February 26, 2019 | Written by: Raphael Barisaac
Categorized: Banking | Blockchain
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A trade fan speaks
In the realm of banking, I’m what you’d call a “trade person.” I don’t just mean it in the literal sense—my job: Global Co-head of Trade and Working Capital for the UniCredit Group —I mean it on a deeper, personal level. We “trade people” share a passionate belief that, in the big picture of the global economy, everything revolves around trade, which serves the “real” economy. And we’re motivated from the moment we wake up to develop new ways to simplify and streamline the processes around international trade in order to grow it.
To a large extent, it’s about using digitization to remove obstacles that have historically made it harder for small and medium sized enterprises (SMEs) to engage in cross-border transactions. The fact alone that SMEs account for half of the world’s output and two-thirds of its jobs makes a strong case for focusing on the segment. But there’s also a qualitative difference—an inherent agility and culture of innovation—that makes the SME segment an especially attractive candidate for digital solutions.
A safer landscape for SMEs
UniCredit had the needs of SMEs in mind when it partnered with a group of European banks to create we.trade, a blockchain-based trading solution, back in 2017. Why blockchain? Let’s lay out the case. The big reasons companies avoid trading with a foreign partner is complexity and its first cousin, risk. Legal processes involved in international trade deals are often lengthy and bog down progress, something anathema to the agility SMEs thrive on. And here’s a big one: what if the counterparty doesn’t pay?
The blockchain trading solution developed by we.trade is based on the IBM Blockchain Platform running on IBM Cloud, which uses the Hyperledger Fabric framework from the Linux Foundation. Banks like UniCredit provide an entry point for their customers onto the platform, where every company on it will have been thoroughly vetted for things like money laundering. In that sense, think of we.trade as a kind of safe, pre-screened ecosystem for international trading.
Blockchain fits the bill
Blockchain addresses the risk of contract non-compliance in two ways. First, it uses distributed ledger technology (DLT) to create an immutable, time-stamped record of every entry. Suppose a company tries to unilaterally change the terms of the trading agreement. The DLT at the heart of the we.trade platform instantly alerts all parties to the trade—including intermediaries like the bank—of the change.
The second big risk reducer is the built-in smart contract feature that’s a core element of blockchain technology. Smart contracts all but eliminate counterparty risk by automating contract execution, one step at a time; once one side does something that follows the agreement, blockchain prompts the other side on what they need to do—like send a payment.
A promise fulfilled
Here comes my passion again. Blockchain has the potential to uncork the international trading opportunities for SMEs. We’re seeing lots of customer enthusiasm and we’re attracting new banks to join the network. It reinforces our belief that we.trade—and the blockchain technology it runs on—is adding a new stimulus to international trade.