OPINION – Blockchain-based trade finance platforms offer many opportunities to Mainland China and HK

*By Oriol Caudevilla

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Practically unfalsifiable and impossible to change once a record has been added, blockchain is a distributed database stored on multiple computers as a massive number of identical copies. Even though it is best known for underpinning the operation of cryptocurrencies such as Bitcoin, blockchain can be used in many other areas, such as smart contracts, financial services, supply chain management, insurance, IoT, video games…

Considered for long a new technology, blockchain is developing fast, and is quickly becoming a key player in the finance industry. 

Even though many people think that China has adopted a tough stance towards blockchain technology, this is not actually accurate. The Chinese Government is encouraging Chinese companies to seize the opportunity offered by blockchain technology, while it is adopting a tough approach on cryptocurrencies and virtual-currency trading platforms.

These virtual-currency platforms use blockchain technology, but, as I said, blockchain can have many different applications other than cryptos.

A few examples of China´s friendly approach to blockchain are the fact that China Central Television (CCTV) defined blockchain´s economic value in 2018 as “10 times more valuable than the internet”, and also the fact that President Xi, speaking as part of the 18th collective study of the Political Bureau of the Central Committee in Beijing in October 2019, said that the country needs to “seize the opportunity afforded by blockchain technology.” President Xi´s statements on blockchain were believed to be his first in-depth remarks on the technology.

One of the current most relevant applications of blockchain within China is that of China´s new Central Bank Digital Currency (CBDC), the Digital Yuan or DCEP. However, it must be noted that CBDCs in general do not need blockchain necessarily, but it might be compatible and useful to use this technology.

It is considered that blockchain could be useful for wholesale CBDC. In contrast to retail CBDC, wholesale CBDC is limited to commercial banks, clearing institutions or other entities that have traditionally had access to central bank reserve.

When it comes to China´s digital yuan, it will be operating through a two-tier structure, in which the PBOC issues the digital currency to commercial banks and institutions without the employment of blockchain technology, but the financial institutions could give out the digital yuan to the public through blockchain.

Nevertheless, in this article, I want to focus on a very interesting application of blockchain that is taking place all over the world and in a very relevant way in Hong Kong: trade finance.

Trade finance refers to financial transactions -domestic and international- where financial institutions provide credit to guarantee an exchange of goods. Applying blockchain technology to trade finance will help to reduce many inefficiencies, since traditional trade finance processes (e.g., Letter of Credit) are still a resource-intensive operation due to the physical exchange of documents, for this industry has not seen many changes these last centuries despite the world´s quick evolution.

Regarding the benefits of using blockchain in trade finance, we can cite the fact that it will speed up transaction settlement times, it will increase transparency between all parties, it will reduce costs and it will unlock capital (capital that would be temporarily not available, waiting to be transferred between parties involved in the transaction), while providing payment certainty to sellers, as well as mitigating risks and increasing financing revenues for banks

As I mentioned in my article “Hong Kong is moving towards a new era of Fintech” (Macau Business, November 9), in his Hong Kong FinTech Week´s opening keynote, Hong Kong Monetary Authority (HKMA) Chief Executive Eddie Yue announced that Hong Kong has embraced a new era for smart banking, and one of the four main initiatives that Mr. Yue mentioned the city was undergoing to prepare its financial sector for the future was precisely related to blockchain in trade finance.

In this sense, the operators of eTradeConnect (Hong Kong´s Blockchain-based trade finance platform) and the People’s Bank of China Trade Finance Platform announced in November 2019 that a Proof of Concept (POC) would be conducted to explore connecting the two platforms. The HKMA announced in early November that Phase 1 of the PoC was completed successfully. The second phase will begin soon in early 2021 with a focus on expanding the range of trade activities and financing products. 

The blockchain-based trade finance eTradeConnect platform is considered to be a leading platform in the Asia Pacific Region. Following the success of the 2016 Proof of Concept, this new blockchain-based platform was developed to replace the paper-based trade finance system.

It is owned and operated by the Hong Kong Trade Finance Platform Company Limited (HKTFPCL). Through eTradeConnect, customers and their trading partners can conduct trades and trade financing through sharing of information in an effective and cost-efficient way. Participants of the platform benefit from enhanced transparency and potential access to multiple banks for trade loans with the use of eTradeConnect.

Furthermore, eTradeConnect was developed in collaboration with 12 banks in Hong Kong: Australia and New Zealand Banking Group, Bank of China, BEA, Hang Seng Bank, HSBC, Standard Chartered, Agricultural Bank of China, Bank of Communications, BNP Paribas and Shanghai Commercial Bank.  

Related to this, the People’s Bank of China, alongside the China Banking Regulatory Commission, the China Securities Regulatory Commission and the Foreign Exchange Bureau, proposed in May 2020 a blockchain-based trade finance platform to cover the whole Greater Bay Area.

To sum up, now that China has concluded in principle the negotiations for a Comprehensive Agreement on Investment (CAI) with the European Union, and now that China signed last November 15 one of the world´s largest free-trade deals in history, the Regional Comprehensive Economic Partnership (RCEP), after eight years of negotiations, it seems the perfect time for Mainland China and Hong Kong to keep encouraging innovation in the area of blockchain in trade finance. There is no doubt that both Mainland China and Hong Kong are very committed to innovation in general and to blockchain technology as well as to improve its commercial ties with the rest of the world, hence the importance of keeping the development of blockchain-based trade finance platforms.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan. He is currently a member of the Blockchain, Digital Banking and Greater Bay Area Committees at the Fintech Association of Hong Kong (FTAHK).