China’s interbank blockchain platform has officially launched
This is one of very few blockchains that can accurately claim to be world changing.
After a series of successful tests, the China Banking Association (CBA) announced that the "China Trade and Finance Interbank Trading Blockchain Platform" officially launched on 29 December, the same day it verified the success of test runs between two of the participating banks.
The tests showed that the platform can facilitate the standardisation, digitisation and accuracy of interbank trade finance information, the CBA said in a statement, "laying an important foundation for building a new trade finance ecosystem and improving the efficiency of financial services."
This is potentially a very big deal because, according to the World Trade Organisation, blockchain can potentially bring extreme savings to the world of trade finance but still needs to overcome challenges associated with a lack of standardisation and little real-world use. The China Trade and Finance Interbank Trading Blockchain Platform might go right to the centre of solving those issues.
And savings in trade are good for everyone.
Feel the savings
A decent chunk of the price tag on many of the things you'll ever spend money on represents the cost of trade, including the cost of shipping raw goods and finished products around the world. The savings and costs involved are passed up and down. For example, the cost of a plane ticket eventually needs to help an airline recover the cost of buying the plane, so if the cost of shipping aluminium (or whatever) is considerably reduced, then these savings can eventually reduce the cost of travel.
So it goes for most things in this extraordinarily complex and interconnected world. More efficient trade is good news for all, likely with minimal or non-existent downsides. And beyond that, you have the potential for job and value creation that comes from trade, which gives more people more money to buy things and generally helps keep the world turning.
Bottom line: more efficient trade would be really cool and potentially able to make the entire world measurably economically healthier. According to Maersk, about 20% of the cost of moving a shipping container is sheer paperwork and bureaucracy. And according to the World Trade Organization (WTO), streamlining global shipping supply chains could potentially increase global trade volumes by 15% and boost global GDP by about 5%.
More and better trade is good for everyone, and facilitating that means looking at trade finance.
The heart of trade
China's new platform is geared largely towards facilitating efficiencies in trade finance, which refers to who fronts the money for the cost of gallivanting products around the world.
Basically, the sender wants to be paid upfront while the receiver only wants to pay on arrival. Trade finance is a system that keeps everyone happy. Typically extended by big banks, trade finance is an integral part of trade today and almost all trade in the world involves it.
Unfortunately, it's still done mostly with old fashioned pen and paper systems and digital equivalents such as manually sending emails of scanned paperwork. The inefficiencies associated with this are compounded by the complex web of international trade which sees goods changing hands many times before arriving at its destination.
It doesn't help that each facet is also likely to involve multiple parties – for example importers, exporters and several intermediaries, all of whom have their own different banks who are extending their own different financing solutions for each function. And it really doesn't help that trade finance is a loan, which means a lot of due diligence, risk management and trust is involved across all of this.
This enormous overhead is running through almost all the trade in the world. If you want to make global trade more efficient and cost-effective, blockchain trade finance solutions are a great place to start.
Plus, beyond improving the efficiency of existing trade, blockchain trade finance solutions can allow more participants to enter the market. It's estimated that there's about $1.5 trillion of unfulfilled demand for trade finance in the world today.
Much of this might be because trade finance is typically the domain of large players who can't justify the costs or risks of extending finance to small unknown players, especially in developing countries. This leads suppliers towards smaller banks and alternative providers, but those financiers then run into their own costs and similar problems when they need to interface with larger banks. The end result is trillions of dollars in global trade being left on the table.
Plugging that gap would be immensely helpful, and blockchain technology with its potential for cutting costs in this area, and quickly bringing trust through transparency between parties of strangers, might be the perfect tool for the job.
Meanwhile in China
China's new interbank blockchain trade financing platform might be specifically oriented around helping fill that trade finance gap, with the CBA announcement describing plans to get "the majority of small and medium-sized banks to join the platform, expand the platform business type and actively cooperate with relevant agencies such as taxation and customs," once the platform has proven itself stable and reliable in 2019.
It's perhaps not coincidental that about 40% of the existing trade finance gap is in the Asia Pacific region, and that about 74% of it is accounted for by SMEs.
Platform participants so far appear to have well-justified high expectations, with HSBC vice president and head of industrial and commercial finance telling China News that current estimates show the system bringing cost savings of over 30% a year to platform participants. That's a lot of cheaper consumer goods.
If it lives up to its highest expectations, China's new interbank blockchain platform might have the potential to change the world on a macro scale. It's the kind of change most people probably won't notice immediately, but would certainly miss if it were to suddenly disappear after they got used to it.