Last year Minsheng Bank and CITC launched a Chinese Letter of Credit blockchain. On Friday, the Bank of China and the same two banks announced another trade finance blockchain. This time it’s a forfaiting trading platform. So far they’ve executed six transactions worth $4.2 million.
This initiative focuses on forfaiting as opposed to the more common factoring whereby a supplier receives early payment of an invoice. Forfaiting is similar to factoring but differs in several ways. Forfaiting is always for exported goods, usually for significant amounts of at least $100,000 in sales of commodities or capital goods. The term is commonly longer than factoring at 1-3 years. With forfaiting, the supplier receives the money and if the buyer defaults, there is no recourse to the supplier.
Perhaps the biggest difference is the debt instrument is usually a bill of exchange or promissory notes which is tradeable. Hence banks that advance the funds can trade the bills between each other. And this trading solution is what the Chinese consortium has developed.
The main benefit of the platform is automation to reducing phone and email communications. It includes identity authentication and asset verification as well as an intelligent credit rating system. The aim is to standardize transactions which may stabilize market prices and result in cost savings.
The consortium believes blockchain provides strong security for the trading platform by employing encryption. And the duplication of data on multiple nodes makes data tampering very hard.
Another advantage relates to trading where there is one place where all aspects of a transfer can happen including rights transfer.
The consortium plans to involve other banks.
Other Chinese trade finance projects
Last week Ping An’s OneConnect announced its trade finance platform for small to medium-sized Chinese banks.
The Bank of China is also involved with a consortium in the “Bay Area Trade Finance Blockchain Platform” (BATFB) which targets trade with territories such as Hong Kong and Macau.
The Hong Kong Monetary Authority is about to launch a trade finance platform in association with HSBC, Standard Chartered, and several other banks.
Zheshang Bank has a blockchain which processed more than $4 billion of trade finance. Two months ago they used the assets as collateral for a $68m securitized loan note.