Could distributed ledger technology (DLT) narrow the gap in digitization between domestic and global trade? Domestic trade services have undergone waves of automation and digitization, but cross-border trade has had more limited success in shifting from paper to electronic.
For the past several years, industry practitioners have been conducting proofs of concept to determine if, this time, DLT and related technologies can bring about the long-sought-after transformation of global trade toward paperless. While no DLT-based trade finance solutions have yet achieved broad-based, high-volume commercial adoption, there are signs of promise.
Addressing obstacles: Searching for a legal framework for digital commerce
Open questions remain about the scalability, security, and interoperability of DLT. However, one of the most intractable obstacles to digitization has nothing to do with technology: there is no global legal framework to support digital versions of documents.
Without a framework to supersede the individual laws of each country, or leverage pro-digitization legislation from one country or standards body for global use, parties must submit paper versions of documents common to global trade such as bills of lading, negotiable instruments, and certain industry certificates.
United by the prospects of digital transformation, a number of industry and governmental organizations are supporting the private sector in the search for solutions. These include:
- The Bankers Association for Finance and Trade (BAFT) is working on a Distributed Ledger Payment Commitment, which envisions a standardized, electronic representation of traditional trade payment commitments on distributed ledgers.
- The International Chamber of Commerce (ICC) has proposed a Legal Roadmap for Digital Trade, which goes beyond DLT to encourage adoption of technologies supporting digitization.
- The United Nations Commission on International Trade Law (UNCITRAL) has put forth a Model Law on Electronic Transferable Records, which would enable equivalent treatment between paper and digital documents for any country that enacts the legislation.
- Other governmental organizations, such as the monetary authorities of Hong Kong and Singapore are investigating new solutions and new standards.
- Consortiums like R3, an enterprise blockchain software company supported by an ecosystem of banks and other trading partners, are examining the requisite legal and regulatory changes to enable digitization via DLT.
Timing remains a key concern. Can industry and government work together to provide a global legal framework to enable digitization of trade finance in the short term, or will this endeavor take years or even decades, as has been the case to-date?
Pursuing opportunities: Testing key value propositions
While industry and government work together to find answers, proofs of concept and commercial deployments of solutions continue at a healthy pace. Select areas of opportunity where banks, corporations, and technology companies see opportunity include:
- Digitizing trade processes. DLT-based solutions may support more efficient processing of letters of credit, collections, and other trade transactions. Through collaboration on a single platform, integration with electronic trade document providers, and automation via self-executing smart contracts, DLT multi-bank platforms may enable trading partners to significantly reduce transaction processing times and related costs.
- Accelerating the move toward open account. Automation and digitization improve visibility, which in turn reduces risk, increases comfort, and strengthens relationships among trading partners. Spurred by stronger relationships, companies have shifted from traditional trade to open account. By increasing visibility and facilitating greater automation, DLT-based solutions could further accelerate the shift to open account.
- Improving trading partner onboarding. DLT may enable companies to conduct and maintain KYC and related onboarding information more efficiently by reducing the complexity and cost of sharing customer information across systems and geographies.
Beyond the hype
The high level of experimentation with DLT in trade finance over the past several years is a promising sign. However, the industry must address long-standing obstacles, most notably the lack of a cross-border legal framework to support electronic documents, before fully automated, digitized global trade will be achieved.
The benefits are significant and well known. DLT is an enabling technology and a catalyst that presents an opportunity for the private sector to work with industry and governmental organizations towards achieving this vision.