U.S. Bank begins testing a blockchain for trade finance

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U.S. Bank has completed its first fully digital trade finance transaction as financial institutions move away from paper-based processes for international trade.

The national bank worked with the blockchain-based WaveBL platform, which supports encrypted digital document transfers between trade partners and their banks, to facilitate the trade transaction.

"It was a collective effort to join forces and pilot this right for this client of ours," Daniel Son, head of working capital finance at U.S. Bank, told American Banker. "If you want to do something digital, you need to make sure that all the parties within the underlying trade transaction are enabled to deliver, send and accept these digital transactions."

U.S. Bank served as the presenting bank for an undisclosed exporter already working with WaveBL, according to Son. MSC Mediterranean Shipping Company issued the electronic bill of lading and facilitated the shipment, and the India-based bank ICICI Bank processed the other side of the transaction.

Ofer Ein Bar, vice president of financial solutions at WaveBL, said partners like U.S. Bank "bring us closer to achieving our mission to provide practical solutions that streamline trade finance transactions and enable meaningful industry advancements. This is only the beginning."

Blockchain technologies carry the benefit of common systems between parties, but only work efficiently when every party member involved in the transaction is on the same chain, according to Finzly CEO Booshan Rengachari.

The concept of using blockchains in trade finance has existed for years, but applying a single blockchain across the entire industry is impractical, according to Rengachari.

"Every major bank in every country has had some proof of concept for building these trade finance transactions digitally for more than 10-15 years," he said. "The problem is, can every bank get on the same chain? If you look at some major banks, they're not on a single core platform. They don't have a common ledger. In these proofs of concept, the major banks have their own private chain that nobody else is using. Can we really bring all of these banks together into one common ledger or one common blockchain? Technically it is possible, but practically it is not possible."

However, Rengachari pointed out there are a few potential workarounds. "It could be a chain of chains, or there could be one common agency, a global agency that connects multiple chains and makes them interoperate from one to another," Rengachari said.

He added that distributed ledgers could help the trade industry unlock the broader benefits of document digitization.

"Digitization brings a lot of benefits to fast-tracking payments, collecting taxes and tariffs and fast-tracking transportation of documents, but the key is bringing every party of the transaction to the same chain," Rengachari said.

Javelin research director James Wester, research director for digital assets and crypto at Javelin Strategy, also told American Banker that incorporating blockchain into trade finance workflows has been attempted before.

"Prior efforts were shuttered after failing to gain traction," he said. "Those attempts showed just how hard it is to achieve the alignment required across the entire trade finance value chain."

One obstacle to full document digitization is differences in legal requirements and regulations across the supply chain, according to Wester.

"The industry remains paper-heavy because physical documents still carry the necessary legal weight across multiple jurisdictions," he said. "A blockchain-backed digital document only works if regulators, customs, financial institutions and all counterparties agree to recognize it. That alignment is finally starting to happen, and the U.S. Bank story shows how players across the value chain are beginning to embed digital documents into real-world workflows."

International trade transactions usually require a courier to physically transport documents across continents, which can take several days. According to U.S. Bank, fully digitizing the trade transaction documents reduced that part of the timeline to minutes. This translates into direct cost savings for banks, according to Son.

"When you're no longer having to send physical documents back and forth, then you don't have courier expenses anymore," he said. "Digital costs a fraction of courier costs, especially when there's a mistake that you have to correct and then resend the documents back and forth."

Son also highlighted the indirect cost savings for banks when switching to fully digital trade documents.

"There's a risk mitigation component to digital versus paper," he said. "Covid is the best example from recent years, since post offices and couriers were shut down. How do you actually deliver documents during a time of pandemic? What about geopolitical issues? When you're working with physical documents, you're subject to those disruptions."

"Just like misdelivered packages, sometimes it goes to the wrong address or the wrong party," Son said. "In some cases that's fine as it just gets rerouted, but in most cases that could be extremely damaging from a data privacy and reputation standpoint, not to mention enormous delays. All of that is a pretty big incentive to move these documents more through digital channels."

Tariffs are a hot topic in U.S. regulation at present, but experts note that the shipping industry has been navigating various changing trade policies for many years already.

"One benefit of a digital framework is that it gives every participant in the trade ecosystem better visibility and control, especially during moments of disruption caused by tariffs or sanctions," Wester said. "But tariffs and sanctions have existed long before digital recordkeeping, so whether today's trade environment will accelerate adoption remains to be seen."

The trend of document digitization is picking up speed across the trading and shipping industry. The Digital Container Shipping Association, a trade group that includes nine of the world's ten largest container lines, has committed to issuing 100% electronic bills of lading by 2030. A bill of lading is one of the most important documents in the trade transaction process — it is used as a receipt of goods, a contract between the shipper and carrier and a document of title. Currently, the bill of lading is often still reliant on the physical transfer of paper records via courier.

A co-signed commitment statement published by the DCSA states that "electronic bill[s] of lading could save customers $6.5 billion in direct costs and enable $30-40 billion in annual global trade growth. Likewise, digitizing these processes would substantially benefit the environment by removing the need for physical documents and associated transportation."