Blockchain for Banking News

BIS Project Dynamo: can tokens help SME trade finance?

port container shipping trade

The BIS Innovation Hub released the results of Project Dynamo, which explored using Digital Trade Tokens (DTT) to address the trade finance gap for micro, small and medium-sized firms (MSMEs). The DTTs were stablecoins backed by bank funds and issued on the Ethereum public blockchain.

It’s well known that there’s a substantial trade finance gap for SMEs pegged at $1.7 trillion by the Asian Development Bank. The International Finance Corporation (IFC) extended the group to include micro firms and estimates the gap is $5.2 trillion.

A key reason for the gap is small businesses are perceived as high risk by banks and funding providers.

The concept of supply chain finance aims to address these risks but is an imperfect solution. The idea is that a buyer uses its credit standing to help to secure credit for its suppliers. However, that might work for tier one or two suppliers but not further down the chain.

With blockchain, an alternative path is for the buyer to use tokens to make a conditional payment. The buyer or its bank will issue digital tokens to pay the supplier. These tokens are stablecoins backed by ringfenced funds. However, the tokens are only convertible to cash once a specified condition is met – such as proof of delivery or an electronic bill of lading.

Now the supplier holds the unrealized DTT and has a number of options. They can keep it, or they can sell it to get funding, in a similar way to factoring an invoice. Alternatively, they can pass some of it on to their suppliers. If a sub-supplier receives the token, it has the same options, and so on through the supply chain. When the token’s condition is met, the token holders receive cash and the token is burned.

The DTTs were nonfungible tokens in the Dynamo trial because each shipment is unique.

The project concluded that this process would help SMEs get funding by making it easier for investors who can purchase the tokens.

However, the project envisioned some challenges around awareness and potentially high integration costs. There are also reservations about the transparency of public blockchains and unpredictable gas fees, although these are both addressable. And with any tokenization, there are always regulatory hurdles.

Additionally, for the buyer, there’s an element of pre-funding they might not be keen on.

Project Dynamo involved supply chain finance firm Linklogis and one of its major investors, Standard Chartered. Last week the bank proposed that programmable CBDCs could potentially be used for this type of solution.