When the Marie Schulte rounds the breakwater off the Chineseport of Qingdao in early November, bankers on two continents willbe watching anxiously.

In particular, they'll be focused on 88 bales of cottonworth approximately $35,000 that the container vessel is carrying —not because of the value of the goods, but because of thetechnology attached to the shipment.

Unloading the goods at the end of their 7,000-mile journey fromHouston will mark the final stage of an experiment by CommonwealthBank of Australia, Wells Fargo & Co. and the trading firmBrighann Cotton to prove for the first time that the combination ofmuch-hyped technologies — blockchain and smart contracts — candeliver real-world benefits.

As port staff scan the bales, an update to an electroniccontract will be triggered, transferring ownership of the goods andauthorizing the release of payment. The deceptively simple soundingprocess is only possible because digital-ledger technology encryptsand stores the parameters of the contract, ensuring all parties areworking off the same synchronized version, which cannot beunilaterally altered or tampered with.

This assurance allows the various phases of the transaction tobe coded into the smart contract, and triggered automatically whencertain conditions are met, without the need for a long-windedpaper trail and human authorization. The experiment offers aglimpse into how transactions might one day be managed in the$4 trillion trade-finance industry, a global business that's beenin the spotlight in recent years owing to high-profile fraudcases.

“This is a truly innovative step,” said Scott Farrell, aSydney-based partner at law firm King & Wood Mallesons who sitson the Australian government's financial technology advisory body.“This experiment turns up the dial,” he said in a telephoneinterview.

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Fraud Risk

While other banks have researched blockchain solutions for tradefinance, Commonwealth Bank and Wells Fargo appear to be the onlyones to publicly announce a real-world transaction for one of themost cumbersome processes in global finance. Reams of paper, faxedstatements and multiple contracts typically follow the movement ofgoods around the world through the hands of exporters, shippingcompanies and importers — and all of these must be keptsynchronized.

As well as the risk of human error, the process is also highlyvulnerable to fraud. Qingdao, where the ship will dock, was at thecenter of a multi-billion dollar scam in 2014. The Chinesegovernment discovered that firms were taking advantage ofinefficiencies in the paper-based system to use the same stockpileof metals to secure multiple loans.

“Trade finance is one the most clunky processes inbusiness,” Michael Eidel, head of transactions at CommonwealthBank, said in an interview at the bank's office in Sydney. “It isripe for disruption.”

It could take a while before the technology takes off andtransforms trade finance. The “scalability and interoperability ofdifferent blockchains” is still something that needs to be furtherexplored, Eidel said. Chris Lewis, Wells Fargo's head ofinternational trade services, said “significant regulatory, legaland other concerns” need to be addressed.

For future iterations of the technology, Commonwealth Bank islooking at widening the number of participants to include insurancecompanies as well as opening up to other banks and clients, Eidelsaid, declining to give any timeframe for rollout.

CBA and Wells Fargo, which is based in San Francisco, aren't theonly banks actively experimenting in this area. Globally, GreenwichAssociates estimated that the annual budget for blockchaininitiatives hit $1 billion this year.

For a snapshot of the blockchain initiatives some Asian banksare exploring, click here.

The two are among the more than 50 global financial firmsaffiliated with the R3 consortium, which is developing blockchainapplications for use in financial services. Barclays Plc, a memberof the consortium, earlier this year said it had been testing theuse of an R3 distributed ledger in developing smart-contracttemplates that would simplify legal documentation.

Two other members, Bank of America Corp. and HSBC Holdings Plc,are currently working with the Singapore government on adistributed ledger that enables paperless letters of credit fortrade finance.

The number of different banks working on blockchain initiativesunderscores the challenge for the widespread adoption of any newfintech application: getting players in a highly competitive andsecretive industry to agree on common standards in using the sameplatforms.

“Absolutely trade finance is going to move this way,” JonathanPerkinson, who leads Deloitte's payment advisory practice in Sydneyand is part of the professional services firm's global blockchaininitiative. “Really the question becomes how quickly the sector canalign to one solution.”

From: Bloomberg News

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