The risk posed by fraud in the $4 trillion trade-financingindustry has prompted banks to start exploring distributed-ledgertechnology like the one that underpins bitcoin.

Standard Chartered Plc, which lost almost $200 million from afraud at China's Qingdao port two years ago, has teamed up with DBSGroup Holdings Ltd. to develop an electronic ledger of invoicesthat uses a parallel platform to the blockchain employed in bitcointransactions. Lenders such as Bank of America Corp. and HSBCHoldings Plc say they're looking at blockchain for trade financeand other banking applications.

Blockchain proponents argue that the technology will change theface of banking, helping lenders cut billions of dollars in costs.Trade financing, a centuries-old banking mainstay, may becomeground zero for blockchain adoption because it promises to do awaywith paper invoices and the fraud that accompanies them — if bankscan come together around a joint platform.

For blockchain applications, “invoices should be considered aleading candidate here, given the high potential for fraud,” saidHenry Balani, global head of strategic affairs at Accuity,which provides technology to monitor trade-based moneylaundering.

Lenders typically don't publish their losses from tradefraud, though almost 20 percent of banks in a 2015 survey bythe International Chamber of Commerce reported an increase in fraudallegations.

In the Qingdao case, companies controlled by a Chinese-born,Singaporean businessman are alleged to have used invoices for thesame metals stockpiles several times to bilk banks out of hundredsof millions of dollars. Standard Chartered wrote down $193million in commodity assets in 2014 because of the incident. Inanother example, a trans-Atlantic fraud conspiracy that usedfictitious purchase orders and fake invoices to get loans for metalshipments was estimated in 2008 to have cost banks includingJPMorgan Chase & Co. close to $700 million.

“Because there is no common platform for banks to screentransactions financed by other banks due to confidentialityconcerns, there is a possibility that customers may capitalize onthis information-sharing gap to obtain financing from multiplebanks using the same invoice,” said Lum Yin Fong, one of the DBSexecutives who oversaw the bank's ledger tie-up with StandardChartered.

The banks conducted a trial late last year — code-namedTradeSafe — that used a shared ledger of as many as 60 mockinvoices, according to Gautam Jain, Standard Chartered's globalhead of digitization and client access for transaction banking.Details from an invoice are used to generate a unique hashvalue stored on the ledger, which appears if another bank tries toregister the same details separately, according to Jain.

HSBC and Bank of America said in separate e-mails they'reinvolved in a number of blockchain projects including applicationsfor trade finance. Citigroup Inc., meanwhile, said it's in the“early stages of exploration” to assess how the technology can helpin treasury and trade. None of the banks provided anyspecifics.

Despite the incentives, blockchain will only be able to solvethe fraud problem if banks agree to club together to use thecentral registry, according to Liew Nam Soon, Ernst &Young's Asean managing partner for financial services.

“There has always been a culture of competitiveness andchallenges in banks working together on large-scale projects orinvolving more than a handful of banks,” Liew said. “There isevidence, however, that this is changing with the current digitaldisruption in the industry, compelling many banks tocollaborate.”

Common Process

The issue for any collaboration on a distributed ledger isgetting participants to agree on common standards in adopting thesame invoicing platform. For example, the number of data fieldsfrom an invoice that will be used to generate the hash value forthe blockchain will need to be negotiated with the different banks,Standard Chartered's Jain said. Banks will also need commonmessaging standards, according to Accuity's Balani.

“The challenges are related to agreeing a common process andensuring that a single operating system can be adopted for all,”said Owen Jelf, the London-based global managing director ofAccenture's capital markets practice. “Think of it like puttingseven people who speak seven different languages in one room to tryto settle a problem, in this case how to settle a trade financetransfer.”

It helps that one of the biggest advocates for digital ledgersin banking is a well-known former banker. Blythe Masters, who onceran JPMorgan Chase & Co.'s commodities business and helpedinvent credit-default swaps, is now the chief executive officer ofDigital Asset Holdings LLC, which is seeking to popularize the useof blockchain in the financial industry.

Standard Chartered and DBS are working with the InfocommDevelopment Authority of Singapore, a government agency that seeksto advance technology and telecommunications in the city, topromote the distributed ledger used in the TradeSafe trial. The IDAaims to commercialize the technology and is in discussions withother banks, a spokesperson said in an e-mailed reply to questions,declining to provide names or a timeline.

“We need committed partners,” the IDA said. “Trade financing isborderless and banks that do adopt this technology will be able tobenefit regardless of the country of origin.”

From: Bloomberg News

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