The Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority (HKMA) have joined forces to test distributed ledger technology (DLT) in the multi-trillion dollar global trade finance industry. The initiative is aimed at reducing the risk of human error and potential fraud involved in manual and paper-based transactions, while hastening integration across Asian markets.
Moving into the digital era
Key insights
- Distributed ledger technology promises to cut costs and time involved in traditional paper-based trade finance transactions
- The Global Trade Connectivity Network (GTCN) platform is expected to be rolled out to other markets relatively quickly. Japan is understood to be next in line, with South China to be connected through Shenzhen and potentially Thailand
- Competing regulatory regimes in different jurisdictions may slow the Asia-wide deployment of blockchain in trade finance
After developing proprietary pilot programs to test blockchain in domestic transactions, MAS and HKMA have collaborated to develop the Global Trade Connectivity Network (GTCN), a DLT infrastructure for cross-border transactions.1 Anticipated to go live in early 2019, GTCN will initially focus on transferring digital documents and data for trade finance between Singapore and Hong Kong before expanding to other markets.2 “We firmly believe that the time has come for trade finance to move into the digital era," said HKMA chief executive Norman Chan.3
The initiative is intended to eliminate a number of pain points involved in traditional trade finance transactions which can be hampered by inefficiencies involving the manual creation and shipment of paper-based contracts, invoices and bills of lading. The administrative costs of processing, moving, verifying and securing the necessary documentation can double shipping costs, according to IBM.4
“Trade financing is largely paper-based. This is not only inefficient, but increases risks such as fraud and duplicate invoicing," MAS managing director Ravi Menon said.5
Fintech vendors invited to pitch
MAS believes that GTCN will ultimately eliminate duplication, boost efficiency and reduce transaction costs but there are a number of significant technological challenges. The platform will need to navigate competing regulatory systems in different jurisdictions as well as data privacy issues. “We need vendors' help," said HKMA executive director Li Shu-Piu.6 To that end, technology and fintech vendors have been invited to make proposals for inclusion on the platform, which will eventually act as a type of motherboard for different trade applications.7 The development of business and technical models is expected to conclude in the first quarter of 2018.8
Technical capabilities to handle very large transaction volumes remain unproven, and the costs of maintaining the protocol are high
Another concern involves the remaining potential for human error in blockchain. While the technology promises to simplify transactions, it does not make stored data inherently trustworthy if it is already flawed when first recorded.9 Industry experts have also pointed to the hacking of cryptocurrency exchanges as evidence of the vulnerabilities in blockchain applications. Wolfgang Lehmacher, head of supply chain and transport industries at the World Economic Forum, noted that the “technical capabilities to handle very large transaction volumes remain unproven, and the costs of maintaining the protocol are high." Training people to use the system will be critical, he said.10
New frontiers of digital innovation
GTCN is the latest in a series of Asian projects promoting fintech. MAS has also signed agreements with other central banks, including collaboration on cross-border payments with the Bank of Canada.11 It recently launched an SGD 27 million Artificial Intelligence & Data Analytics initiative to promote the adoption and integration of AI within financial institutions.12 MAS also announced it has joined the Massachusetts Institute of Technology Media Lab to strengthen Singapore's talent pool in the fintech sector.13
A high level of investment is being directed to blockchain technology around the globe as the financial services industry aims to mine greater efficiencies and seek cost reductions. GTCN will be closely watched as a proof of concept and as a pilot for further regional collaboration in deploying DLT for cross-border transactions.