Commodity Monday Special Issue: 2018 reviewed, 2019 predicted
This is our first issue of 2019. Happy new year! In this issue, we are going to discuss 5 key trends in blockchain in 2018 as it applies to commodity supply chain, finance and payment in emerging markets. We then reflected on our own developments in 2018. We will also predict what may happen in 2019. However, as Niels Bohr, the famed theoretical physicist once said:
Predictions are hard, especially about the future.
So if we are right we might, later this year, say “We told you so”. If we are wrong, however, we might be a bit less vocal about it :)
#1. Commodity trade finance — Let the 100 flowers bloom
Trade finance is notoriously manual, time consuming and fraud/error-prone. It often resides on multiple siloed systems, requiring extensive reconciliation efforts. Blockchain benefits, therefore, sit squarely with trade finance and supply chain so it is logical to see many initiatives taking place — “Let the 100 flowers bloom”
What happened in 2018
Enterprises seemed to wake up to the promise of blockchain in trade finance in 2018. Multiple consortiums were announced. Some even graduated from proof-of-concept pilots into production:
- komgo: commodity financing platform by a consortium of 15 banking institutions, trading companies, an inspection company and an energy major. komgo would tackle KYC and Letter of Credit first. The digital L/C has been launched in early January 2019.
- Vakt: post-trade management platform by a consortium of 6 energy trading companies and 3 banks. It has launched in the physically traded BFOET crude oil market. There are more energy majors joining the consortium.
- Marco Polo: Open account trade finance platform by a consortium of 10 banks. Unlike komgo and Vakt which are built on Ethereum, Marco Polo is built on Corda blockchain by R3. R3 also has interest in Voltron which focuses on tokenizing letters of credit.
- We.trade: Open account trade finance platform by a consortium of 12 banks focusing on SME sector in Europe. The project was merged with Batavia which offered similar solutions. The platform is built on IBM’s Hyperledger.
- eTradeConnect: Trade finance and settlement platform by a consortium of 12 banks in Hong Kong. Given the similarity in solutions, We.Trade and eTradeConnect entered into cooperation. It is convenient that both platforms have been built on Hyperledger. eTradeConnect is built by OneConnect, the fintech arm of Ping An, China’s largest insurer.
- Trade Information Network (TIN): not to be confused with Global Trade Connectivity Network (GTCN) which is a blockchain-based trade finance collaboration between Hong Kong Monetary Authority (HKMA) and Monetary Authority of Singapore (MAS), TIN was set up by 7 large global bank to share trade documents (purchase orders, invoices) for pre-export finance towards SMEs. TIN, being built by GCI and not based on the blockchain, is a defensive effort against non-bank competition.
Predictions for 2019
Within financial services, trade and supply chain finance, cross-border payments and P2P lending are the most promising use cases in terms of impact and feasibility. 2019 will see more consortiums to be announced whilst some existing ones will merge (particularly those building on the same blockchain). Also actual, fully-integrated production roll-outs will likely be delayed as it is not a simple task to coordinate so many consortium players, given their legacy systems and processes. It is good that most of these consortiums set up separate operating entities to handle the innovation.
#2. Shipping/logistics — Not all plain sailing
Revolutionising international trade focusing just on trade finance and not on logistics is like an ‘one-legged man in an ass kicking contest’. This is because whilst trade finance digitisation deals with the financial flow, logistic/shipping digitisation deals with the physical flow of international trade.
To illustrate the pain point in physical trade flows, the World Trade Organisation wrote in Can Blockchain revolutionize international trade?
International trade transactions involve a multitude of actors and continue to rely extensively on paper. In 2014, shipping company Maersk followed a refrigerated container filled with roses and avocados from Kenya to the Netherlands to document the maze of physical processes and paperwork that impact every shipment. The numbers speak for themselves: they found that around 30 actors and more than 100 people were involved throughout the journey, with the number of interactions exceeding 200. The shipment took about 34 days to go from the farm to the retailers, including 10 days waiting for documents to be processed. One of the critical documents went missing, only to be found later amid a pile of paper.
What happened in 2018
It is therefore expected that logistics digitisation, especially shipping, has become topical in 2018.
- Tradelens, which brings global supply chains into a more connected and digitized state, is jointly developed by Maersk and IBM. The stated objectives are to reduce the cost of global shipping, improve visibility across supply chains and eliminate inefficiencies stemming from paper-based processes. The platform is now in production with engagement with 100 organizations comprising over 60 network members including four ocean carriers, three inland carriers, 40 worldwide ports and terminals, and eight customs authorities.
