In October 2019, blockchain-based finance platform Marco Polo announced its intention to facilitate its first trade deal between Russian steel company Novolipetsk and the German metals engineering corporation Vesuvius GmbH. Using distributed ledger technology (DLT) Russia’s Alfa-Bank and Commerzbank from Germany will also collaborate, working together on a transaction that is likely to blaze a trail into the future of trade finance.
The Marco Polo Network is the largest and fastest growing trade and working capital finance network in the world. Its platform was launched in 2017 by R3 and TradeIX to provide open enterprise software for corporations and banks. It has long since been at the forefront of blockchain-based trade services, championing solutions that streamline transactions and offers extra security when trading data and assets. Currently, the platform has partnerships with more than 20 banks worldwide and its ambition is to replace the existing traditional trading methods and lead the way for distributed ledger-based technology.
A blockchain is a decentralised, distributed, and often public, digital ledger that is used to record transactions across many computers so that any involved record cannot be altered retroactively, without the alteration of all subsequent blocks. Blockchain technology optimises financing services by increasing transparency. As a result, Blockchain-based trade finance makes transactions quicker, with benefits such as speed, efficiency, accountability and trust existing for all players involved in a trade.
The pilot transaction between Russia and Germany takes current blockchain transactions further by adding a fourth organisation to the exchange, this is particularly important when trading operations rely on more than one bank for support. Allowing distributed ledger technology to bring multiple companies together on one platform to trade opens up the possibilities for more efficient, safer transactions between suppliers, manufacturers, banks or other financial organisations. This is because the blockchain creates an environment in which parties can share data and connect faster and more securely meaning companies can process purchases and initiate payments in less time, boosting efficiency and increasing cash balances. Indeed, one of the key benefits of using blockchain-based trade finance is that it can help those facing a lack of liquidity. Access to finance is often a determining factor in facilitating growth, therefore in eroding this barrier, more companies will be able to execute growth plans that allow them to enhance revenue, which in turn, is good for the wider economy.
The cross-border payment project is Marco Polo’s first import-export operation between Russia and Germany, yet all parties are already familiar with the blockchain technology. For example, Alfa-Bank is one of Russia’s largest banks with a number of blockchain solutions already in place. Meanwhile Novolipetsk is the largest steelmaker in the country and a key industry player that actively advocates for blockchain technology in Russia. On the German side, Commerzbank has a longstanding history in working on blockchain transactions with the Marco Polo Network, and the German engineering firm Vesuvius is an established company in the industry and blockchain area as well.
The transaction makes a significant milestone for commercial blockchain and could provide evidence of projections that blockchain-based solutions will disrupt the global trade finance market. Analysis by the Boston Consulting Group estimate global trade flows will hit a record US$24 trillion by 2026; yet, if blockchain technology allows finance to flow more freely, trade finance revenues could reach US$48 billion in the next three years.
Evolving technology emerging as a result of the fourth industrial revolution (4IR) is set to transform trade finance based on its ability to allow increasing numbers of startups, banks and companies to contribute towards change.
From mobile banking applications to blockchain ledgers, the explosion of financial technology (fintech) initiatives are shaping the roles of banking and trade finance professionals around the world. For example, the 2018 ICC Global Survey on Trade Finance – a survey of 251 banks headquartered in 91 countries – found that 43% participants identified “developing partnerships with fintech firms” as a priority for development in the next 1-3 years.
Industry has recognised that the amalgamation of collaboration and technology is the future of trade finance and the results of this evolution are likely to change the trade finance industry forever.