Michael Bickers talks to Mirka Skrzypczak, Head of Working Capital & Trade Products, NatWest, about the reality of the blockchain consortiums.
MB: Last week, Wells Fargo’s CEO was quoted in the media stating that blockchain has been oversold, the CEO of Mastercard also said the business model has not been proven. Both companies, however, are experimenting with blockchain. How would you respond to those comments with regards to the consortiums and what they are doing – in particular Marco Polo?
MS: To say that the business model has not been proven or has been oversold is open to debate. There are reputable institutions across the globe (including a few central banks) that have confirmed an enterprise level of performance of the Corda network, the exact performance figures can be provided by R3. Corda enterprise is absolutely at a market enterprise level of operability and stability. It has been tested, I believe, by one of the US stock exchanges and some of the central banks across the world. This provides reliable evidence that the network is not just a proof of concept but something that is available here and now. I would encourage everybody to learn and understand the applications of blockchain and DLT and how different industries are using them for different things. A great example of what is happening now, is with Halo, and the fantastic work that Unilever and Sainsburys are doing with responsible farming and responsible sourcing from Africa. Fiona Satchel of Halo would never say this is a fad or being oversold, the work being done is unbelievable and very real. If you spoke to Maersk about the application of DLT in their physical movement of goods, they would also strongly disagree that it is significantly oversold. We as an institution already use it too, not as a POC, but a live application for our syndicated loans – built on Corda by Finastra. DLT is very real for us.
I don’t think blockchain is oversold but it is necessary to acknowledge that on its own, it is not worth a lot, you need to understand what creates the network effect. To maximise its full potential it also needs supporting technologies such as Cloud and APIs. If you wanted to create blockchain applications within your own CRM systems, then you are likely to be disappointed in terms of seamless inter-operability or any significant cost savings. However, if you think about it in an infrastructure construct and read the aims, then you are looking at a completely different picture and infrastructure development that perhaps never existed before.
I can have some sympathy with DLT sceptics and their comments; their views do not take anything away from them as experts in their fields. Four years ago, I might have been saying the same thing. Luckily, I met people like those at R3 and various developers’ forums to expand my knowledge.
MB: One or two of the consortiums are trying to distance themselves from using the term blockchain. What are your views on this and to what extent are the consortiums using blockchain structure and DLT?
MS: Again, it’s a different level of knowledge. For me, the cryptographic properties of DLT are underpinning the success. I like to believe I am a trade specialist and that most of the world is moving towards open account trade. But there are still big opportunities within the market and big parts of the world that do not trade on open account terms, especially when there is no trust between the parties. The lack of trust can be derived from a myriad of factors, not just a lack of willingness but geographic, geopolitical factors etc. I think that the cryptographic properties of DLT give that certainty from day one, where there was no certainty before, and understanding that is key.
There is nothing wrong with trying to standardise across the industry as common standards for trade is what the consortium are considering. But for a person passionate about technology, not just DLT but all new technology, I can see how it is changing our society. For example, when APIs became a reality, was it necessary to consider the exact same standards for how to construct the source data for APIs to consume? No, as APIs know exactly what data to take and from which ‘field’. With or without standards it works.
MB: Do you think we are overplaying the standards aspect?
MS: I will give you an example: if you have technology that works and compound AI with DLT, think about that – and this is not impossible it is already happening. If you have a purchase order (different types of purchase orders), you can direct that technology to pick up the relevant fields from all the different forms. They will pick up the exact same one, although maybe located in a different way, inputted in a different format or named differently but the meaning is the same. Why would I make those five forms standardised when there is technology that can solutionise it for me? I like to think outside the box and do not like digitising the status quo, I like using technology and this is the perfect example of how it can be done. Of course, it is AI, but it is not crazy. There is optical character recognition now and robotics that are being employed broadly across the industry. Rather than trying to squeeze everyone into the same format why can we not be smarter about how we use technology and decide how you want to reach consensus for the points from that purchase order and use them on that basis.
MB: That is a very interesting point, so the advances we are seeing in technology could to a large extent, or completely, supersede a lot of standardisation that people are pushing for?
MS: It does, it is human nature. Our natural step is to try and digitise what we do manually. That is natural and I think we have every right with this technology to take it to the next level and consider doing it entirely differently. That is what fascinates me, and I believe it is absolutely possible. That is why we believe that good work comes from any type of consortium, why? It builds bridges and brings people together. We need this more than any time before when it comes to trade communities and dealing with trade barriers.
MB: So, you see that as the way that things will pan out, in terms of consortiums and interoperability etc.?
