Crypto Market Commentary
25 April 2019
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Global Trade Finance And Cardano
There’s one industry which the likes of Deloitte and the WTO agree is ripe for decentralized disruption.
Worth US$10 trillion globally, it’s estimated that up to 90% of world trade is dependent on some form of trade finance invoicing and proper access to liquid capital, e.g., at any given time, there are over US$43 trillion of invoices in balance sheets waiting to be paid across the globe.
“Up to 90% of world trade is dependent on trade finance invoicing….but around 70% of all SMEs in emerging markets lack access to credit.”
Despite this, according to a recent World Bank Group Study, around 70% of all SMEs located in emerging markets lack access to adequate credit. Of these, 50% have at some point had trade finance requests rejected by traditional banking establishments.
This isn’t because of bad credit however, and the invoices these companies are generating are financially sound. Rather, it’s because the required infrastructure doesn’t exist to provide such a large number of SMEs with invoice credit. As a result, a US$1.5 trillion credit gap has emerged, predominately from Asian countries, whose economies are growing at an unprecedented rate.
According to the World Economic Forum, if the issue of trade financing is left to continue unabated, the trade finance gap will rise to more than $2.4 trillion by 2025.
The Traxia foundation, and it’s first working solution LiqEase, are seeking to digitize working capital assets for SMEs via the Cardano blockchain, and facilitate US$1.1 trillion of invoice asset trading globally.
The first project invested in by Cardano, LiqEase’s ultimate goal is to create an entirely new digital asset class for trade finance assets, which leverages blockchain technology as a solution.
A lofty goal indeed. But why does trade finance need blockchain in the first place? Let’s find out.
Why does Trade Finance Need Blockchain?
If you’ve been following the FinTech space for any significant length of time, you’ve probably heard just about every purported use case under the sun for blockchain.
The fact is, not every industry needs blockchain. Not even every industry would benefit from blockchain.
But trade finance isn’t one of those industries. The trade finance industry faces real challenges, which blockchain solutions are poised to resolve. Here’s why:
* Blockchain facilitates rapid credit risk assessments from the immutable on-chain transaction history.
* Minimal human error with document checks.
* Instant verification and reconciliation of records.
* Contracts fulfilled automatically through smart contract technology.
* Low-cost, instant and secure data exchange.
* Disintermediation of third parties, i.e. banks, who are no longer required to assume credit risk.
* No double spending, so limited counter-party risk.
* Undisputed ownership of invoice assets — it’s all there on the blockchain.
We’re firmly in the 21st century, and time’s not slowing down anytime soon. But trade finance is barely keeping up, and much of it’s infrastructure hasn’t changed for years. In technological terms, trade finance is still operating in antiquity.
Current trade finance processes are expensive, laden with bureaucracy and require a significant investment in time. Add to this mix lengthy cross border payments and settlements, and it’s clear that an efficient solution is needed.
Major institutions are taking note of blockchain’s potential for trade finance. Big-Four consultancy firm, Deloitte, remarked that trade finance could be significantly improved by:
Likewise, Deloitte sees opportunity for digitization of trade finance throughout the ongoing blockchain revolution.
They’re not alone either. During 2018, the World Trade Organization published a 160 page report on the potential of blockchain to revolutionize international trade, concluding that:
It seems then, that the usefulness of blockchain for trade finance isn’t of any doubt. The real question is, who will build the first exchange for trade finance digital assets?
Traxia and the LiqEase Decentralized Exchange
The Traxia Foundation was established to enable greater worldwide connectivity, by ensuring trade finance is accessible to companies located anywhere in the world.
As Traxia is a Swiss foundation, they are helping to foster growth by supporting companies to build using their financial and technical resources, the first of which is LiqEase.
LiqEase’s goal is to build a new digital asset class for trade finance assets, using blockchain technology. LiqEase is a B2B trade finance platform, and has already discounted invoices via a real-world use case with Porsche as a Buyer.
To trade invoices for accounts receivable, LiqEase are building their own decentralized exchange for invoices. Called the LiqEase DEX, professional investors on the platform will be able to access an entirely new asset class, bought and sold easily on a decentralized marketplace, just like current digital assets are.
The sign-up process for new buyers or sellers on the platform is simple.
To facilitate the trading of invoices, LiqEase have created a “Special Purpose Vehicle” in Luxembourg; which will allow investors on the platform to buy and trade invoices like corporate bonds.
However, there’s big challenges ahead for the Traxia team, as many traditional trade finance professionals and investors are still wary about a blockchain based solution, so it will take some time to see how a decentralized, tokenized ecosystem is adopted.
The First Project Invested in by Cardano / Emurgo
Emurgo, the venture arm of Cardano, was formed to foster growth on the Cardano blockchain. Subsequently, Emurgo has made an early investment in the Traxia project.
Tobias and Bruno, CEO and CMO of Traxia respectively, appeared on the Cardano Effect Podcast.
It seems fitting then, that Traxia is among the first solution to be migrating to Cardano.
Other projects Emurgo have invested in include Tesseract, who are building an open wallet protocol, Helixworks, a DNA biotech company, and Y2X, which provides services in Asset Management and launches STOs.
Trade finance is integral to every aspect of our modern daily lives. Despite this, there’s still multiple inefficiencies even with all the technological tools we have at our disposal.
However, one new tool which has emerged in the last decade, decentralized ledger technology, may hold the key for making trade finance more accessible and equitable, levelling the playing field for large and small companies.
Adoption of a blockchain solution will be more difficult. Sentiment around cryptocurrencies had impacted the wider blockchain industry, and many traditional financial professionals view the space with caution.
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