The Hong Kong Monetary Authority (HKMA), which is more or less the central bank for Hong Kong, just made a very interesting move. They announced they would be working with a group of the world’s largest banks, in conjunction with Ping An, to roll out an industry standard blockchain-based solution for trade finance.
On first glance this program is similar to others that have been in the news recently. Unlike other blockchain initiatives, the platform the HKMA plans to use has already been shown to be functional, and numerous money-center banks are reportedly ready to cooperate with the program.
Major Hong Kong banks like Standard Chartered and HSBC are apparently ready to work with the HKMA to speed the adoption of the blockchain platform that Ping-An has already deployed in China. The reasons why these banks are willing to adopt new ways of doing business probably have a lot to do with the increased revenues that blockchain-based trade finance offer.
Growing the Market with Blockchain
According to estimates reproduced by the Financial Times of London, the global market for trade finance is in excess of $9 trillion USD. The problem is, many SMEs simply aren’t able to participate in the system at the moment. The banks that deal with trade finance instruments like Letters of Credit (LOCs), need to have extensive information about a company before they are willing to issue credit on a company’s behalf.
Blockchain and AI appear to be changing this market dynamic. The blockchain platform that Ping-An has already deployed in mainland China helps SMEs to meet the regulatory requirements that would qualify them for trade financing from major banks. This is positive for the SMEs, but it also helps major banks to expand into new markets.
In fact, the advent of this kind of trade finance could allow an entirely new trade ecosystem to develop. Instead of major companies dealing with other large entities, smaller players can connect with other SMEs, and make deals internationally. This might have a negative effect on the bottom line at established exporters, but the banks that are making the deal happen win, no matter what.
Incredible Synergies Exist in Logistics for Blockchain
There are other areas of the global supply chain that want to use blockchain. Both the Port of Rotterdam and DP World have begun to develop blockchain-based platforms for tracking shipments, which could easily be integrated into a system like Ping-An’s. So far this hasn’t been discussed, but one the platforms are operational, it would be a natural next step.
For the moment, tracking the chain-of-custody for global trade, and settling the trades financially happens on multiple systems. Open ledger technology has the potential to change this. Blockchain-based tracking systems would likely make the entire haulage process safer and more transparent, but it could also be unified with trade finance platforms that could make international deals work.
Ping-An’s existing system is designed to reduce the incidence of over-financing, which is common due to the opaque nature of the existing trade finance infrastructure. All the banks that are on the proposed trade finance platform can see what similar deals cost, so the ability of a company to overstate their financing needs is reduced because banks have the ability compare any proposed transaction with similar ones that have already happened.
A Different Approach to Blockchain Adoption
Many central banks around the world have been adverse to implementing blockchain technology in real-world applications. The HKMA is making a bold move by adopting a new system for a market that is worth trillions of US dollars, and it looks like they have a lot of support from the banks that would both own and use the system.
Numerous other central banks have been wary to embrace blockchain, and some have been very critical of cryptocurrencies in general. The fact that a de-facto central bank in one of the world’s most important financial hubs is working towards using blockchain for a massive market is encouraging for the technology.
It is unlikely that there will be multiple systems to handle trade finance in the future, so first-movers in the space are likely going to have a competitive advantage as more companies realize the benefits that blockchain offers to both FinTech, and other areas of commerce.