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insight

Cross-border Trade Finance

(Translation)

Mr Norman Chan, Chief Executive of the HKMA, announced in September that seven new initiatives will be launched to prepare Hong Kong to move into a new era of Smart Banking. Work pertaining to these initiatives is in full swing and we have some good news in respect of cross-border collaboration to share with readers. The HKMA and the Monetary Authority of Singapore (MAS) exchanged a Memorandum of Understanding today on a joint development of the Global Trade Connectivity Network (GTCN), a cross-border financial infrastructure platform based on distributed ledger technology (DLT). Ronnie interviewed Mr Howard Lee, Senior Executive Director of the HKMA to learn about the background for the building of GTCN, its operation and the benefits it would bring about.

Ronnie:

Howard, I learn that there is a story behind the cooperation between the HKMA and MAS.

Howard:

Somehow, it makes one think of the saying “great minds think alike”. Together with a consortium of five banks in Hong Kong, the HKMA conducted a proof-of-concept (PoC) project on the use of DLT to build a trade finance platform in Hong Kong last year. We touched on this project during a dialogue with MAS this year and found out that they were also developing a similar platform. That was how the idea of linking the two platforms was conceived and an agreement between the two authorities was reached.

Ronnie:

Both Hong Kong and Singapore are international financial centres in Asia and so it is just natural that the two cities would come up with similar ideas. After all, there are many different kinds of financial services that DLT could be applied to, why did both cities use DLT to build the interface between their trade finance platforms?

Howard:

Although many kinds of financial services have been digitalised, the processes of trade finance are still largely paper-based and labour-intensive. DLT can bring about a completely new record-keeping method that is different from the traditional one which requires the setting up of a centralised database. With DLT, all participants will have their own database and whenever a participant makes an update, a copy of the update will be made and saved to the records of all participants. The data is encrypted in the process and once recorded, it is immutable.1 These features are particularly suitable for enhancing trade finance processes. Of course, as DLT is something new, initially the PoC participants were unsure about whether the DLT would work in a commercial environment. However, the success of the PoC prototypes is indeed very encouraging, and has given us more confidence in the platform.

Ronnie:

I have heard that in the past, some commercial entities had also tried to digitalise trade finance processes but their efforts were in vain.

Howard:

Trade finance involves many stakeholders, including buyers and sellers, and their respective banks, shipping companies and government authorities. Because of their cross-border and cross-industry nature, commercial entities in general lack the required capability and credibility to co-ordinate digitalisation efforts. On the other hand, as we are now spearheading this project, there has been a lot of encouraging feedback from banks and trading companies. They believe that the HKMA, acting as a go-between, helps to draw in various stakeholders to the platform and enhance its coverage. Compared to the past attempts where only partial digitalisation was possible, this platform is indeed a breakthrough, which is made possible by fintech by overcoming geographical boundaries.

Ronnie:

I understand that the DLT trade finance platform has four revolutionary features: (1) digitalisation of trade documents, (2) automation of processes, (3) sharing of required documentation and data among participants, and (4) reduction on risks of human errors and frauds. Can you give us more details?

Howard:

Nowadays when seeking trade finance from banks, borrowers have to present various supporting documents, such as customer orders and invoices. As many invoices are still paper-based, they cannot be transferred easily and are prone to clerical errors. Besides, the lack of trade finance information sharing among banks has led to exploitation by fraudsters in obtaining multiple financing from banks with one single invoice. To avoid falling victim to these ploys, banks would simply pass over some business opportunities. This affects small and medium-sized enterprises (SMEs) most. The soon-to-be launched DLT trade finance platform will enable auto-verification of trade documents and real-time updates to all counterparties. This will enhance the transparency of loan information and any fraudulent documents could be detected easily. This would considerably reduce the risk of frauds and help enhance banks’ willingness to engage in trade finance business. Banks would also be able to introduce more non-conventional trade finance products to catch the latest market trend, which can particularly improve the working capital of SMEs.

Ronnie:

According to a report by the World Trade Organisation, total global trade was US$16 trillion last year, of which 80% to 90% required trade finance. In reality, however, only US$4 trillion worth of global trade was financed, leaving a huge financing gap.

Howard:

Indeed. When the interconnection of trade finance platforms between Hong Kong and Singapore is in place, we hope to play an exemplary role and encourage other trading partners to participate, so that the benefits of the DLT trade finance platform can be spread far and wide. I believe that as more companies gain access to trade finance, global trade volume will naturally grow, bringing real economic benefits. As such, this cross-border platform will adopt an open architecture which can accommodate different types of digitalised trading standards and connect trading partners from around the globe with DLT.

Ronnie:

I understand this is the first cross-border open trade finance platform in the world that is spearheaded by government authorities. It is also a DLT trade finance platform with the largest number of participating banks worldwide. When will it be launched?

Howard:

Our next step is to start the preparatory work including tendering, system development, testing, etc. We expect to formally bring the whole platform to the market in 2019.

 

Reference:

1. Blockchains and Mah-jong Playing (《區塊鏈與打麻將》), R&M Column (Chinese version only)

Last revision date: 16 November 2017
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