- Global Shipping Business Network (GSBN), a new consortium consisting of 9 leading ocean carriers and terminal operators was formed in November 2018, will establish a digital baseline that aims to connect all stakeholders, including carriers, terminal operators, customs agencies, shippers, and logistics service providers to enable collaborative innovation and digital transformation in the supply chain. The consortium was initiated by CargoSmart, a technology solution provider.
- AB InBev, Accenture, APL and Kuehne + Nagel tested a blockchain solution developed by Accenture and concluded that the solution could save the ocean shipping industry hundreds of million of dollars each year and reduce the need for data entry by up to 80%. It is unclear if the initiative still going ahead.
Predictions for 2019
Despite the need for a industry-wide blockchain implementation standard, there will be more blockchain projects in global shipping to be announced in 2019. Indeed, the GSBN is a rebuff against TradeLens due to uneasiness around who controlling intellectual property rights.
#3 Cross-border payment — Infinity war
Alongside trade finance, cross-border payment has been seen as one of the most promising area for blockchain adoption. Blockchain-based payment networks are the newest addition in alternative payment channels, competing against bank’s dominance.
What happened in 2018
- Bitcoin: Conceived as a peer-to-peer electronic cash, bitcoin’s vision of becoming the global, censorship-resistant currency is still being realised, 10 years after its birth. In 2018, economic transaction value, a measure of usage of bitcoin in global commerce, actually reduced. What holds Bitcoin back, apart from regulatory uncertainties, is its price volatility. Technological advances such as lightning network which can potentially solve scalability issues (right now Bitcoin can only process 7 transactions/second compared with over 20,000 for Visa) won’t be the only factor leading to its mainstream adoption. Making a cross-border payment using bitcoin is, however, still one of the most convenient and cost-effective ways. Average transaction cost has reduced from $55 in December 2017 to $0.26 at the time of this writing.
- Ripple: RippleNet connects over 100 financial institutions which brings it in direct competition with Swift, the interbank payment messaging network. XRP, the native cryptocurrency, is not strictly needed on RippleNet. In 2018, Ripple launched xRapid, a liquidity solution aiming at increasing the use of XRP as an intermediary currency in cross-border payments. So far liquidity of XRP is still low, particularly in African markets. A blockchain network similar to Ripple is Stella, with a specific focus on emerging markets.
- Swift: The 40 year old network is a monopoly in the interbank cross-border payment. To move with the time, in 2017, Swift launched gpi (global payment innovation) aiming at creating fast, friction-less cross border payment experience. In 2018, the network completed a proof-of-concept involving 34 banks on using DLT — Distributed Ledger Technology (private blockchain) — for Nostro account reconciliation and liquidity. The POC reported positive results but the network said further technical advances are still to be made before DLT can be implemented.
- Ant Financial: The operator of Alipay raised $14bn in 2018 to fuel its global expansion with blockchain being a main focus. The company launched a remittance service using a blockchain-based wallet between Hong Kong and the Philippines (completed under 3 seconds), followed by a recent expansion into Malaysia and Pakistan. With specific focus on emerging markets’ unbanked or underbanked, Alipay is the one to watch who could quickly bring blockchain to mass market adoption in cross-border payment.
- JPMorgan: Launched in 2017 with a few banks, the Interbank Information Network (INN) expanded to 75 banks in 2018. Using blockchain technology, IIN reduces the time correspondent banks currently spend responding to compliance and other data-related inquiries that delay payments. It competes with legacy platforms such as SWIFT and new startups like Ripple.
Predictions for 2019
Anyone attempting to make cross-border payments will quickly find out that they are expensive, slow and lacking in transparency on both costs and delivery times. Remittances out of South Africa, a Binkabi’s target market, cost nearly 18% on average. At over 90% of total cross-border payment revenue pool, banks — through correspondence banking — are still the dominant channel. Therefore, it is not a surprise that most blockchain implementations aim at making bank’s business more efficient. 2019 will see this trend continues with clashes between the 3 protagonists — Ripple, Swift and JP Morgan. With Swift having nearly 11,000 banks on its network (vs. 100 on Ripple’s), it is unlikely that they will be unseated anytime soon. Hence, the “they got the tech but we have the network” argument in defence of Swift. Bitcoin will likely to be too volatile to be a global currency but expect surprises from the likes of Ant Financial (Alibaba) and other big tech companies.
#4. Agriculture supply chain and traceability — Can elephants dance?
Within agriculture, blockchain application in supply chain and traceability are equally impactful.
What happened in 2018
- ABCD, the alphabet soup comprising of Archer Daniels Midland, Bunge, Cargill, and Louis Dreyfus, have not rushed to implement blockchain technology. However, after a couple of pilots— Louis Dreyfus’s soybean and Cargill’s soybean in 2018, the agribusiness conglomerates, which account for more than a quarter of the world’s trade in agriculture, decided to partner, stating that blockchain implementation could make trading more efficient and transparent, as well as reduce costs. The partnership later added Cofco, the Chinese state-owned agrifood major who has aggressively expanded internationally in recent years.
