Bank of America : Merrill Lynch Explores Using a Blockchain for Trade Finance

Blockchain testing remains at the forefront of bank innovation efforts. This article discusses one of the expected use cases to emanate from blockchain pilots currently under development, most specifically in this instance citing Bank of America Merrill Lynch, which is reportedly planning to explore trade finance scenarios in conjunction with another bank. In a recent piece entitled Blockchain in Corporate Banking: What’s Up?, trade finance was one of the three main use cases Mercator identified as high probability pilot efforts for blockchain in 2016. One of the primary reasons for that is the relatively cumbersome and expensive processes still commonplace in traditional trade finance, where banks continue to play a dominant role.

The World Trade Organization (WTO) estimates that approximately 80 to 90 percent of world trade relies on trade finance, mostly of a short-term nature. In addition, private banks account for approximately 80% of the trade finance market. Banks play a critical role in international trade by providing trade finance products that reduce risk.

In light of the ongoing search for balance sheet strength, banks need to look at cost reduction in all areas, and blockchain technology potential fits nicely into the displacement of manual with digital in this complicated business. The article goes on to explain the separate participation of BofAML and dozens of other banks in the R3 consortium. There is a mention of SWIFT as well, which has been attempting to digitize the space, and are primed for a possible inclusion of blockchain capabilities.

….the global trade finance market has suffered since the financial crisis of 2008. The World Trade Organization states that leading trade finance banks have been shedding assets in order to comply with new capital adequacy regulations, scaling down the size of their balance sheets. Subsequently, banks have become more risk-averse, and only offer trade finance services to “quality” customers…….To reduce costs and increase efficiency, corporates are increasingly replacing paper document flows with digital data flows

Other discussion points include cryptocurrency and the technology marriage with mobile devices. As stated on these pages before, stay tuned for ongoing revelations as some of these various pilots become public.

Overview by Steve Murphy, Director, Commercial and Enterprise Advisory Service at Mercator Advisory Group

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