Early promise has given way to the harsh realities of investor demands for a growing number of blockchain-based trade finance platforms.
Almost exactly four years ago, the World Economic Forum suggested that if distributed ledger technologies such as smart contracts were implemented globally they could facilitate US$1trn in new trade and knock a big hole in the trade finance gap that hit US$1.7trn last year.
More recently, a report published by Commerzbank and the Fraunhofer Institute for Material Flow and Logistics in February also suggested that blockchain adoption could reduce the trade gap by US$1trn over the next decade. The report predicted that blockchain platforms such as Marco Polo would profoundly alter the way in which international trade is undertaken.
Nir Kshetri, a research fellow at the Research Institute for Economics and Business Administration at Kobe University in Japan recently suggested that small and mid-size enterprises in emerging markets could benefit more from the implementation of blockchain than from either tariff removal or trade deals.
But recent developments in this space are far from encouraging. For example, Amsterdam Trade Bank, which developed and delivered a blockchain solution for trade financing as far back as 2017, was declared bankrupt by the Amsterdam District Court in April.
Just a few weeks before Kshetri made his comments, we.trade went to the wall. The highest profile blockchain venture to hit the buffers to date, the platform struggled to deliver a return on investment for its owners (which included 12 European banks) since its launch in 2019 despite promises to enhance cash flow by digitising paper-based processes.
Not long afterwards, HSBC’s B2B online trade platform Serai went the same way as the bank decided that it could no longer support a venture whose revenues failed to meet expectations over the previous three years. Plans to offer working capital and supply chain finance from the bank and other financial institutions never came to pass and the platform failed to attract sufficient numbers of buyers and sellers.
Fintech MonetaGo then announced it was moving away from distributed ledger technology in favour of the cloud, referring to a number of factors from scalability and lack of in-house expertise to regulatory factors and technological maturity when explaining its change of technology direction.
It was reported that MonetaGo had serious reservations about the effectiveness of blockchain for larger scale technology projects and saw cloud as a safer bet based on its more extensive adoption.
Others remain undaunted. In June, Olea – a joint venture between Standard Chartered and Linklogis – completed its first receivables finance transaction, while Infosys Finacle announced in August that it had been inducted into India’s International Financial Services Centres Authority’s regulatory sandbox to pilot a blockchain-based trade finance solution.
In May, the Global Shipping Business Network consortium reported that it had created proofs-of-concepts for open account and letter of credit. According to Web3 infrastructure platform Kaleido there are more than 40 active trade finance initiatives using blockchain.
Jacco De Jong, Global Head of Sales at Bolero, says it is interesting to see a shift away from blockchain for some trade finance related initiatives, especially since blockchain was positioned as the key differentiator for their solution.
“One should not ignore the potential of blockchain in general, and certainly not for trade finance,” he says. “However, we know that the global trade finance landscape is complicated, risk adverse and historically resistant to change. It could well be that trade related issues – such as in the ESG and origination space – will spearhead blockchain-based propositions to support the global trade finance sector in creating transparency in the physical supply chain.”
With investors increasingly jittery and unwilling to continue to fund ventures that struggle to reach break-even, the companies behind these projects will need to convert interest into revenue pretty quickly.