporations are late to take on the blockchain debate, and their lack of awareness may be the symptom of a simple lack of interest. After all, banks are all over blockchain because bitcoin shook them up and made them keep their eyes wide open.

Another possible explanation for such slow corporate uptake is that one of blockchain technology’s value propositions, if not the main one, is that buyers and suppliers can connect directly and form online networks, removing the need for middlemen.

Smart contracts running on the blockchain should automatically detect trigger events along the trade value chain and instruct parties on actions to take to comply with contractual obligations. This sets the blockchain as the enemy of all intermediary operators in a business-to-business (B2B) environment.

A B2B relationship is made of a sequence of buyer and supplier pairs (Figure 1), with a relatively high level of trust between the two.

Figure 1: B2B Supply Chain Pairs

Source: Aite Group

While there can be very little trust between an exporter and an importer at the edges of the B2B value chain, this is certainly not the case between the paired parties. So if each pair on the B2B value chain intrinsically trusts each other, what additional contribution could a blockchain bring?

Furthermore, there is a clear shift to trade on open account terms, and open account business is increasing in market share. Open account occurs when a seller ships the goods and all the necessary shipping and commercial documents directly to a buyer, who agrees to pay the seller’s invoice at a future date.

Open account is typically used between established and trusted traders. That has compelled the banking industry to seek to re-engage with buyers and suppliers. They are doing this by developing a blockchain-based value proposition aimed at meeting the needs of traders operating on these open account terms.

But, if open account transactions are founded on trust and keep banks out of the picture, why should corporate trade partners want to get them back with a blockchain? Since open account transactions are based on the principle of trust between parties, why the need for a trust-free distributed ledger technology?

Challenges ahead of full blockchain implementation

Additional challenges present the need to examine prior use evidence before B2B partners can fully adopt blockchain applications:

• Nobody runs totally digital flows end to end. How does one manage the transition of ownership between data encrypted in a block in the chain and paper-based documents?
• Companies (e.g., logistics service providers) are making money on paper-based trade, so why should they change to digital?
• Trade finance is frequently referred to as the domain that would most benefit from blockchain applications. But trade finance partnerships are already established on trust, so why the need to change?
• Freight forwarders are taking care of paper-intensive customs business on behalf of their clients. The service allows the client to outsource a significant portion of logistics clearance and controls activities, making it a highly profitable business to the service provider. Since all parties are enjoying the benefits of a de facto situation, why should they replace that service with paperless blockchain applications?

Is secrecy the enemy of blockchain?

To summarize, the blockchain is presented today as the enemy of all intermediary business, as it eliminates the need to have a central controlling entity responsible for safekeeping trading records.

If there was to be industry-wide adoption of blockchain, the role of this controlling entity would be replaced by a decentralized ledger that no one single party owns or controls. This apparent advantage may backfire and be counterproductive to corporations.

The untold truth is that the last thing corporations may want is to give total visibility of their trade transactions. The existence of a publicly distributed ledger may not represent the best commercial interest for B2B partners.

There is the problem of revealing too much information: A company does not want its competitors to know where it’s getting goods. Commercial confidentiality is the most important element to preserve.

Blockchain adoption dependent on a wait and see approach

Innovation happens in bursts. When the Internet became popular, two “asteroids” hit the consumer world: email and the Web browser. Such a disruptive effect from blockchains has not yet occurred in the corporate world.

While the bitcoin has been the killer app (i.e., the asteroid) for banks, there is nothing for corporations with the same mass adoption scale as bitcoins – yet. If this is the case, then little or no demand for blockchain-based applications can be expected by corporate users.

Maybe those most aware of the technology within corporations are financial directors and corporate treasurers, for the simple reason that they are frequently exposed to banks and therefore absorb the inherent dynamics. These corporate representatives expect changes in payments, securities trade, and bank clearing.

All have concerns that the blockchain discussion is moving too fast, however. The corporate side of the equation needs to first see a consolidation of the different players that populate the crowded space of blockchain applications. The need for standards and regulation is the next call.

The post Blockchain for trade: Not all that glitters is gold appeared first on Trade Ready.

The world of trade finance is moving faster than ever. So, at FITT, we wanted to talk about the ways in which technology is shaping its future, and how that will affect businesses involved in exporting and importing products and services.

To do this, we selected virtual trade finance as the topic for our latest monthly #TradeElite Twitter chat. While there are many angles and facets of this growing industry to consider, our talented and experienced group of experts guided us through this complex world.

Over the course of our hour-long chat, they broke the topic down in easy-to-understand ways, while also providing complex analysis to dig deeper into the main issues.

The conversation on virtual trade finance took place on May 5, 2016. Find out more about our expert moderator and panelists, and check out the highlights from the chat below.

Moderator:

Chris Principe (@cmpleo) lives in South Florida, and has over 25 years of experience in the trade finance industry. He currently serves as the Publisher of Financial IT magazine, and continues to hold roles with other banking and trade finance companies.

Panelists:

Haseeb Awan (@haseeb) is a Fintech entrepreneur. He is currently researching the impacts of currency fluctuations on businesses. He has also co-founded BitAccess, and splits his time between Ottawa, Islamabad and San Francisco.

JT Burke (@jtjtburke) is the VP of Business Development for China Systems US and Canada, a leading trade services solution vendor based in New York.

Enrico Camerinelli (@ecameri) lives in Italy and holds several roles, including Vice President of the CSCMP Italian Roundtable, Senior Research Analyst, Europe for Aite Group, and subject matter expert in supply chain program development for the UN Economic Commission for Europe.

