Global Trade Review - Commodity Trade Finance Conference Case Study: Hong Kong Monetary Authority (HKMA) September, 2017
Global Trade Review - Commodity Trade Finance ConferenceCase Study: Hong Kong Monetary Authority (HKMA)September, 2017
3
March
2017
Today
November
2017PoC
Solution visioning
Design and test parameters
Development sprints
DeloitteD Banks
HKMA
• Money laundering
• Limited oversight
• Industry in Hong Kong
Network establishment
BackgroundIn collaboration with the Hong Kong Monetary Authority (HKMA) and several large global banks, Deloitte developed of a Proof of Concept (PoC)
© 2017 Deloitte 4
STRATEGIC ALIGNMENT – OUR UNDERSTANDING OF THE ISSUE
Trade finance relates to the process of financing activities related to commerce and international trade. Companies involved with trade finance include importers and exporters, financiers, insurers and export credit agencies, and other service providers
The goals to be accomplished in a trade transaction are:
Buyer receives goods (in the agreed upon quantity and state) from the seller
Buyer & seller maximize working capital
Seller receives payment at the agreed upon time after fulfilling their obligation
SHIPMENT
PURCHASER
SUPPLIER
INTERMEDIARIES
PAYMENT
Financier (if required) effectively managing their scope of risk for the transaction while keeping operational costs low
Buyer & seller minimize transaction cost / transaction cycle for a given risk appetite
$19 Trillion USD ~25 Percent$10 Trillion USD
size of global merchandise trade current trade financing market first order efficiency gains with DLT
© 2017 Deloitte 5
EXPORTERS• Slow, paper based process• Difficulty in asset tracking • Delays in payments• Small, medium exporters face competitive
market conditions and lack adequate access to trade finance credit
IMPORTERS• Slow, paper based process• Difficulty in asset tracking • Competitive market for accessing trade finance
credit due to lack of innovation• High insurance premiums due to difficulties with
asset tracking and fraud
BANKS• Difficulty in asset tracking • High probability of fraud from forged trade
documentation • High pressure from BASEL III regulation to shed
Trade Finance liabilities due to high cost of capital • Lack of innovative trade finance offerings in the
market due to difficulty in asset tracking
FREIGHT FORWARDERS• Paper based process• Manual interaction with all parties • Lack of transparency in the transfer of
assets resulting in low margins and high insurance premiums
REGULATOR AND GOVERNMENT AGENCIES• Oversight is challenging due to paper
based nature of transactions
Trade Based Money Laundering activity
between January 2004 and May 2009, in
aggregate totaled more than US$276
billion3
The WTO contends that access to trade
finance credit is more competitive than ever
due to low margins and an increase in
competition in the global trade market
Source:1. http://www.reuters.com/article/us-asia-trade-blockchain-idUSKCN10L17D2. http://www.europarl.europa.eu/RegData/etudes/note/join/2010/431578/IPOL-TRAN_NT(2010)431578_EN.pdf3. https://www.fincen.gov/resources/advisories/fincen-advisory-fin-2010-a001
The WTO contends that access to trade finance
credit is at its most competitive ever due to low
margins and an increase in competition in the
global trade market
In recent years a number of banks have suffered
great financial loss due to the manual nature of
trade finance leaving them open to forgery of
documents1
A comprehensive report by the European
Parliament into freight forwarding cited
lack of technology leading to incurring of
non essential costs (e.g. premium freight)2
BUSINESS VALUE FOR STAKEHOLDERS – PAIN POINTS IN TRADE FINANCE
Trade Finance
Pain Points and
Real Life Examples
2
3
4
5
1
© 2017 Deloitte 6
BUSINESS VALUE FOR STAKEHOLDERS – BENEFITS OF DLTEXPORTERS• Mitigation of payment risk• Clear oversight of delivery process• Reduced cost by digitising paper based
documents• Smart contract triggers financing• Potential to disintermediate ‘trusted third parties’
as stakeholders can directly connect on the platform and access data relating to transaction
IMPORTERS• Mitigation of exporters non-performance• Clear oversight of delivery process• Reduced cost by digitising paper based documents• Smart contract triggers payment• Potential to disintermediate ‘trusted third parties’
as stakeholders can directly connect on the platform and access data relating to transaction
BANKS• Increased operational efficiencies• Protected data privacy due to permissioned access• Ability to provide new value-added services• Shared platform with other stakeholders ensuring
greater transparency and less manual reconciliation• Prevent double financing or abuse of transactions
FREIGHT FORWARDERS• Digital handling of trade documents• Instant communication between parties• Faster payment from reduced process
time
REGULATOR AND GOVERNMENT AGENCIES• Real time oversight of process• Immutable ledger of transactions relating
to transfer of an asset• Real time information feed • Ability to improve credit rating information
DLTBenefits
andSuccess Stories
2
3
4
5
The Irish Funds Industry Authority is working
with the regulator to prove regulatory
oversight is possible on their regulatory
reporting project5
1
Wave’s platform has proven that a trade’s
transaction time can be reduced from as many as
20 days to just a few hours by greatly speeding up
the process of checks which can mean same day
payment1
PSA Singapore Terminals is looking to create a trade
system which leverages DLT to track imported
containers and automate the importing process2
After successfully completing DLT based trade
