Finance and the financial industry serve as a pool of liquidity (they provide money that makes business happen that would otherwise be constrained by lack of capital) to many industries. In effect banks and other financiers provide capital to businesses to trade. Not surprizingly, the finance industry has woken up to the fact that blockchain technology may be very useful.
Trade finance is useful, and often necessary, if you need someone else's money to buy something you cannot afford, in order to re-sell it to someone else. This could apply to a second hand car or an oil tanker loaded with crude.
The financier usually has a checklist of items to work through to help them understand the risks involved with providing money to someone as trade finance. Sophisticated financial constructs like Letters of Credit and Bank Guarantees have also been devised to limit the risks. And the risks are considerable. Globally, trade finance is estimated to be a $4 Trillion a year industry.
A recent article by Bloomberg Technology highlights the problems experienced by banks in this industry, and some of the massive frauds they have had to absorb. Standard Chartered Plc lost nearly $200 Million in a particular case in 2014, and JP Morgan nearly $700 Million in 2008.
Experiments with blockchain technology are being conducted globally, with banks in the lead when compared to other industries. Some of these experiments are being conducted in the area of trade finance. At ChainReactor we have a view as to the eventual form such a solution will take.
When is information a competitive advantage, and when should it be shared for the common good?
The TradeSafe Proof of Concept conducted in Singapore in 2015 demonstrates that the reduction in risk brought about by banks and other industry players sharing information or meta data is desirable. At the same time each organization must adhere to various regulatory requirements, that change across different jurisdictions, that may secure customer privacy or reporting imperatives.
When the burdens of compliance are already significant, no bank wants yet another onorous system to maintain, and more integration complexity.
ChainReactor's approach is to offer an all-encompassing platform for the integration of blockchain functionality into the fabric of the bank's IT operations. ChainReactor supports existing infrastructure and databases, adding blockchain features without the need for extensive integration or re-engineering. When multiple organizations - banks, regulators and other industry players such as insurance companies, certification providers, and logistics companies - also use ChainReactor, it is a matter of defining trust networks, backed up by commercial relationships.
This trusted network of participants can now share data in a permissioned blockchain instance. Each participant can participate in multiple such permissioned blockchain instances according to requirements. For example, one bank may participate in one blockchain consortium for trade finance, and another dealing with mortgages and real estate.
Blockchain is now a feature, not a seperate system.
Like many organizations, banks are wary of public blockchains since they are constrained by their licensing, regulations and privacy concerns. If there is a compelling reason to utilize a public blockchain, the facility to use it is again a feature, rather than a distinct system that requires integration.
Back to Trade Finance
With ChainReactor in play the players in trade finance are able to build a geographcally sensitive, multi-party blockchain that can grow over time. The beauty of the architecture lies in the ease of implementation.