Blockchain research banking consortium R3CEV is a focal point for the exploration of distributed ledger technology and its potential applications to trade finance. Its experimental model and collaborative approach to solving trade finance problems marks it out as a new development in a finance sector increasingly enmeshed with technology.
With hype growing around blockchain applications to trade finance, the banking consortium R3CEV (Crypto – Exchanges – Ventures) is increasingly in the spotlight as a research centre for this new technology. As a rare example of collaboration between dozens of major global banks, and a centre for innovative applications to traditional trade finance products, the consortium merits a closer look. TXF speaks to R3’s Charley Cooper and Stephen Atallah about the potential gains for trade finance, the consortium’s plans to include non-bank members, and the culture of collaboration they’re creating.
Trade and Export Finance (TXF): Do you think R3CEV is a unique and new development in the sense of banks working together towards a common aim?
Charley Cooper (CC), managing director at R3CEV: Yes and no. There are definitely examples of successful consortiums in the past, not just in trade finance but also more broadly, like Tradeweb, SWIFT and BAFT, that have helped shape various parts of the industry.
So in that sense it’s not entirely new, but what is new is the extent to which we were able to pull together this many global financial institutions behind a unified mission.
We launched only in the middle of September - - with nine banks, and now we have nearly 50 and we’re beginning to onboard non-bank institutions. The pace at which we have grown, the size and scope of what we have done in that short space of time is unprecedented. That’s partly due to our business plan, but it’s also what this technology demands, because what it could accomplish is incredibly profound and demands that we cast a broad net.
TXF: What is the rationale behind on-boarding new non-bank institutions?
CC: We started as a bank consortium, but banks were merely a beach-head - it was a place to begin but not to end. To have a meaningful impact on the way financial services operate, banks are only one piece of the ecosystem, albeit a very important one, and ultimately their counterparties, infrastructure players, clearing houses, exchanges, all have a role to play in how this technology could revolutionise the ecosystem. We think their collaboration from the beginning is important in building a system in which they will all feel comfortable.
Our initial bank members made it clear they wanted to include non-banks, to work with clients and end users. We’ve always believed this is the right way to go, and our clients have agreed with us.
Non-bank members want to make sure the concerns they bring to the table are met when we’re putting pen to paper - that’s not the right analogy, but when we are coding and developing the product, they want to make sure they’ve heard from both sides, so that the solution we develop benefits not just one user but the entire community of users.
TXF: What kind of players are you planning to bring on board?
CC: We can’t give any names yet as we’re in the legal documentation phase, but they are asset managers, exchanges, clearing houses, insurance companies, financing organisations, and infrastructure players, so it is a broad net.
We began our new member push in the last few weeks, so you’ll see them onboarding in the next several weeks or months.
TXF: Is there not a risk of dilution of your aims with so many different actors involved?
CC: No, we don’t believe so. There are two different levels to this: the first is driving the adoption of the technologies that could benefit the entire industry. Now as we begin to focus on specific commercial products and different areas or pain points for potential clients, we need to be working with a small subset of clients.
Just because we’re a consortium doesn’t mean all our members are involved in every single thing we do. As we begin to work on developing specific commercial solutions, that will be done on a client by client basis.
TXF: In what ways do you think the distributed ledger could transform trade finance?
Stephen Atallah (SA), trade finance product advisor: This is an exciting time for trade finance: there’s the attention being given to the distributed ledger and a unique bank consortium that’s highly motivated to transform the industry.
We’ve asked banks what key areas they want to improve in trade finance, and naturally close to the top is less paper. The trade finance world has been dragging its heels with digitisation. There’s so many players in any transaction that some of them are going to still be working with paper - it’s driving the banks crazy.
The distributed ledger can reduce cost, increase speed, and create more digitalisation, specifically for collateral management, whether it’s commodity finance, trade finance, asset-based lending: establishing who has possession, where the assets are, avoiding them being overpledged.
These are fairly basic products, but blockchain would be really transformative for them. We’re also working on supply chain finance, receivables purchases using the distributed ledger, looking at coded contracts, self-executing contracts, introducing some automation into the process.
In the future we can see a marketplace being created where trade finance debt can be traded more easily and efficiently. This could be a source of new revenue for the banks, lowering their origination costs, and could also provide extra data for credit scoring.
TXF: What are the main obstacles to the research and to widespread adoption of this technology?
SA: One obstacle is that our research is very intertwined with fixing problems with existing technologies. For example many banks want an automated document matching system. This already exists, but not all of them are comfortable with them, and they want to see if distributed ledger could solve that problem. At the same time, we need to construct projects that address the issues where we think the technology can add the most value first.
Aligning all the goals and prioritising an ever-increasing list of projects is one of the biggest challenges. It speaks to the wealth of opportunities here, but we need to make sure we’re not trying to be all things to all people.
