Distributed Ledger Technology for Trade Finance: Improving Operational Efficiency in Trade Finance Transactions
Implementation: 2020
Technology type: Distributed ledger technology (DLT)
Technology service providers: Contour and CryptoBLK
ITD’s Partner Department: Private Sector Operations Department
Other Partners: Bank for Investment and Development of Vietnam (BIDV)—issuing bank; Standard Chartered Bank (SCB)—confirming bank; OPEC Plastics Joint Stock Company—importer; SGC Plastics—exporter
In line with ADB’s Operational Approaches:
Promoting digital development and innovative technologies
Developing capacity
Adding value and promoting quality infrastructure
ADB’s Trade Finance Program (TFP) uses the Trade Finance Program Management System (TFPMS) and SWIFT to handle the end-to-end trade finance process, from guarantee application to issuance. Trade finance is a paper-heavy industry: various document exchanges take place that involve several entities, including exporters, importers, banks, and transportation and logistics companies. Most of the steps involved in the process are manually done.
Together with the Government of Singapore and the International Chamber of Commerce (ICC), ADB supported the Digital Standards Initiative (DSI), which aims to create standards to facilitate the interoperability of various digital networks and platforms related to trade. Shifting towards digitalization will not only improve operational efficiency and interoperability, but it will also help establish a system that can be more easily measured, monitored, and regulated. In addition, establishing standards would also help resolve issues with the market of trade finance platforms, which tend to be fragmented, siloed, and not interoperable. As part of its support in the digital transformation in the trade sector, ADB sought more efficient ways to process guarantees and loans for trade finance. This tested whether distributed ledger technology (DLT) could make trade finance transactions quicker while minimizing risk.
Standard Chartered Bank (SCB) and Bank for Investment and Development of Vietnam (BIDV) were the partner banks for this initiative. Contour, a global network of banks, trade partners, and corporations that used DLT in its decentralized global trade finance network to enable real-time collaboration among various stakeholders, oversaw the project with ADB. CryptoBLK was also engaged to develop additional workflows on the Contour network to enable credit guarantee issuance on behalf of a crediting bank.
The first credit guarantee transaction using DLT involving $50,000 worth of plastics shipped from Thailand to Viet Nam was successfully conducted in September 2020. This was also the first cross-bank Letter of Credit transaction between Vietnam and Thailand that was done using a DLT-based platform.
The live transaction, which started with SCB sending its guarantee request and ended with ADB TFP issuing its guarantee issuance, took less than 4.5 hours. Some issues were encountered that caused some delays in the transactions, but the process was still significantly faster compared to the conventional process. ADB also provided feedback to Contour on the areas for improvement and the issues that were encountered, which were temporarily resolved using workarounds.
The initiative demonstrated that using DLT in trade finance enabled the faster review and processing of documents compared to the currently used system, thereby increasing efficiency and reducing operational costs. Automation eliminated redundant steps and reduced manual processes. In addition, it offered other benefits, including streamlined processes and enabling real-time tracking of transaction status and an audit trail if needed.
Unfortunately, Contour was ultimately unable to generate sufficient funding from its bank shareholders, resulting in its closure on 30 November 2023.