Welcome to the monthly TFG & ICC DSI Monthly Column! Check back here on the 3rd Wednesday of every month to hear from Pamela Mar, Managing Director, ICC Digital Standards Initiative (ICC DSI) and get the latest insights into digital trade!

May: Spotting the innovation frontier for digital trade and finance

The annual BIS Innovation Summit offers a glimpse into how technology might transform finance. 

It brings together three key groups:

  1. Central bankers, who responsible for managing risk and growth in the current financial system.
  2. Innovators, technologists, and disruptors, seek to introduce new methods and approaches.
  3. Large financial institutions, which benefit from the existing system but also recognise the potential for technology to enhance their operations and the movement of money in the modern economy.

This year focused largely on what BIS chief Agustin Carstens called “small steps and gigantic leaps”. Small steps are the innovations which introduce incremental changes, tweaks, and upgrades to existing systems; they are low risk, but deliver returns steadily within today’s operating framework.  

Gigantic leaps drive a fundamental rethinking of the entire system in order to transform it for the better, to achieve new goals that become reachable, most commonly due to the rise of new technologies.  

Tokenisation: The next big step?

The summit offered insights into three core components of BIS innovation hub’s program: central bank digital currencies (CBDC), tokenisation and smart contracts, and AI.   

All three have the potential to both disrupt and drive the digitalisation of trade and finance. Of these three, the first is largely under the purview of central bankers, with the private sector largely following their lead. By comparison, the latter two offer excellent grounds for experimenting with different applications, with the race clearly on to pilot, develop and chart the path to scale.  

Tokenisation and smart contracts are a little further ahead than AI, and we can already see how might be able to transform digital trade and finance.  

About a decade after blockchain burst into mainstream business media as the killer app for the supply chain of the future, today tokenisation and smart contracts have the potential to realise this promise.   

Because tokens carry unique identifiers for assets and owners, they can eliminate the settlement risks created by the need to check, match and clear in any payment situation when paired with smart contracts.

A supplier receives payment a certain number of days after the buyer issues the payment instruction due to several necessary steps. Data must be checked, identities must be matched, and as the payment travels across the globe, delays occur at each stage. Some of these delays are caused by paper processing. 

Even when instructions are electronic, human intervention is required to verify all details. As noted by Carstens, these delays incur both monetary and human costs.

By applying tokenisation tied to a smart contract, the transaction can be automated on the basis that certain conditions have been fulfilled. Because the token carries unique but secure data attributes, it can be passed along any number of parties without being connected, and without divulging sensitive information.

Tokenisation can thus not only solve settlement and payment delays, but also helpg financing in multi-tier supply chains, where a buyer may not know a supplier or processor several tiers upstream and for whom financing is critical for executing their part of the supply chain.  

Today, that upstream supplier might fall into the $2.5 trillion trade finance gap, and have to resort to money lenders with their costly rates, in order to fulfil the order.

Case studies: Practical application

The application of tokenisation to the trade finance supply chain has already been experimented with the BIS Innovation Hub Hong Kong through its Project Dynamo, which used tokens and smart contracts to finance SMEs upstream in the supply chain.  

Payments were triggered by the creation of the electronic bill of lading (eBL), to denote the fulfilment of an order. The Global Shipping Business Network working with ANT group is going one step further, where they have combined the concept of eBL with tokenised deposit through Project Ensemble, spearheaded by the Hong Kong Monetary Authority (HKMA). 

This is the first step towards using blockchain to merge the transfer of title for goods and the corresponding cross-border financial payments between various parties involved in global trade. Trusted trade data (logistics and financial) can also serve as the basis to support trade finance and help bridge the trade finance gap for SMEs.

The trade finance supply chain has long been saddled with many intermediaries: parties who absorb the risk of matching and clearing, money lenders who step in because trade finance does not reach upstream, or local lenders who offer bridge financing for suppliers who might be paid only in delay.  

There are also intermediaries within banks, — staff involved in checking, legal and compliance officers who stand guard over SOPs to manage the risk, and so on.  

Panelists at the BIS event noted that scaling these new models for finance will deliver a more streamlined financial system, with fewer intermediaries, fewer layers, and more transparency.  

