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Can unicorn Tradeshift disrupt trade finance with blockchain?

trade handshake

Tradeshift, the unicorn startup, previously announced they’re getting into blockchain for trade finance. Ledger Insights spoke to CTO and co-founder Gert Sylvest who heads up Tradeshift Frontiers, the division that explores new technologies. The plans are novel in several ways. For example, suppliers don’t need credit ratings. But perhaps the most surprising is they want to use a public blockchain.

To date, the majority of the company’s business has been in managing supply chains for big buyers like DHL, Fujitsu, and Unilever. And supply chain financing is integrated into their centralized platform.

In May the company announced a $250 million Series E financing led by Goldman Sachs at a value of $1.1 billion. The volume going through the platform is approaching half a trillion dollars.

Tradeshift has blockchain advantage

Instead of focusing on enterprise buyers, their blockchain solution Tradeshift Cash will target the suppliers.

Many of these companies are micro, small and medium-sized and there’s 1.5 million of them already on the platform. So unlike other blockchain initiatives, Tradeshift is merely targeting existing users with a new application. Potentially a supplier can instantly get paid up to 70% of the outstanding invoice value.

For invoices to qualify, the supplier needs to have traded with the buyer at least two times or for more than $30,000. The supplier needs to have a history of $50,000 on Tradeshift. And invoice values can be $500 – $50,000.

Sylvest points out that for 70% of SMEs their finances are pretty opaque. Traditionally trade finance involves running credit ratings on the buyer and supplier. Tradeshift Cash doesn’t need a supplier credit rating. In fact, the financier’s won’t have the identity of the buyers or suppliers, though Tradeshift will know.

“We can make an extreme form of transaction-based finance that basically uses the knowledge about the relationship between the companies rather than very specifically, you know, what is this company? And what is their history? Because in the end the probability that something is going to be paid rests on the nature of that relationship,” Sylvest explained.

And Tradeshift knows how many invoices the SME has submitted to the supplier previously. Plus the financing will relate to invoices that are already on the Tradeshift platform. That means there’s additional knowledge about the invoices.

How it works

The financier will know the buyer’s credit rating (only) plus they will have data similar to ‘the buyer is a Fortune 5000 company’. They will also know that the invoice matches a purchase order. And that the enterprise has already accepted the invoice to pay. Tradeshift provides some details about the relationship regarding the number of past transactions. And there are a few other details like location and currency.

All financed invoices will already exist on the main centralized Tradeshift system. The invoice information is anonymized. Hence the financier never gets to see the invoices. A supplier will install the app and ask for say $50,000 in financing. The system will pick enough invoices that correspond roughly to that amount.

Tradeshift takes on the role of tokenizer. They tokenize the information and put it out on the marketplace. Then financiers compete with each other by offering the best price, or the lowest cost of funding. That offer is then passed backed to the small company who can accept or reject it.

Financiers

From the financiers perspective, they will define the volumes they’re interested in funding. Financiers won’t be limited to banks, but will also include non-institutional investors such as family offices. They will all go through Anti Money Laundering and Know Your Customer procedures so that they won’t be anonymous.

Given this isn’t the typical risk package, it’s possible the initial partners won’t be conventional players.

“This is a new kind of financial product in the market. So it’s not really comparable to anything out there,” commented Sylvest. “So we want to find a partner that is also committed to you know, not just providing dumb money, but actually wants to help shape this financial offering. And that means investors who also have a great appetite for data.”

Launch and regulation

Currently, the project is being piloted with thirty customers, but the launch date depends on whether regulatory obstacles arise. Sylvest emphasized their desire to run it within a well-defined regulatory regime. Given the release will support one currency and that currency is not yet defined, this implies the initial region will depend on which jurisdiction gets a green light first.

The launch could be in the first quarter of next year. And the current milestone is to secure financing for $100 million worth of receivables. They’re planning for that level of volume in the first twelve months.

Technology and community

“We might be on the Hyperledger governing board, but we actually believe that we are a blockchain agnostic company,” commented Sylvest. When it comes to Tradeshift Cash, the CTO’s thinking contrasts with the typical permissioned blockchain. “We have a pilot running on Ethereum, but we are actually quite open to what will be the production technology here.”

They don’t have plans for an ICO. The token needs to represent invoice values in fiat currency because the token represents an IOU between the buyer and the seller. Hence in July Tradeshift announced a partnership with stable coin platform MakerDao. This week, MakerDao announced a funding round of $15m from Andreessen Horowitz’s a16z.

Sylvest emphasized the importance of community in technology selection. The impression is they want a public blockchain, but they also recognize it’s early days and will give them more regulatory headaches.

The CTO pointed out that they have a diverse range of SMEs spread over 190 countries. “So it’s never going to be like, you know one financer is going to understand, to be able to appreciate the risk, in that kind of spread. So for us, the community is really really important.”

“We definitely want to make a big bet on the biggest communities because we believe you know, that is going to be the real differentiator.”

With permissioned blockchains, financiers might need to have a node which would be painful for private investors. Ethereum removes that obstacle.

Public blockchain benefits

Sylvest wants entrepreneurs to build on top of their platform: “Who are the people that can help us build new financial models on top of this tokenization layer that we are building?”

The CTO continued: “Who are the people who will actually participate in co-developing the source code and who are the people who build creative applications on top? Like custody or identity solutions or marketplaces and auctions and user experiences and so on.”

He commented that a lot of marketplaces on public blockchains could be built on centralized infrastructures. “But the very fact that it is a public blockchain means that you can now exchange things between those ecosystems. So it’s like someone, you know made a big hole in a number of siloed marketplaces. And I think today many of the permissioned blockchain use cases don’t have good answers to a solution to how would you create those kinds of ecosystems.”

An important issue is incentives and who gets the lion share of value. On permissioned blockchain’s it tends to be the early participants. With Tradeshift Cash the plan is to give away as much of the value as possible to the suppliers and financiers, especially the latter. Tradeshift will take a 0.1% transaction fee.

It’s a matter of waiting a few months to see if Tradeshift gets the regulatory approval it seeks. Because the blockchain painfulness will be hidden from the suppliers, Tradeshift Cash has the potential to grow faster than many other blockchain applications.