- Blockchain-based food traceability has seen a fairly busy year with IBM Food Trust formalising partnerships with the likes of Walmart for leafy greens (following trials with Walmart, Tsinghua University and JD.com in China) and Carrefour’s Quality Line products. In an initial pilot conducted by Walmart and IBM, the amount of time it took the retailer to trace an item from store to farm was reduced from seven days to just 2.2 seconds. This enables quick actions and damage control during food recalls and improved consumer engagement. Others reported to implement traceability solutions on selected ranges included retailers Auchan, Albert Heijn and restaurant chain Sweetgreen.
Predictions for 2019
Don’t expect elephants to dance. Large companies are unlikely to move quickly due partly to complexities in the Agrifood supply chain. These companies need to balance between consumer demand for transparent supply chain whilst protecting their commercial privacy (or should we say secrecy) of supply sources. Some commodities are easier to trace than others. The journey from farm to fork for meat is very different than that for cashew nuts, for example. Therefore, traceability implementation will be done gradually by range/line rather than across the board.
#5. Blockchain adoption — Beyond the hype
What happened in 2018
Blockchain has the potential to add $1trillion to global trade in the next decade. However, there have been no real-life blockchain implementation at scale. Most projects are still in experimental stage or just gone live.
- Crypto winter: the crypto economy (combined network capitalisation of all cryptocurrencies) crashed from nearly a $800 billion to around $100bn in 2018 (a 90% drop). Whilst crypto prices, in theory, shouldn’t have anything to do with blockchain technology adoption (on the contrary, lowered bitcoin prices have seen average transaction costs reduced from $55 to less than $1), they put a dampened sentiment among investment community (particularly retail) towards new projects. Most blockchain projects that have raised money throught ICOs have failed or continue to fail.
- Enterprises’ Emerging doubt: After hundreds of millions of dollar invested and nearly as many in announcements, hundred of use cases and proof-of-concepts, there are still no blockchain deployment at at scale. HSBC just came out with a news that they settled forex deals worth $250 billion in 2018, but that was apparently an internal deployment and represented only a tiny portion of the bank’s forex volumes. Hard questions are being asked and use cases are being narrowed down from 10 to 1, 2 with regard to enterprise adoptions. Another, often less discussed ‘Tragedy of the commons” issue, is why should any organisation put in much work to benefit an industry whilst being faced with the possibility of cannibalising their own revenue?
Predictions for 2019
Projects that bridge between blockchain’s decentralisation idealogy and solving real-world issues will gain tractions in 2019. As we, Binkabi, see ourselves in this category, it is perhaps more objective to quote the work of McKinsey in “Blockchain’s Occam problem”. Occam’s razor is the problem-solving principle that the simplest solution tends to be the best:
Niche applications: There are specific use cases for which blockchain is particularly well-suited. They include elements of data integration for tracking asset ownership and asset status. Examples are found in insurance, supply chains, and capital markets, in which distributed ledgers can tackle pain points including inefficiency, process opacity, and fraud.
Modernization value: Blockchain appeals to industries that are strategically oriented toward modernization. These see blockchain as a tool to support their ambitions to pursue digitization, process simplification, and collaboration. In particular, global shipping contracts, trade finance, and payments applications have received renewed attention under the blockchain banner.
#6. Binkabi — Join us in 2019
Binkabi platform shares many features with the above trade finance initiatives — such as the bridging with traditional finance — but we differ in 3 main areas:
- Origination-focused: whilst most of the above initiatives are concerned with improving existing processes, Binkabi platform is where the trade is orginated (0 to 1) as well as financed. Binkabi offers end-to-end commodity trading and financing solutions.
- Emerging market and farmers-focused: Binkabi focuses exclusively in agriculture commodities in emerging markets. Most of the above platforms focus on developed markets and large players across many industries.
- Tokenization-focused: Most of the above platforms aim at automating trade processes leveraging private blockchains (That is why the term DLT — Distributed Ledger Technology — is often used/preferred). Binkabi is a platform for issuing tokens on public Ethereum blockchain. We have commodity-backed tokens, fiat-backed tokens and collateralised debt tokens in our ecosystem. Tokenisation is where we see blockchain to be most suited for, as it makes asset tracking both effective and convenient.
That’s said, the above initiatives are complementary with Binkabi platform as they enable us to offer end-to-end digitisation solutions with regard to international commodity trade.
Binkabi — Platform for issuing, trading and financing commodities on the Blockchain
Chat with us at t.me/binkabi_io or visit our website
