Revolutionizing Trade FinanceBlockchain Innovation

Ann F. McCormickDirector, Treasury Solutions Officer April 24, 2018| St. Paul, Minnesota

Minnesota AFP

2

What is Blockchain & how does it work?

Agenda

Blockchain relevancy in the market

Q&A

Blockchain for trade finance

3

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

1 2 3

4 5 6

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

1111

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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