This article is an updated version of a thought piece I wrote for the Entrepreneurship without Borders course^[1] at The Massachusetts Institute of Technology (MIT) circa November 2016. The topic of the global unbanked^[2] continues to fascinate me, alongside the largely untapped potential of blockchain technology to rethink and reboot the global financial system.

During my MBA studies at MIT, I read several papers focused on NASDAQ’s use of blockchain technology to revolutionise settlements and trading^[3],[4] via their Linq product, that encouraged government leaders and companies to explore the technology to help solve their challenges.  While I applaud their efforts to increase awareness and engagement with blockchain technology, these solutions are weak use cases for the blockchain and a far cry from the impact envisioned by its early pioneers.

The use of the blockchain by large institutions and governments to reduce operating costs via private networks, for example, shows that banks do not grasp the full potential of blockchain technology today, or are finding it hard to implement on a mass consumer level, or possibly both.  As one recent Financial Times article^[5] notes, “tighter regulation, new competition from technology companies and the low central bank interest rates […] have forced the banking sector to look seriously at reducing costs wherever they can.”  Paul McMeekin of CFO Magazine is even more direct: “Public blockchain technologies do not offer the scale and speed needed to achieve mass adoption for high-volume use cases.  However, a private, permissioned-based network built on blockchain technology can provide tremendous value to the payments industry.”

Given MIT’s thoughts and concerns about inequalities in the developing world and the global unbanked, I would like to refocus attention on these far-reaching issues and consider how the blockchain represents a more compelling use case for providing access to banking services for billions of the world’s inhabitants.

The World Bank reports^[6] that two billion people do not have access to financial services.  Public ledgers that require 5-10 seconds to complete a transaction (too long for most mature consumers in the developed world) present no real-time issues for a population that has no viable alternative, and there’s a huge potential to capture this market.  While mobile money accounts have driven financial inclusion in recent years, especially in sub-Saharan Africa – where 12% of adults (64 million people) now have such accounts, 45% of them exclusively so – the World Bank notes that “there are big opportunities to expand financial inclusion, particularly among women and the poor.”

The unbanked is not a problem confined to the world’s adult population either.  UNICEF reports^[7] that approximately one in three children born in the world is not documented, with the lowest birth registration records in countries such as Somalia (3% of births documented), Liberia (4%), Ethiopia (7%), and Zambia (14%).  Several Asian countries also make the list including Pakistan (27%), a country with an economy ranked as the 25th largest in the world^[8].  In 2015 there were also nearly 100 million people who were forcibly displaced, stateless or refugees, according to the United Nations^[9], and that number has likely not decreased since then.

If global banks could envisage and implement a blockchain-enabled technology to address the lack of identities – thus making access to basic bank products both cost-effective and enforceable – the seeds would be sown for an explosion in global economic activity and the rebalancing of income inequality in the developing world.  Needless to say, this would also drive the need for increasingly more sophisticated financial services in coming years, a carrot for a global banking system that is genuinely starved of expansion opportunities in the developed world.

Blockchain platform BanQu^[10], for example, has helped displaced people in some of the world’s poorest countries create economic identities.  Its mission clearly articulates the company’s desire to put the small consumer back on the map, using a collation of e.g. key physical characteristics and biometrics, personal / commercial recommendations, and other public profile information, uploaded to a secure ledger that serves as the ‘shared truth’ identity of that person.  Taken one step further, an identifiable person can then use their identity to apply for bank accounts, loans and other credit facilities, and banks can rely on the security of a blockchain ledger to verify credit scores and satisfy ‘Know Your Customer’ regulations and the like.

Ideas like these are required in order for the world’s unbanked and subprime population to be included and fairly treated in the global economy, and such inclusion can only come from a fundamental shake-up of the banking sector beyond its current imagination. There are positives signs, however. The World Bank Report also notes that “the number of people worldwide having an account grew by 700 million between 2011 and 2014 […] Three years ago, 2.5 billion adults were unbanked. Today, 2 billion adults remain without an account”.