In other words, there will be losers, i.e. those who make money from the inefficiencies present today. On a macro level, their elimination means more resources going towards real needs in the real economy, like the millions of SMEs who today cannot find financing.  

On the micro level, expect every change to be fought by vested interests whose rents are being jeopardised.

Politics aside, it does appear that the use of tokenisation and smart contracts when applied to eBLs is just a small sliver of the opportunity present in the digitalisation of trade, to drive a better way to finance needs in the world. 

Our task is twofold: one, drive the use of eBLs so that that these financing models can be scaled; and two, discover more of these opportunities at every point of the digital supply chain.

Monthly TFG & ICC DSI Column: April

April: An interoperability layer for trade finance: Has the time come?

In November 2021, in the wake of intense pressures on trade finance in developing markets as a result of the COVID crisis, McKinsey, the ICC Advisory Group on Trade Finance, and the Fung Business Intelligence proposed a vision to drastically scale up inclusion and interoperability in trade finance. 

 “Reconceiving the Global Trade Finance Ecosystem” took digitisation of trade and finance as a given, but anticipated that greater challenges would arise unless there was a commitment and an attempt to align divergent approaches on standards, data sharing and governance.  

The risk was that fragmentation – the so called “digital islands” effect—would increase rather than be resolved as a result. And meanwhile, the trade finance gap, a measure of financial inclusion, would increase.  

Two and a half years later, in spite of the recovery from the covid crisis, the trade finance gap has widened from $1.5 trillion in 2021, to $2.5 trillion, and fragmentation persists. 

On the other hand, technology-driven innovation has produced many creative solutions to address the financing gap, including data-sharing platforms, buyer-driven financing, and tokenisation and AI applications to enable deep tier financing. The case for digital identity as a key pillar of the solution has also become clearer.  

However, any new solution that proves successful in a pilot or a single market will encounter challenges when expanding across multiple markets, networks, and stakeholders, each with their unique and sometimes varying approaches. There is no easy answer to the scale problem as long as the world of digital trade finance remains balkanised.  

At the heart of “Reconceiving the Global Trade Finance Ecosystem” was the proposal of an interoperability layer which would address exactly this challenge, by working to align standards and processes to facilitate data sharing and portability; and serve as a forum for collaboration and coordination on SME inclusion, sustainability, or new emerging issues. 

At the time, the proposal of an interoperability layer may have seemed far-fetched, or too ambitious given the immediate pressures of supply chain issues related to COVID. While many may have thought that it was a worthwhile idea, no party was prepared to take the lead to make it happen.. 

Is it time to revisit the idea of an interoperability layer?  

There are two factors that make us think that it is time to revisit the idea.

 The first factor is that we have put to rest the idea that standards alignment across the trade ecosystem is “impossible” or too difficult. This week, the ICC DSI will launch the first integrated analysis of all 36 key trade documents (KTDDE), incorporating both B2B and B2G documents, with significant step ups in data alignment and the creation of a key trade data glossary. 

It has taken 18 months to accomplish what many considered impossible, given the challenges of integrating various data models and aligning the diverse viewpoints of more than 50 contributing organisations on the requirements for advancing digitalisation..    

The soon-to-be-released report is just a start – given that 15 documents still require significant work on digitalisation – but it is a first step against the forces of fragmentation, and sets the basis for the move to transact based on data in the place of documents.  

Much more work is required to create plug and play interoperability between the finance documents and data, and the rest of the trade ecosystem which will ensure that finance and trade processes work from a single set of secure, verified, authenticated data.   

Secondly, the originally identified fragmentation issues persist, but new issues have arisen as well, many new of which require a greater level of collaboration and coordination. 

For instance, the New York state legislature is currently considering amendments to the Uniform Commercial Code, which would provide legal clarity and recognition for digital trade payment instruments in line with MLETR. Across the Atlantic, the French Parliament is also conducting its own hearings on its own alignment to MLETR. These are both key legal underpinnings to trade digitalisation.    

Normally such issues would be dealt with by local advocacy, except that both could have widespread impact given the use of New York state law in finance documentation and especially the French decisions on reliable systems (as reported in GTR). These are on regional radars, but what about global radars?  

They should be.  