MS: Consortiums, in terms of interoperability, is interesting but there is no such thing as one DLT platform. There are various platforms developing various technologies. There is Hyperledger, Fabrics, Quorum, Corda etc. There are huge numbers of DLT platforms same as there are huge numbers of blockchains and digital currencies available, but I think at some stage the end game won’t be the same magnitude. I think there will be fewer than what we currently see, like the adoption of mobile phone technology. There is only android and iOS but prior to that there were plenty. What drives this? Ease of build, ease of adoption, ease of interoperability and very often the developer communities give feedback on what they love building on and what they hate. That drives the popularity and commonality of one platform over another. That is the natural thing that I believe will happen with DLT, if there is a platform that is not easy to build applications on or comes with challenges for any future interoperability. You can create a nice asset class on the platform but to make the class speak to something else is very difficult and that is where you start seeing the limitations. You are likely to drop the platform and move on to something that does not give you that level of restriction. There will be trial and error, absolutely, but eventually we will settle on a few level DLTs that will be interoperable globally.
MB: Is the aim for the consortiums, to a large extent, to facilitate cross border trade rather than domestic trade?
MS: Absolutely, that is the key point from Marco Polo and Voltron’s perspective. It is all about global trade and not domestic. It can be used in any type of trade; the underpinning network is the corda node network. The reach is as big as the corda network is. Any application built on that network is automatically capable of being consumed by other nodes on the network. Same as creating an app for iPhone, it will be on as many iPhones as people download it and as many as there iPhones in circulation.
MB: In terms of adoption, how do you see it replacing traditional trade finance structures and being used in receivables-based finance?
MS: There is a place for both, but each would look somewhat different. If you look at traditional trade, you will still need that reassurance and DLT is perfect for when you need to reach consensus between multiple parties. Rather than going through letter of credit cycles that will last 15 days, it will be done in minutes if not seconds. You do not necessarily need individuals corresponding between each other, you have nodes with clearly set up rules and consensus mechanism built within them which happens automatically. Any LC issuance, acceptance etc. is done seamlessly, only when you do not have consensus through the network do you need to go into some sort of manual intervention. Other than that, it happens seamlessly.
For receivables finance, because of the Corda node network’s ease of adoption, it will allow for a much broader penetration across SMEs for example. Also, it will allow the new development of products like purchase order financing (newer in Europe at least). It provides the opportunity to build products that did not previously exist and higher visibility across various players in the supply chain end to end. For example, in a supply chain in the middle, I know the tier one suppliers who supply directly to me and tier one customers who I sell directly to. But there is not necessarily visibility of tier two, three and so on on both sides. That puts me in a vulnerable position, overnight I could lose my supply chain suddenly because I don’t understand where it comes from. With the network effect you will have far greater trust and far greater visibility.
MB: So, it enables you to verify the strength of your supply chains upstream and downstream. What are the costs for banks to come on board?
MS: I think it is negligible, if you compare it to, for example, what you pay annually for a credit agency like Experion or DB, I would say what we pay them and what we would pay a consortium like R3 or for Marco Polo’s development, the latter is definitely cheaper. If I was to build an IT research and development infrastructure, I’d have the power of the consortium so the cost would be split between 20 to 30 players. This is a totally different picture for the development. What you get for your money is phenomenal. However, you need to be aware that for the first two years you are building a utility and only see the benefit at the end. It is a different collaborative mindset, pushing yourself towards an open source platform. Your USP and IP will have to evolve accordingly.
MB: I understand that, as with BPO there was some resistance from banks in setting this up in terms of what they would need to do, in terms of cost, software, hardware, infrastructure etc. Some banks found it prohibitive, but as you say the cost is spread amongst the members of the network.
MS: There are two things that need to be understood, one is the licence for Corda which is separate and the other is the software companies who build applications on Corda e.g. TradeIX and Cryptoblock. It is a different cost structure and both elements are negotiable – I would say rather reasonable. If you compare it to other annual IT spending that you have on a regular basis, this is not scary at all. The R&D cost to build platforms can be as low or as high depending on how many parties you are co-sharing with, whether you are going unilateral or going for a uniclub approach. It varies. If you want to create something standardised, for example, letter of credit is standardised so in Voltron there is no issue for everyone to be standardised as it is easier. There is no reason not to share those costs.
MB: So, there are various options available, depending on what they are looking for, to particular banks interesting in joining.
The major trade and receivables finance blockchain consortiums such as we.trade, Marco Polo, Komgo and Voltron, will gather at BCR's conference "Consortia 2019" in London this May. For more info on this event, please click here.