finance transaction, Barclays noted cost savings as a
result of reducing the need for manual reconciliations
and significantly reducing the transaction time (20
days to 1 day)3
A current Dubai backed government project
to bring together all the parties in the trade
finance process also backed by Aramex
shows willingness of forwarders to test DLT4
Source:1. https://www.home.barclays/news/2016/11/how-blockchain-is-transforming-trade-finance.html 2. https://e27.co/the-blockchain-revolution-of-trade-finance-20160728/ 3. https://www.barclayscorporate.com/content/dam/corppublic/corporate/Documents/product/Banks-Trading-Up-Q1-2016.pdf 4. http://www.coindesk.com/ibms-biggest-ever-blockchain-trade-finance-trial-go-global/ 5. http://www.irishfunds.ie/news-knowledge/news/irish-funds-working-with-industry-participants-and-deloitte-to-develop-a-
blockchain-proof-of-concept
© 2017 Deloitte 7
BUSINESS VALUE CREATION FOR THE BANKS
Note: Payment settlement efficiencies have been excluded as it is assumed it will be performed off chain. Share of savings per bank depends on individual size of trade finance business.
Real Time Forensics Analysis• Enable oversight by regulators to banks
in banks forensics analysis on their node with advanced algorithms
What operational efficiencies will be introduced to the banks?
Operational Efficiencies
How can fraud be reduced via DLT?
Fraud Reduction
What types of new products or services will be enabled?
Revenue Uptake
Increase Cross Selling• $1.00 in trade finance fees can bring
in $1.70 in FX and cross border payment fees and $2.25 in transactional banking revenue
Shared Infrastructure • Opportunity for potential future savings
by creating shared infrastructure among participants for automating purchase order and invoice reconciliation
Reduce Document Forging• Provide an opportunity to track and
verify unique trade documents digitally from trade parties (i.e. logistic service providers) to prevent forged documents
Reduction in operational FTEs• Reduce manual paper work, document
management for customer onboarding, transaction reconciliation and monitoring etc.
Expand Market Reach• Enabling transparent evaluation of
risk on the DLT will help banks take on new customer segments such as small and medium enterprises, increase credit offering and formulate more innovative trade finance programs
Potentially 10-15% reduction in operational
costs and compliance due to digitization of
trade finance processes1
Potentially 5-15% increase in revenues based
on digitization of trade1
US$10bn+ of savings in fraud from forged
documents in China alone2
Source:
1. Note. This percentage is not specific to DLT technology but for digitization overall. https://www.swift.com/sites/default/files/resources/swift_oursolutions_paper_embracingdigitalintradefinance.pdf
2. https://www.wsj.com/articles/china-uncovers-more-than-10-billion-in-fraudulent-trade-financing-deals-1411620122
© 2017 Deloitte 8
STRATEGIC ALIGNMENT – OUR UNDERSTANDING OF THE ISSUEDeloitte has developed a trade finance solution which automates the current processes and pain points for stakeholders while also opening up the ecosystem to other players
Our Trade Finance SolutionScreenshots
First MVP release: September 2016, open for
demonstration
Developed on an Ethereum based private blockchain
platform
Leverages “Smart Contracts” developed on
Ethereum
Demonstrates the use of“Oracles” as external data
sources
© 2017 Deloitte 9
STAKEHOLDER INTERACTION WITH THE NETWORKNetwork participants will have multiple modes to access the DLT network
Node Operator
Network Participants
Legend
Regulator
Other Participants DLT
Network
Node
Freight Forwarder
Commercial Clients
SMEs
SMEs
SMEs
Bank
Trade
Facilitation
Service Provider
Corporate Client
Bank
Regulator can have access to network to gain insight into transactions
Large corporates with high volumes can be provided
direct access to the network
Freight forwarders can provide trusted information about shipments into the
network
Small / Medium Enterprises and
Commercial Clients can participate in the
network through their bank
Small / Medium Enterprises also can access the network through a 3rd party
service provider
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BLOCKCHAIN BENEFITSBlockchain eases the existing pain points of buyers, sellers and financial institutions while opening the trade finance ecosystem to new non-traditional players
Speed / Real Time Updates
DisintermediationPrivacy &
TransparencyIrreversibility
Capital AccessAccurate / Traceable
InformationFraud Reduction
Eliminate manual processing of paper documents & signatures via uploads to a single interface
and real-time updates
Remove the need for trusted intermediaries to verify
transactions, and allow two parties to transact directly with
each other
Increase security of access, amendments, and exposure,
through the use of key-permissioned access
All transactions are tracked and irreversible, reducing risk of double spending, abuse, and manipulation of transactions
Increase access to third party financiers for improved lending
rates
Improve access to latest sales contracts, single sourced
amendments, and pre-verified documents that are signed by
all parties
Unique tracking and authentic verification of each transaction
and asset will mitigate fraud and associated behaviour
12© 2016 Deloitte. All rights reserved DLT Trade Finance Business Analysis Report© 2017. For information, contact Deloitte China. 12
COMMERCIALISATION OPTIONS - OVERVIEW
Create a separate, autonomous legal entity that owns and develops the platform. The platform will be offered as a utility for participants who operate their individual
nodes.