The interoperability platform will not replace the good work of industry associations, but rather build on them and ensure complementary actions. And there is a growing list of key issues in digital trade finance needing to be addressed for the good of the industry, such as ESG. 

Two and a half years ago, the practice of issuing trade finance based on ESG metrics was not commonplace, given the lack of standard frameworks and the lack of good data.  Today, banks race to build such a practice against standards which should be harmonised across the finance industry.

In short, the challenges facing the digitalisation of trade finance are many. An interoperability layer will take effort to build and might not be able to solve all of them, but today, with the sheer scale of need calling out for solutions, it might be a good time to reconsider it. 

The KTDDE integrated framework for 36 key trade documents will be launched on Wednesday 24 April at Commodities Week Europe, by the Digital Standards Initiative. The DSI is also involved in an advocacy effort on the New York State legislature consideration of the UCC. They welcome any expressions of interest.  

The ICC Digital Standards Initiative will launch a complete framework for “documents to data”, based on its 18 month work on key trade documents and data elements at Commodities Trading Week, April 23 to 25 , 2024. Watch this space! 

Monthly TFG & ICC DSI Column: March

Digital Trade: From “we need standards” to “let’s drive adoption” 

It is now well known that the official deliberations at the recent WTO ministerial meeting (MC-13) produced results that underachieved in the eyes of supporters of digital trade and e-commerce. 

To me, this stood in stark contrast to the almost unanimous call for increased digitalisation of trade amongst the business, policy and technology communities heard in the unofficial events alongside MC-13.  

Beyond MC13: Digitalisation is still at the forefront

The consensus is growing stronger and clearer: digitalising trade is essential for creating the efficient supply chains we need. Digitalisation checks many boxes: efficiency to deal with rising costs, traceability to deal with increasing requirements at the border; and security and trust, no matter where the documents traverse.  

At the regional levels, digital trade is a focus, for instance, as the leading element of the  Digital Economy Framework Agreement of the Association of Southeast Asian Nations (ASEAN), while the Commonwealth has just launched its trade digitalisation and legal reform working group. 

Nationally, the UK passed the Electronic Trade Documents Act just six months ago; a similar bill has just been tabled this past week in France; Australia has recently committed to adopt legal reform measures to allow electronic records in trade within its Simplified Trading System; and China has recently adopted frameworks to experiment with the MLETR in two free trade zones.   

For businesses, years of collective efforts to advance the digitalisation of specific processes within supply chains are now yielding results. 

This progress is evident in several key developments, including the FIT Alliance‘s declaration on e-Bills of Lading, the World Economic Forum’s launch of the TradeTech initiative, and the growing support for the ITFA’s digital negotiable instrument project.

One might even think that the demise of initiatives like TradeLens, Marco Polo, we.trade and Contour are now no longer strikes against digital trade, but lessons that we as a community must digest en route. 

Every call for the digitalisation of trade – whether from business, policy or NGO—seems to be followed by a common refrain that “we need standards,” showing that we all recognise that simply digitising processes individually is not enough. 

We hear strong support for combining the many individual initiatives currently underway into one holistic, integrated vision with agreed standards, to enable greater data flow and sharing across supply chains.  

This makes a lot of sense. Our work at the ICC DSI shows that over half of the key trade documents used in international supply chains already have harmonised electronic versions or multiple electronic versions whose core data terms can achieve a significant degree of interoperability. 

However, if we only concentrate on expanding digitalisation within document-related processes without making an effort to integrate these processes throughout the supply chain, we risk missing out on the significant benefits digital trade offers in terms of equalising opportunities and enhancing efficiency.

In other words, the “standards” referred to in the common refrain will be essential to driving connectivity across the supply chain: first to align data across different processes and secondly, to ensure that the principles for protecting, verifying and authenticating data and electronic documents are consistently applied and thus generate a more trusted, open trade environment.  

2024 has every potential to be a turning point in digital trade, with the long work on standards close to being achieved. Indeed, the rousing call “we need standards” is slightly imprecise: the standards already exist at many points across the supply chain. 

Our work now is about making these known to those who have the means to drive change, driving adoption as legal frameworks open up, and sharing the gains to deepen capacity for digitalisation where it is in short supply, to make concrete steps towards the digital trade ecosystem that is within our reach.