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TRADING & TECH
Blockchain: First business deal off the block
Barclays uses blockchain technology to guarantee the export of almost $100,000 worth of cheese and butter from an Irish firm to the Seychelles Trading Company
January 9, 2017: Trade transactions are usually a time-consuming business, requiring manual processing and authentication through intermediaries in order to cut the risk between importers and exporters.
These transactions, which usually require international courier services, are vulnerable to fraud and can take between one week and a month to complete. Yet, Barclays believes it has found a way to cut the processing time to less than four hours, using blockchain technology.
In what it describes as a groundbreaking first, Barclays Africa and Barclays Plc used the technology to guarantee the export of almost $100,000 worth of cheese and butter from an Irish firm to the Seychelles Trading Company in September 2016.
Using technology developed by Israeli startup Wave, both parties in the trade were able to transfer cryptographically sealed documents via the blockchain, which is an electronic record-keeping system originally developed for bitcoin transactions.
Though Barclays is not the first to experiment in this space, with HSBC and R3 among other companies examining how to simplify trade processes using blockchain, it is the first to have pulled it off for real.
“Every company, startup or consultancy playing in the blockchain space is very quick to run to the press with stories of successful tests, trials and investigations. What makes this pilot so groundbreaking is that it was live, involved real clients, real merchandise and a real letter of credit,” said Kelly Parkhurst, Barclays Africa project manager for the pilot.
Experimenting to implementing
Parkhurst said the trade signified a new phase in blockchain application, with experimentation starting to be replaced with implementation. Wave will be running pilots with a number of banks and third parties across different regions in order to encourage adoption.
“The beauty of the Wave application is in its simplicity. It solves an age-old problem in a very easy to understand and practical way,” she said.
“Its application should streamline the supply chain process drastically and create a lot more efficiencies for the broader trade industry. For banking, this means that risks are reduced as documents will be harder to forge and financing of trades will be processed and executed in a much shorter time frame. All parties will also save on courier fees, handling fees and storage.”
Vindication of the technology
For Gadi Ruschin, chief executive officer (CEO) of Wave, the first paperless trade transaction was a ‘major milestone’ as it proves blockchain tech is something that can be used now, and not just in the distant future.
“This pilot involved some of the biggest players in the industry and it was a great success — reducing transaction time from weeks to hours, saving thousands of dollars and reducing documentary risks for all parties,” he said.
“Just eliminating the paper documents that were being used in trade for the past 500 years will have a huge impact. I believe that in the near future there will be additional initiatives in the areas of provenance and trade finance tools that will use the blockchain technology for international trade.”
Gadi Ruschin, CEO, Wave saysthe transaction proves that blockchain technology
For the meantime, however, encouraging adoption is key. Parkhurst said for trade transactions using the blockchain to become a reality, the greater trade industry will need to adopt the application.
“This is no mean feat. There are literally millions of players in this industry that operate across the globe,” she said.
“This sounds like a daunting task, but where there is a bottom line impact in an increasingly competitive world, there will be interest. The Global Alliance for Trade Facilitation estimates that seven per cent of the global value of trade is absorbed by the cost of documents alone, which means that these companies stand to make significant savings in cost and time, and should incentivise them to adopt the application.”
Preston Byrne, chief operating officer (COO) of US-based blockchain development firm Monax, said there are more basic barriers to uptake, though he expects them to be addressed over the next 18 months.
“Across the industry, generally speaking, the technology is still immature and there are significant user experience and governance issues, which still need to be overcome. But these are not hard challenges,” he said.
Why it makes sense
Byrne expects the use of blockchain in trade to take off, nonetheless. “For many of the same reasons that a blockchain makes sense in other areas of finance, it also makes sense in trade finance and supply chain workflows,” he said. “Blockchains are, first and foremost, reconciliation engines.”
These engines of reconciliation also have the potential to be employed beyond trade, in sectors such as insurance. Wave may be focused on international trade, but there are other companies looking to build blockchain and smart contracts into other spaces.
In a recent report, McKinsey & Company found as many as 20 blockchain startups focusing on some aspect of the insurance market, finding the most promising use cases were in enabling growth, increasing effectiveness, and reducing cost through the automation of key processes. In insurance, aside from the benefits of greater security and easier verification, employing blockchain technology could also allow for more crowdfunded insurance to take place. McKinsey concludes that blockchain is ‘ready for exploration’ by insurers.
Parkhurst is clear that though Barclays is pursuing blockchain and Wave from a trade scenario, there are plenty of other use cases that could see the technology speed up and secure all sorts of business processes.
“It can be adapted for any form of documentation that needs to track and verify ownership, which opens it up to a plethora of use cases in not only banking, but insurance, law and beyond,” she said.
Byrne said financial transactions are actually some of the least interesting blockchain applications, yet they are the ones where the tech got the earliest attention and the prototypes tend to be more advanced. Usage in other sectors is inevitable and increasingly, taking place.
“We are now seeing a rapid branching out into other areas with blockchains being treated as they should be, as a distributed database, rather than as a simple distributed ledger,” he said.
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