In conclusion, there is a far more impactful use of blockchain technology to drive economic equality in the developing world, with a higher willingness to accept what developed world consumers regard as technical imperfection and a proven track record in mass-scale adoption of current blockchain-enabled applications.  This situation is unlikely to be implemented in the developed world for some time.  According to the World Economic Forum’s recent white paper^[11]: “The most impactful DLT applications will require deep collaboration between incumbents, innovators and regulators, adding complexity and delaying implementation.”

I look forward to the opportunity to be a part of that change!

---

[1] Also known as Implications of Blockchain Technology for Economic and Financial Development

[2] Roughly 2.5 billion adults in the world do not have access to banks, which means somewhere in the order of 5 billion people belong to households that are cut off from the financial system, The Age of Cryptocurrency, Paul Vigna and Michael J. Casey, First Edition (January 2016)

[3] https://ir.nasdaq.com/news-releases/news-release-details/nasdaq-linq-enables-first-ever-private-securities-issuance

[4] https://digital.hbs.edu/platform-rctom/submission/the-disruptor-disrupted-nasdaq-wrestles-with-blockchain/

[5] https://www.ft.com/content/0288caea-7382-11e6-bf48-b372cdb1043a

[6] http://www.worldbank.org/en/programs/globalfindex/overview

[7] https://www.unicefusa.org/press/releases/unicef-1-3-children-under-five-do-not-officially-exist/8339

[8] http://www.tradingeconomics.com/pakistan/gdp-growth

[9] http://www.unhcr.org/en-us/figures-at-a-glance.html

[10] “Our customers can build their future with this 360-degree economic profile that is device, language, and currency agnostic”, BanQu homepage http://www.banquapp.com, October 18th, 2016

[11] World Economic Forum, The Future of Financial Infrastructure, August 2016, http://www3.weforum.org/docs/WEF_The_future_of_financial_infrastructure.pdf

This article is an updated version of a thought piece I wrote for the Entrepreneurship without Borders course^[1] at The Massachusetts Institute of Technology (MIT) circa October 2016. Eximchain, the disruptive blockchain tech company I mention in the article, became a fatality of the COVID-19 pandemic (however its founders continue to do foundational work in DeFi), but the rest of the article has aged pretty well.

During my MBA studies at MIT several pressing questions were raised about the feasibility of a fully decentralized supply chain, and how blockchain technology might change the game for stakeholders.  In this article I focus on a particular part of the supply chain: trade finance for the transportation of finished goods between manufacturers (exporters) and retailers (importers), and how this process can be opened up using the blockchain.

Containerisation of finished goods and commodities has its roots in the 1920s, however it was not until 1961 that a global container standard was agreed^[2] and not until the 1980s that containerisation started to proliferate through the shipping industry.  It heralded a new era for global trade, where manufactured goods (like television sets and Harley Davidsons) could be securely shipped in a specific-sized container across continents, significantly reducing the expense of international trade.  In the past decade, however, the ability to ship finished goods has increasingly favoured larger companies with established multinational presences and trade relationships.

One of the key challenges has been securing financing during the actual transportation of finished goods, commonly referred to as a Letter of Credit^[3].  Given the time it takes to be transported from the manufacturer in a foreign country to their ultimate destination, the goods need to be insured for significant events such as losses (damage or physical loss of the items during transportation) and to ensure payment between the counterparties, especially if they do not have an established trading relationship.  A small- to medium-sized manufacturer (SME) of products (owning one factory, for example) in China or India may be able to raise financing from local banks for working capital, but is unable to secure trade credit for the international movement of its goods.

Some of the pain points for trade finance banks are: the time consumed by assessing credit risk for each counterparty; difficulties establishing counterparties’ identities; and the fact that it is a largely manual process, all of which result in higher fees or no terms being offered to SMEs.  Companies like Nike and Walmart, on the other hand, have developed highly sophisticated supply chains with lenient financing terms provided by international banks.  SME manufacturers ‘locked out’ of direct global trade are more likely to supply goods to these global giants instead of directly to consumers, unless they are prepared to carry the risk of losses/badwill while their goods are in transit.