Jointly funded by founding members (e.g., banks) as core stakeholders in the Steering
Committee.
Private Sector Entity
2
Working Group
Continue to operate in a Working Group model where decisions are made through
consensus as an association. By definition, it is not a legal entity. Each participant owns
and operates their own node.
Participating members contribute resources to drive common objective forward.
Each bank will send a representative to negotiate and make decisions on its behalf.
1
Bank 1 Bank 2 Bank 3 Bank 1 Bank 2 Bank 3
Private
Sector
Entity
Hybrid
The Shared Infrastructure Operatoracts as the key facilitator to create an
organisation jointly owned with the banking industry.
Participating members will follow the organisation’s directives and contribute to
drive common objective. This may include representatives from the Government,
banks and industries.
3
Bank 1 Bank 2 Bank 3
Shared
Infrastructure
Operator
13© 2016 Deloitte. All rights reserved DLT Trade Finance Business Analysis Report© 2017. For information, contact Deloitte China. 13
COMMERCIALISATION OPTIONS – COMPARISON SUMMARYB
en
efi
tsD
raw
backs
Working Group
• Scale together rapidly
• Amplifies the benefits due to pooled funding while spreading the risk across all parties
• Collective asset ownership
• Developed assets are collectively owned by members which allows for strategic input by all
Economies of information
• Improves sharing of information and decreases the costs and time dedicated to working in silos
• Reduces risk of competing efforts that are misaligned with each other
• Speed to Consensus
• It may take longer to reach consensus on decisions across participants
• Misaligned Incentives
• Lack of consensus in strategic direction of the group or misaligned incentives may slow down development efforts
1
1
2
3
1
2
• Reduce risk of project failure
• Agreement from all parties to use the platform before it is built will reduce risk that the platform will be built in isolation
• Transparent costs
• Allows for clear accountability of costs by the entity
• Rapid decisions making
• Reach a single, unified process sooner through this autonomous body
• Trade finance industry requires cohesion to gain true value for all participants
Private Sector Entity
Entry barrier
• Depending on the governance model, collectively building and owning the same asset may discourage smaller players to join the DLT platform
2
1
2
3
1
Hybrid
All benefits of options 1 and 2 apply to option 3
• Transparency and control
• Enable setting DLT standards for adoption on multiple use cases across banking industry
• High level governance of transparency and full control of the solution to comply with established standards
• Data governance
• Data privacy is easily enforced to protect all participants involved and participants have minimal risk
• Cross-border facilitation
• Easier to facilitate cross-border cooperation for interfaces/integration
3
1
2
3
Bank 1 Bank 2 Bank 3
Shared
Infrastructure
Operator
14© 2016 Deloitte. All rights reserved© 2017. 14
COMMERCIALISATION AND CRITICAL SUCCESS FACTORS IN DELIVERYGovernance model
Technical• Develop PoC in isolated test environment, pilot would be deployed in ‘test bank’ environments with small client subset• Organisation will be responsible for ensuring timely completion of upgrades by participants, and setting the schedule and guidelines of deployment• Technology solutions group responsible for software development (e.g., development of node software), maintaining node software, providing support for participant deployments• Until the technology further evolves and DLTs are fully interoperable, there should be one single DLT platform• Technology roadmap (including assessment of interoperability) will be created by a technology architecture group
Legal• Working Group - no resolution dispute committee; either need to appoint a party to mediate disputes or have joint responsibility to mediate disputes• Legal entity - form Legal and Regulatory committee (1 member from each bank, 1 from Regulator) to assess legal and regulatory implications)• Establish legal framework (including how liability will be handled)• Establish a clear definition of a smart contract and legal standing to be agreed by platform owner in current form• Engage legal counsel to advise the committee on the impact of potential decisions
Regulations• A digital ID to identify participants and node operators on the network will be critical to address AML/KYC concerns while maintaining data privacy of participants• Work with regulator to shape regulations within the region and how to interoperate with other regions• Re-think how participants will be regulated given regulator has near real-time insight into the ledger• If operating outside the region, define a clear target list of regulators and identify point of contacts in each one• Draft go-to-market plan to target foreign regulators (in conjunction with regulator and local SME resources)