Rebecca Harding (@rebeccaaharding) is the Co-Founder and CEO of Equant Analytics in Brighton, UK, a FinTech and Advisory business combining macroeconomic, geopolitical and market data with tailored analytical, risk and trading interfaces.

Ed Marsh (@edbmarsh) lives in the Boston area and is the Founder and Principal of Consulium Global Business Advisors, a management consulting company.

Dr. Michele Vincenti, CITP|FIBP (@alvana1) is President and CEO of Alvana Business Consulting Inc. in Vancouver, BC. He has many years of previous experience in trade finance, and has taught international business courses at several post-secondary institutions.

What does virtual trade mean to you?

@cmpleo Q1: Pure data terms, it’s the global money flows supporting trade. $2 tn more trade than we know about @EquantAnlaytics #TradeElite

— Rebecca Harding (@RebeccaAHarding) May 5, 2016

A1 using technology to reduce traditional barriers to trade #tradeelite

— Ed Marsh (@edbmarsh) May 5, 2016

A1. Less paper on my desk! #TradeElite

— audrey ross (@tresAudrey) May 5, 2016

What are the components needed to make trade virtual?

#TradeElite A2: Verification of the data and verification of the sender will enable participants to trust the information and act.

— NextGenTradeSCF (@JtJtburke) May 5, 2016

#TradeElite : A2 – Also a pathway for more (trusted) participants to add to and access the data flow for more efficient operations for all

— NextGenTradeSCF (@JtJtburke) May 5, 2016

@edbmarsh #TradeElite A2: possibly, but in trade today, paper=safety. So to move away from paper you need trust

— enrico camerinelli (@ecameri) May 5, 2016

What are the biggest roadblocks to achieving virtual trade?

@cmpleo @FITTNews A3: harmonisation of government/customs standards. acceptance of digital documents

— maxim berdichevsky (@MaximMGL) May 5, 2016

A3 So demand, security, trust and old ways of thinking and processes are some of the key holdup. #TradeElite

— Chris Principe (@cmpleo) May 5, 2016

Who will lead the push towards virtual trade: corporations, FinTech companies, banks or government?

#TradeElite Q4 – Corporations will drive the change. They have the most to gain by driving down the costs of trade

— NextGenTradeSCF (@JtJtburke) May 5, 2016

#TradeElite A4: The others are enablers. Important indeed, but instrumental only if corporates demand for it https://t.co/eRRYOVZ1Z2

— enrico camerinelli (@ecameri) May 5, 2016

@cmpleo @FITTNews #TradeElite : A4: Who ever makes most of the profit from. Corporations save #money and they have more #data to play with

— Michele Vincenti (@alvana1) May 5, 2016

@cmpleo A4 #TradeElite Corporates without a question through #supplychain & more flexible technology

— Rebecca Harding (@RebeccaAHarding) May 5, 2016

Why hasn’t e-invoicing become more widely used, despite the benefits?

@cmpleo Q5 cultural and regulations issues. People still trust paper more than digital & not all countries accept e invoices #TradeElite

— Haseeb Awan (@haseeb) May 5, 2016

#TradeElite A5: SMEs have less invoices to process, so e-inv= cost reduction not a big value for them https://t.co/Jzp1x5XYKh

— enrico camerinelli (@ecameri) May 5, 2016

A5. Fear of Hackers and Nigerian Princes. #TradeElite

— audrey ross (@tresAudrey) May 5, 2016

Can virtual trade help SMEs overcome obstacles to trade financing like on-boarding, compliance and risk?

@cmpleo A6 Yes #blockchain key. Disruptive within banks & through #FinTech – has potential to build trust & security at low cost #TradeElite

— Rebecca Harding (@RebeccaAHarding) May 5, 2016

#TradeElite A6 Virtual trade will mitigate, not eliminate, existing challenges for SME’s to finance using trade instruments.

— NextGenTradeSCF (@JtJtburke) May 5, 2016

What will be the big innovative changes in supply chains over the next few years?

#TradeElite A7: #blockchain, for sure https://t.co/gX7Pcl5dVD

— enrico camerinelli (@ecameri) May 5, 2016

#TradeElite A7: 2nd place: on-demand production (e.g., 3D printing) https://t.co/gX7Pcl5dVD

— enrico camerinelli (@ecameri) May 5, 2016

#TradeElite A7: 3rd place: supply chain finance= achieve results not only with physical SC operations https://t.co/gX7Pcl5dVD

— enrico camerinelli (@ecameri) May 5, 2016

@cmpleo A7 has to be #BigData to track transactions in #TradeFinance + understand defaults, yields, costs & mkt size #TradeElite

— Rebecca Harding (@RebeccaAHarding) May 5, 2016

A7 Agreed #blockchain and #bigdata, how about IOT with talking supply chains, where is it, what is it, how many is it, who is it #TradeElite

— Chris Principe (@cmpleo) May 5, 2016

Could a cryptocurrency, if implemented compliantly and correctly, become a trade currency?

A8 for sure, where/when it addresses business need #tradeelite

— Ed Marsh (@edbmarsh) May 5, 2016

#TradeElite A8 YES. with “GOOD” cryptocurr no need more for LCs, eBOLs, etc https://t.co/dIjXm8p5mo

— enrico camerinelli (@ecameri) May 5, 2016

#TradeElite Yes, you are right and look now, CitiBank has annouced CitiCoin https://t.co/iPSW0rzeBT

— Chris Principe (@cmpleo) May 5, 2016

Read the rest of the chat and follow future discussions by following the #TradeElite hashtag.

Stay tuned for the next #TradeElite chat, coming up Thursday, June 2 from 2:30-3:30PM EST.

The post Talking all about virtual trade finance appeared first on Trade Ready.