Revolutionizing Trade Finance...Revolutionizing Trade Finance Blockchain Innovation Ann F. McCormick...
Transcript of Revolutionizing Trade Finance...Revolutionizing Trade Finance Blockchain Innovation Ann F. McCormick...
Revolutionizing Trade FinanceBlockchain Innovation
Ann F. McCormickDirector, Treasury Solutions Officer April 24, 2018| St. Paul, Minnesota
Minnesota AFP
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What is Blockchain & how does it work?
Agenda
Blockchain relevancy in the market
Q&A
Blockchain for trade finance
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Blockchain: What is it?
What does blockchain mean for financial services?
Solving complexity, enabling efficiency and creating trust.
Distributed ledger technology (DLT) A record of consensus maintained and validated by multiple parties, or nodes.
BlockchainA form of DLT comprised of immutable, digitally recorded data stored in packages called blocks.
BLOCKCHAIN
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How blockchain works
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A wants to send money to B
The transaction is represented online as a ‘block’
The block is broadcast to every party in the network
Those in the network approve the transaction is valid
The block is added to the chain and becomes a permanent and transparent record of the transaction
The money moves from A to B
A
?
?
??
√
√
√
√
B
Blockchain records the history of transactions so that everyone on the network – all participants in the transaction – can see and verify.
Smart contracting Inherent contracting
(e.g., pay X when Y
is confirmed
delivered) binds
participating parties
to the transactions
on the blockchain.
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Traditional process Blockchain process
Each participant has his own ledger Single, shared ledger; tamper-evident Greater transparency Reduced fraud
Relies on third parties for validationNo third party – participants must
validate before transaction is added Improved efficiency Increased control
Paper-intensive process Eliminates or reduces paper process Faster processing Reduced costs
Why blockchain is relevant
Virtually any asset of value can be tracked and traded on a blockchainnetwork, which can help reduce risks and cut costs for all involved.
“The blockchain lets people who have no confidence in each other collaborate without having to go through a neutral central authority.”
- The Economist
Potential benefits
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Blockchain: why it’s relevant
With transactions taking place every second, everyone is exploring how blockchain can improve their business.
KPMG – The Pulse
of FinTech Q2 2017
Global venture investment in
blockchaincompanies is
increasing rapidly
2013 2016
$13 MM
$367 MM
Projected reduction in bank infrastructure costs by 2022 due to blockchain technology
Santander
Innoventures
$20BA N N U A L L Y
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Blockchain: how it can be used in banking
Blockchain eases pains of buyers, sellers & financial institutions while opening
the ecosystem to new nontraditional players
Contract terms & obligations can be programmed into the
blockchain, maximizing adherence (e.g., final contract,
signatures, claims)
Blockchain provides a method for recording and
notarizing any type of data, whose meaning can be financial or otherwise
Blockchain can be used as a shared master data
repository for common industry information allowing
members to query data
Blockchain offers immutable and irreversible source of information that can track
true ownership of a product across the supply chain
Blockchain can transfer payment across currencies
almost instantly for a fraction of the cost; access to
unbanked in remote areas
Blockchain can create auditable source of info. shared & verified across network of organizations
(e.g., KYC compliance)
Blockchain shows promise to drive efficiency in clearing & settlement of digital assets
Provenance Multi-party aggregation Record keeping Re-insurance
Trade finance Cross-border payments Digital identity Clearing & settlement
Key value drivers
Counterparty riskRegulatory efficiencyOperational simplification
FraudLiquidity & capitalClearing & settlement time
Use cases
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Blockchain for trade finance
A paper-based, iterative process to agree upon and deliver compliant document sets to settle transactions
Requires a bi-lateral exchange of documents
Operational inefficiencies – manual processes, courier costs, complexity and “document-heavy” – result in a lengthy, costly transaction for all parties
Balance sheet impact – process latency and lack of transaction transparency impact ability to optimize working capital
By converting paper to digital through blockchain and availing to all parties, trade transacting becomes more efficient for all parties.