Finding a way to provide trade finance to SMEs would open up global trade to many more participants, bring better efficiency of trade (allocation of resources), and ensure the best prices for suppliers and consumers.  If the blockchain could also be harnessed to track goods from creation to receipt – as proposed by Jessica Leber^[4] and Rebecca Migirov^[5] – then issues such as slave or child labour, environmental destruction and violence or political turmoil could also be effectively addressed.

In my experience visiting newly constructed containerships and ports across Europe, the U.S., Asia and the Middle East during my former banking career, containerships already implement sophisticated tracking software to monitor each container and its cargo to ensure faster loading/unloading times and to comply with international law, for e.g. the handling of refrigerated or volatile goods.  New ports are also largely automated with tracking at each stage of unloading, stacking and warehousing before transhipment or transfer to land-based transportation.  The main barriers exist at customs checking (especially in the U.S.), and related document checks by transhipment agents and the final importers (the ultimate receiver of goods).  All these hurdles delay the point at which trade finance can be relinquished and the exporters are no longer at risk (paying a fee to their banks).  Banks that provide trade finance are generally not prepared to devote the required amount of time to insure this movement of trade where small shipments are concerned.

Blockchain has the potential to significantly impact each of these current barriers.  If we are able to verify not only the origins of a given product, but also ensure everything from the identities of manufacturers to the materials used in production, using smart contracts for example, then importers and exporters will be able to agree transactions in a timely manner and customs departments can effectively identify shipments that require investigation or can be approved instantly upon arrival.  This efficiency can then be used at each subsequent stage of the supply chain.

Perhaps more relevantly, on the financing side, banks – or even a new collection of investors looking for an alternative to bank-based investments – will have access to a secure and accurate record of exporters’ and importers’ activities, which can be used to implement smart contracts^[6] to start and terminate their exposure automatically.  This also allows banks to assign creditworthiness to their customers to easily measure credit risk, thus significantly reducing transaction costs, while also giving tangible records against which to conduct anti-money laundering (AML) and Know-Your-Customer (KYC) checks.  This ease on doing business has the potential to open up the trade finance market to the majority of global trade partners, 90% of whom currently conduct their trade on an open account basis.

MIT spinoff Eximchain^[7] is currently investigating the feasibility of such an approach for trade finance, and is hoping to implement a creditworthiness score using observed data from its trade settlement service, allowing investors to originate loans for future trade financing.  Of course, there is a long road to tread, and this paper is only looking at a small – but critical – part of the supply chain, ignoring the potential reluctance of lorry driver unions, governments, and sheer consumer apathy for how goods are made available to them.  There is also the real possibility that, even if a decentralized supply chain – or even a part of it – is demonstrated to be feasible, Nike or Walmart would be the biggest beneficiary of such a system and choose to acquire it.  Finally, we must not ignore the risk that existing trade finance banks develop their own individual systems which frustrate the interoperability of a global trade finance solution.

Still, on the face of current evidence, there is a compelling opportunity for a blockchain technology to support the transition to a new trade finance model with a level playing field for all participants, with full transparency for manufacturers, retailers and consumers.

---

[1] Also known as Implications of Blockchain Technology for Economic and Financial Development

[2] https://www.worldshipping.org/about-liner-shipping

[3] A letter of credit is a promise by a bank on behalf of the buyer (customer/importer) to pay the seller (beneficiary/exporter) a specified sum in the agreed currency, provided that the seller submits the required documents by a predetermined deadline; definition from International Chamber of Commerce

[4] https://www.fastcoexist.com/3045726/how-bitcoins-technology-could-soon-shed-light-on-how-products-are-made

[5] https://medium.com/@ConsenSys/the-supply-circle-how-blockchain-technology-disintermediates-the-supply-chain-6a19f61f8f35#.q4u8y9jsp

[6] In a process similar to Chapter 7.1 of the ‘Applying cryptotechnologies to Trade Finance’ paper, https://www.abe-eba.eu/media/azure/production/1549/applying-cryptotechnologies-to-trade-finance.pdf

[7] http://eximchain.com