Older legacy systems were members only. Our objectives are broader and we’re really looking to the long term. The more open distributed ledgers are to competing solutions and applications, the better it is for trade finance because then you will really get the best practices.
TXF: There’s currently a problem with trade finance not being sufficiently available to SMEs worldwide and in particular regions. Could blockchain technology facilitate this?
SA: Maybe it goes unsaid that trade finance has to be affordable and usable by everybody.
For example, title registries and bringing more participants onto digital platforms could go a long way to serving SMEs. Banks are working to define their future roles in trade finance, and we are collaborating on which new investments to make.
Many smaller banks don’t have access to the full suite of trade finance products. If we can facilitate wide-spread access, new banks and clients could participate in transactions they otherwise couldn’t. This is where banks should be thinking, that if we are smart and collaborate, there will be huge new sources of business.
TXF: What about those regions that are still under-banked?
SA: This is a topic we’re eventually going to be working on with the banks. I think they’re going to benefit through improved credit information so people can bank smaller companies, and if there’s a way to create a register and make sure receivables aren’t recorded or sold twice. I’m not saying smaller borrowers are intrinsically more prone to fraud than others, but it’s important to facilitate credible information being shared among more trusted parties.
Trade finance historically is a very low risk asset class, with very low rates of losses from insolvency. The idea that every product we come up with needs to be focused on shielding ourselves from the crooks doing trade out there, is out of focus. Our solutions will definitely address security and safety, but also the needs of the wider market and will ultimately help the under-banked, small and regional banks, as well as the major players.
TXF: When can we expect a commercially viable project to come out of your proofs of concept?
CC: I think we won’t begin to see the roll-out of commercial products until the next two-three years. Timelines are difficult in technology: things can happen much faster or slower than expected, or in a completely different way than anticipated. You could embark on one proof of concept to look at certain problems that need fixing, and you end up uncovering a whole other set of issues that could be addressed.
SA: We’re working on improving letters of credit, accounts receivable and supply chain finance, and we’re also very intent on working on the trade debt marketplace area. Marketplaces have struggled to exist and survive, and this is a chance to get widespread adoption. We see this as a growth area. There’s a lot of other interesting things we’re working on but they’re at a conceptual stage at the moment.
TXF: Could the distributed ledger help streamline regulation?
CC: I spend a lot of time with the regulatory community and the message we give them is that if fully deployed, this technology could make their jobs easier and make them better at what they do. Regulators are working with us in our lab and running experiments with us - our ecosystem is open to people helping create the next stage of the technology.
TXF: Do you think collaboration between banks and fintechs is a trend which is going to stick around? Is it as widespread as many are claiming, and how do you foresee it developing?
SA: I think fintechs working with banks is a match made in heaven. We need each other. We need to get the focus from fintech on technology, and for banks to identify which problems they need to solve.
CC: One thing distributed ledger technology showcases more than any other is that its power comes from the network. The more people utilising the platform, the greater the potential impact. Banks and non-banks realise that.
Does that mean everyone’s going to be collaborating all the time? No – some will follow the consortium model like R3, then you have the venture capital model, and the traditional technology model where you develop something and then try and sell it on Wall Street. I wish them luck – I don’t think that’s going to work, but I may be wrong. Ten or 15 years down the road we’re going to see a combination of the results of all of these models.
SA: If there’s a competitor that’s not working closely with a group of banks, I wish them luck because this is going to be a tough, long haul. That’s why the consortium is necessary: the larger your pack during this phase, the more you’ll achieve.
TXF: Have you found it difficult to create a culture of collaboration between banks, who are used to keeping their cards close to their chest?
CC: I am constantly surprised at how well they’re playing together. It speaks to the power of this technology and the recognition that it is gained from the network, not in isolation. There’s a built-in incentive to work together in the way the technology is structured. These folks are incredibly collaborative, sharing intellectual property and the fruits of their labour.
Our teams hit the office in the morning, and overnight people at the banks work on it in their free time and contribute code to what we’re developing. You don’t see that a lot. We are happy every day that this collaboration is as strong as it is. It’s very validating from our standpoint in terms of the business model we’ve put together.
SA: On the trade finance side the banks are very into sharing because they would love to have these products available to everybody. It’s not in their interest to create a stand-alone solution that only one or two of them can use. That’s just not the nature of this movement.
TXF: Is there a tension between R3’s experiments and the experiments banks are conducting alone?
CC: There’s no tension and we’re happy other people are doing it, because it shows us where we are in our process. Because we run the collaborative lab, often banks working on side projects come to us to test their technology and validate some of their assumptions. So there are independent areas they have ongoing but they keep coming back to us to help them improve what they’re doing, and if that’s the role we can play for them then we’ve done something right.
An unmissable opportunity to examine how we can innovate within export finance and ensure that it remains a core business for financiers, insurers, exporters and borrowers alike.