Trade finance today…
Distributed ledger technology allows all parties to make and verify transactions on a network with each other on a near real-time basis
Enables consensus to allow each participant to adjust the ledger in a secure way, providing a means to verify the transaction is valid and each party's copy of the ledger is identical to every other copy
A more secure, transparent way to digitally track ownership of assets throughout supply chains, or electronically initiate/enforce contracts
Helps speed up transactions, cut costs and can help lower the potential risk of fraud
Inefficient document exchange
Trade finance with blockchain…
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How blockchain benefits trade finance
Blockchain can help remove process latency, accelerate the end-to-end transaction and help improve transaction transparency.
Blockchain ecosystem
Issuer
Distributed ledger
Advisor
Applicant
Beneficiary
To enable near real-time collaboration among all participants within the blockchain, it needs to be:
SecureAuthenticated counterparties digitally action transaction initiations, requests and updates
SharedApplicants, beneficiaries and banks collaborate in near real-time using standardized templates (e.g. smart contracts)
DistributedEach member of the network can use the blockchain to validate the other counterparties
AuthoritativeEach immutable entry is written once, thereby increasing visibility/auditability, resulting in reduced risk for all parties
ActionableData updated in the blockchain automatically initiates the next action, accelerating processing
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Blockchain for Trade Finance: A Use Case
Operational Inefficiencies
Working capital/ balance sheet implications
Lack of visibility, not knowing holistic
exposures
Current State Challenges
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Blockchain for Trade Finance: A Use Case
MicrosoftTreasury
Agrees to Buy
Requests SBLC
Provides SBLC Terms
Accept Terms and Provide Issuing Bank Details
Validates and Approves Issuing Bank
Submits ApplicationSends SBLC
Sends SBLC
Reviews SBLC for Treasury
Processing
Tracks security to expiration date so long as customer maintains payment schedule. If customer defaults, pursues claim with Advising Bank.
Initial Contract Negotiation
Initial Contract Negotiation
Inform Advising Bank in case of Customer default
Amendment Negotiation
Amendment Negotiation Forwards
Amendments
Resends SBLC
Reviews SBLC Again for Treasury
Processing
NBuyer Supplier
Issuing Bank Advising Bank
Manual Process
Buyer
Supplier
Banks
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Smart Contract Update
SBLC Process Flow – With Distributed Ledger
1. Applicant agrees to transact with Beneficiary via SBLC
2. Applicant submits SBLC request to the ledger
3. Applicant bank issues SBLC
Buyer Issuing Bank Advising Bank Supplier
5. SBLC activated with expiration date; transaction complete
4. Beneficiary bank reviews and advises SBLC
SBLC Process
Ledger ProcessSmart Contract Update
Smart Contract Update
Buyer Supplier
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Trade Finance Distributed Ledger
Registries DLTs: AML, KYC
Payments DLTPhysical Supply Chain DLT
Other DLTs
Through the integration of Physical and Financial Supply Chains, Blockchain has the Potential to enable digitization and authentication of Trade transactions never before possible
Revolutionizing Trade Finance with blockchain
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Blockchain in financial services – and across all industries – is still in its infancy, with many obstacles ahead. As an industry, we must be prudent in our approach, collaborating closely with incumbents, innovators and regulators.
Blockchain: what to expect
▪ Because blockchain is a network, mass market of participants needed.
▪ Standards must be developed before mass market adoption.
▪ Legal and regulatory issues and uncertainty must be resolved.
▪ Significant changes to, or complete replacement of, existing systems.
▪ Interoperability between blockchain and legacy systems.
EXPERIMENT & MONITOR
Focus on select Proof of Concepts
Selectively engage with industry
LEARN & EVOLVE
Small number of implementations
Small scale with limited participants
EXPAND
Broaden adoption with proven results
Larger scale with rapid adoption
2016–2017 2018–2021 2022+
Blockchain Activity – Monetary Authority of Singapore
Project Ubin – SGD on Distributed LedgerThe Monetary Authority of Singapore (MAS) announced that it was partnering with R3 on the production of a proof-of-concept to conduct inter-bank payments facilitated by DLT. The aim of Project Ubin is to evaluate the implications of having a tokenized form of the SGD on a DL, and its potential benefits to Singapore’s financial ecosystem.
KYC Utility The Monetary Authority of Singapore (MAS) is piloting a national know-your-customer (KYC) utility for financial services, based on the MyInfo digital identity service, jointly developed by the Ministry of Finance and GovTech.
Regulatory
Integration
Scalability
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Q & A Session
What would you like to discuss further?
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