Blockchain technology will democratise trade finance by opening access to thousands of small businesses – if trade wars don’t get in the way,  says co-founder of Taulia and CEO of Centrifuge, Maex Ament.

In the mid-Nineties the tech boom was at its peak as a myriad of projects, both practical and impractical, competed for funding. The fallout at the end of the decade exposed those where reality failed to live up to the hype, but its legacy was the tetrarchy of Google, Amazon, Facebook and Apple that power today’s business world.

There are strong echoes of that period in the current burst of activity around digital technologies and blockchain, which reflect an extremely hot creative environment. Much of the momentum is driven by the banks and tech consortiums which don’t want to be left out, although unlike the Nineties most recognise that the less practical ideas will inevitably fall by the wayside. Yet there’s good cause to believe that the more robust trade finance solutions on which banks are collaborating will endure.

At the centre of these lies blockchain. There has been a great deal of scepticism surrounding the technology, questions as to what exactly it is and whether it is actually needed. It is still early days and many exaggerated claims about blockchain don’t stand up to close scrutiny. And while it would be good to believe that two to three years are enough for the initiatives now being pioneered to take off, pragmatism suggests that it will take five, eight or even 10 more years before blockchain truly transforms the financial landscape.

Transformative potential

However, we at Centrifuge are convinced that blockchain offers real value by making trade finance accessible to all and more affordable. Our specific mission is to ensure that businesses around the world, whatever their size, get paid on time and to realise this ambition by developing an open, decentralised operating system that connects the global financial supply chain.

It’s also an ambition that comes from a team that has previously harnessed technology over the past 18 years to address supply chain finance. Foremost among the founders’ achievements is the creation of Taulia, which has pioneered flexible supplier financing solutions and a platform to connect suppliers and buyers since its formation in 2009. Over that period, the company has raised more than $150 million and 97 of the Fortune 100 companies use it daily to transfer millions of dollars and address the perennial problem of accounts payable.

I’m super proud of what we accomplished at Taulia, which has been able to help 1.5 million companies gain access to liquidity. However, extend that assistance to small and micro businesses around the world and you’re serving as many as 200 million to 300 million firms out there with the same basic funding requirements as their larger peers.

How can that be accomplished? It’s a question that my Taulia co-founders Martin Quensel, Philip Stehlik and I set out to address when we moved over to set up Centrifuge last autumn. In a nutshell, the solution that we’re focused on will be an open-source protocol using the Ethereum blockchain, supplemented by private sidechains, allowing third parties to build apps on top, such as decentralised funding markets and others.

Companies can utilise it as a vehicle for their unpaid invoices; both banks and alternative lenders can use it to provide liquidity to those companies. There is also the potential for a host of additional services to be added, ranging from credit insurance to currency exchange.

Among the other benefits will be:

  • Easier access to funding for small suppliers from a marketplace of lenders, enabled via the sharing of authenticated data across the network.
  • Smart contracts enabling payments to be triggered automatically once an order has been fulfilled, eliminating eventually the need for invoices.
  • A global business graph of transactions that will reduce payment volume.
  • Major buyers can de-risk their supply chains, as financing is accessible to every tier of the chain. This potentially enables a supply chain to be organised as a decentralised autonomous organisation (DAO) levelling the playing field for suppliers in deeper layers.

The potential for smaller businesses is exciting. The beauty of blockchain and the decentralised ledger is that everyone can participate whereas traditional trade finance too often shuts out SMEs, which are too expensive to vet and onboard and offer only a limited spend.

The blockchain base enables multinationals and micros alike to transact on a global network, but at the same time retain ownership of their data, including validated company details along with their reputation, business relationships and subsequent and historic transactions.

SMEs will be able to create a digital identity supported by a reputation that can develop and advance over time, without relinquishing their data. Owning that identity also gives them freedom over how they leverage it, including finding new customers or utilising whatever financial products they choose. The ability to develop and advance their reputation means they can access trade finance and trade finance-related products more easily.

Sharing the vision

Will blockchain bring about the demise of traditional trade finance? It’s unlikely to disappear completely, just as the telecoms industry, which has undergone a revolution without consigning the telephone to history. Nor will it displace the banks; while their role as middle man in some transactions will become redundant, their ability to build a better data base, offer great service and provide strong underwriting skills will still be needed and valued.

However, blockchain will certainly make trade finance cheaper. While the initial impetus will come from the developed countries, establishing a global trade finance network means that the needs of SMEs in emerging markets will also be met.

Centrifuge’s confidence in the potential of blockchain is shared by others. The company is scarcely six months old, yet has already raised $3.8 million in funding from backers such as Mosaic Ventures and BlueYard Capital.

So it’s frustrating that a cloud currently hangs over this buzz of activity, as the political rhetoric threatening trade wars and swingeing tariffs heats up. It’s sad to hear such talk as protectionism threatens to move us in the wrong direction and undermine the work of the past two decades. It’s not just a case of a 25% tariff being imposed on foreign cars – the impact on the fintech sector would also be devastating.