With blockchain, will paper-based trading be a thing of the past?
In our fast-paced digital world, it’s incredible that trade finance processes are still primarily paper-based. The delays in modernizing this system are put down to the lack of a universal end-to-end solution that’s fast, convenient and inexpensive. Thankfully, blockchain-powered platforms offer just this, but there are still a few issues to resolve before they can be rolled out widely across international trading.
In International trade, letters of credit (LoC) are commonly used in transactions, which are physical written undertakings between a bank (representing a buyer) that guarantee payment to the seller based on the terms of their agreement. There have been previous attempts to bring in digital systems such as a bank payment obligation (BPO) and MT 798, both being digital solutions between banks and provided by Swift. The issue with both was the same: each favoured the banks and made too many demands on importers and exporters, which potentially posed them a higher risk if anything went wrong.
The reason this antiquated paper trail system has sustained is primarily down to confidence, i.e. the security that every party is holding up their end of an agreement. Changes to procedures could potentially open up parties to risk in a process that is already heavily based on trust—that is, the trust that exists between parties, the trade and the movement of money. While digitization offers the potential for increased transparency and less operational risk—the current time-consuming process of having to manually check every document will no longer be relevant.
As technology has improved, blockchain platforms have become a more viable answer to allow trading businesses to ditch paper at last. There are still some hurdles to overcome, however, such as standardizing networks and business regulations across industries. There’s also a need for so-called “superconnectors”, which are government agencies and trusted parties like established banks to act as a bridge between other networks.
Because banks are reluctant to offer an external system as a solution—one that doesn’t rely upon their internal checks and balances—this has also been a hindrance to developing an end-to-end process.
The advantages to blockchain are numerous and include faster turnaround, reduced costs and increased transparency for parties at all stages of trading. However, despite the fact that businesses are moving towards the use of digital platforms, each platform has different rules and set ups. This is why it’s necessary to establish a large uniform network that can be adopted across the board, where regulations and systems are agreed upon by all parties across all borders.
In May 2018, the first end-to-end finance transaction occurred between Cargill Singapore (HSBC) and Cargill Switzerland (ING), where a digitized letter of credit was applied for via blockchain for a shipment of soybeans. The process was a success and the exchange took less than 24 hours (compared to five to 10 days).
Even more recently in April 2019, HSBC used blockchain for a letter of credit between Australia in China for a shipment of wool. This is credited as the first cross-border blockchain transaction with a Chinese importer that used a digitized LoC. This live deal, allowing parties to access the relevant documents in real-time, demonstrates that banks are making strides towards offering a fully digitized service to importers and exporters in the future.
While banks are dipping their toes into the use of blockchain for international trading, this is the perfect time for individuals with experience in this area to consider their next career move.
Since cryptocurrency has become more widely recognized – with the growth of the likes of Bitcoin and Litecoin, for example – there has been an exponential rise in the search for the words ‘blockchain’, ‘Bitcoin’, or ‘cryptocurrency’, to name a few.
According to LinkedIn, the number of job vacancies that contained the aforementioned words in 2016 was 645. By mid-2019, this figure has surged to over 16,500, with a number of companies that are looking specifically for blockchain specialists. Research from Glassdoor has confirmed that job vacancies in the US have escalated 40% since last year, up to 2,907.
The US are leading the charge when it comes to job offers that are related to cryptocurrency, blockchain, and Bitcoin, making up 90% of the global share. Approximately 79% of blockchain and cryptocurrency vacancies are located within in the 15 largest American cities, being concentrated in San Francisco and New York in particular, accounting for 24% and 21% respectively.
The growth of the cryptocurrency industry has resulted in the decline of audit work and decreased workload for accountants, since transactions are recorded on a public ledger and thus requires less confirmation. Therefore, in order to keep on top of the trends and maintain their jobs, accountants will now need to develop blockchain and technological skills to adapt to the rapidly changing financial landscape.
Fortunately, for those who are well versed in blockchain, the competition is lower, due to a lack of qualified personnel. The growing preference of individuals with cryptocurrency knowledge means that those with trading experience – specifically within the crypto or Bitcoin markets – are 25% more likely to be asked in for a first interview. The smaller talent pool has further contributed to a rise in salaries for specialists in this field, with an average annual base salary of $84,884 USD, as estimated by Glassdoor.
As the cryptocurrency industry is still on a rapid incline, it is unsurprising to see that banks have adopted the blockchain method and digitization for their LoCs and other processes. The surge in digitized processes and digitization on the whole is causing the landscape of the financial sector to change significantly – it is therefore imperative that we can keep atop these trends and look towards developing candidates for skills within this area to further excel within the industry.
References
https://www.bain.com/insights/rebooting-a-digital-solution-to-trade-finance/
https://www.internationalinvestment.net/news/4001636/hsbc-blockchain-letter-credit-australia-china
https://cointelegraph.com/news/blockchain-and-crypto-jobs-market-2018-vs-2019-by-the-numbers
by Brad Knoxview my profile