15© 2016 Deloitte. All rights reserved© 2017. 15
Data Protection and IP • Data privacy – data should only be shared on a need to know basis (permissioned)• On chain data should be minimal number of fields – only fields that require data integrity to be preserved and shared with participants• Off chain data should be permissioned• Data resiliency will need to be balanced with data privacy laws (e.g. (Global Data Protection Regulations (GDPR)), particularly when discussing distributed file systems for documents• Personally identifiable information (PII) will require special consideration of all parties (e.g., not maintained on the ledger)• Clear definition of IP and who owns the solution is required (to be decided during negotiations)
Data Retention• Data retention considerations will be factored into the underlying design of the network for nodes to purge ledger information after defined time periods• Legal and Regulatory committee to engage SMEs to assess the potential impact of GDPR on data being stored on and off chain (2018 inception date)
Data Attributes• Work with international bodies to get clear agreement of data attributes relating to trade documents (for example, UCP600 for letter of credit is a common standard/code of
practice relating to letters of credit globally)• Develop common electronic data standards relating to transmittal of trade documents (e.g., purchase order, invoice, transport documents, etc.)
Standard Platforms and Procedures• Form partnerships with international standard bodies (e.g., International Chamber of Commerce) to keep the legal entity at the forefront of standards relating to trade finance and
be the industry leader• Create a standards Working Group from banks and regulator to engage with trade organisations in other identified jurisdictions to establish dialogue around standards• Track International Organisation for Standardisation (ISO) requests by Standards Australia to feed into long term technical roadmap (will help with interoperability)
COMMERCIALISATION AND CRITICAL SUCCESS FACTORS IN DELIVERY (CONT’D)Governance model
Note: Standards apply across all three options
© 2017 Deloitte 17
OUR EXISTING BLOCKCHAIN CAPABILITIES ARE STRONG AND GROWING
Eminence
12Ecosystem Partners
15+Active POCs
5 Active Spoke Labs
2Active Hub Labs
✓ Global Payments
✓ KYC
✓ Reg Reporting
✓ Trade Finance
Pipeline
Alliance
Training
PMO
BIG PLAYS✓ Trade Finance
✓ Global Payments
✓ KYC
✓ Reg Reporting
NEW YORK
BANGALORE
HONG KONG
DUBLIN
© 2017 Deloitte 18
We have a proven track record of delivering blockchain solutions with over 40 proof of concepts built globally. Recently completed projects include:
WHY DELOITTE – PROVEN TRACK RECORD OF DELIVERY GLOBALLY
Created two PoC applications (one on
Ethereum and one on Hyperledger Fabric) to
manage Minimum Competency Code requirements for
banking professionals.
Successful live blockchain (Parity) deployment and
implementation on Azure cloud. Blockchain based management of
certificate lifecycle (e.g. ISO 9001).
RegChain a blockchain based platform which
streamlines the traditional regulatory reporting process by
acting as a central repository for the safe storage and review of
large volumes of regulatory data.
A blockchain Trade Finance Proof of
Concept which digitised the current manual & paper based process
A reinsurance prototype application that creates
opportunities of risk transfers + enables mutual-risk-pooling arrangements.
Adoption of smart contracts, secure validation
of entities & efficient contract signing process.
© 2017 Deloitte 19
DELOITTE SERVICE OFFERING
Code Review
Review code of live blockchain platforms to ensure there are no bugs or weaknesses which can result in manipulation of data
Testing and QA
User acceptance testing, integration testing and unit testing on code and solutions
Integration and Implementation
Implement a blockchain solution as part of an existing incumbent system (rather than replace)
Advise on Initial Coin Offering (ICO)
Disruptive funding model based on blockchain –akin to an IPO
Pilots
Live, secure and robust blockchain solution deployment on the cloud or on-premises
built over a 15 week period
Proof of Concepts
10 week Rapid prototyping phase where a blockchain-based solution is built for your
company
Enterprise and Technical Architecture Design and recommended enterprise solutions
which implement blockchain technologies while complementing business processes.
Big Data and Advance Analysis
Big data meets blockchain – harvesting the large amounts of data which are inherent to blockchain.
20
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