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FinTech in Trade & Trade Finance

FinTech is now a commonplace term used generically to describe new and innovative financial
products born out of technology, ranging from consumer and SME focused e-payment and money
transfer services, P2P lending platforms and alternative currency exchange providers to investment
advice provided by AI and complex transactions executed on the blockchain and of course Bitcoin*.
In essence though, FinTech simply refers to the delivery of financial services by means of
software or technology.

How FinTech is relevant to the evolution (or revolution) of Trade and Trade Finance is in the
potential it offers to bring considerable efficiencies to processes that have changed little in hundreds
of years. Trade transactions still represent 2-in-1; transactions in both physical goods and, in parallel,
in underlying documents sale and purchase agreements, B/Ls, L/Cs, insurance documents,
shipping documents and so on. FinTech could both reduce the volume of documents and streamline
the flow of documents in trade transactions, reducing transaction costs, speeding up transaction
timeframes and introducing greater transparency and, with it, security for contracting parties.

If the diagram below looks familiar to you as the way


in which things currently work

then consider this


one below as a
portrayal of a
potential FinTech-
powered future in
trade

Compared to the traditional


framework above, in the portrayal in
the image on the right, shipping
documents are uploaded on the
blockchain and goods scanned on
loading, triggering title transfer from
Seller to Buyer under a smart
contract, which is also recorded on
the blockchain, and automatic flow
of funds from Buyers Bank to Seller.

*
REMEMBER THIS - Bitcoin relies on the blockchain to work, but the blockchain is not only about Bitcoin. If Bitcoin is the lightbulb, then the
blockchain is the electrical circuit that powers it.

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Blockchain
The most visible application of FinTech to trade is through the use of Blockchain technology and
Smart Contracts.

Blockchain technology or the Blockchain is little more than a distributed ledger; a database on
which information and data can be stored, distributed in as much as everyone, or at least more than
one person or organisation, has a copy of that database. This contrasts with centralised solutions,
where everyone on the system or platform interacts via a single central organisation, or decentralised,
where there may be more than one hub, but essentially everyone still interacts on a hub-and-spoke
model.

Centralised Decentralised Distributed

Any information or data contained in or relating to documents, or even physical assets that can be
tokenised, can recorded on the blockchain. The consensus of participants authorises the data or
transaction to be added as the next block in the chain of blocks of data or transactions that precede it.

It is the existence of this chain, in which the header of each block refers to the one before it, that gives
the system its immutability you cant simply go back and change one block of data without changing
all those before it as well. That is, unless everyone agrees to do so, which is what happened in the
case of the Ethereum Hard Fork,where transactions needed to be rolled back to a certain point in
time.

Also, because no one person owns or operates the blockchain, the issue of trust in that one person
largely falls away, replaced by the consensus approach and transparency in the system. In the
context of trade and trade finance, transfers of title, delivery of documents and flows of funds are all
capable of being done via the blockchain, with added benefits of:

real time visibility of transactions

increased structural and documentary efficiencies and reduced transaction costs

reduced risk of fraud and mitigation of "double spend".

However, the adoption and implementation of blockchain is not entirely without challenge:

There are important Trust of market participants


concerns such as how to Greater support from
in a system that does not
deal with rectification of regulators and changes to
relay on trust will need to be
input error (especially if laws are required to
earned; participants are
the chain is intended to be facilitate implementation,
being asked to move away
immutable!) and how to while use and the
from familiar and time-tested
address confidentiality of protection of data in the
(though paper and labour
information between chain needs to be looked
intensive) methods and
competitors at carefully
processes

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Smart Contracts
Smart Contracts are built on blockchain technology. Neither smart in of themselves (in the sense
of Artificial Intelligence or machine learning smart) nor contracts in the traditional sense, smart
contracts are self-executing computerised transaction protocols that carry out a sequence of steps or
transactions which have been pre-agreed between parties and translated into code. For example:

Upon goods being Title to the goods Payment is


scanned as transfers automatically
passing into the automatically to released to the
ships cargo holds the Buyer Seller

(recorded and
(recorded on the updated on the (recorded on the
blockchain) blockchain) blockchain)

Smart Contracts have the capacity to disintermediate existing transaction structures and to provide a
more efficient means of undertaking repetitive or routine tasks that have predictable outcomes.
However, they too, present challenges and are not without limitations, including:

the fact that the quality of the output depends entirely on the quality of the input raises questions
as to where liability lies for translating agreed contractual terms into code and who bears
responsibility for any unintended consequences?

reconciling traditional legal principles of subjective analysis and interpretation with the notion that
Code is Law a black and white doctrine that states that whatever the code does (or can do) is
precisely what it was intended to do essentially that there can be no unintended consequences
as well as how to deal with resolution of disputes

standardisation and the time frame for adoption and integration, where some parties may be
dealing with one another on a smart basis and others within the existing traditional contractual
framework

Despite the challenges to be addressed, that prominent trading companies are trialling blockchain
Bills of Lading and smart sale and purchase contracts and established trade finance banks are
partnering with FinTech start-ups points the way to the future enhancement and improvement of the
non-physical aspects of commodities transactions by means of FinTech solutions.

For further information or to discuss any aspect of this summary please contact Damian Adams in
Singapore (E: damian.adams@simmons-simmons.com | T: +65 6831 5638), or any other member of
our Commodities Team.

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Asia Commodities Contacts
Singapore

Dan Marjanovic, Partner Damian Adams, Partner


T +65 6831 5686 T +65 6831 5638
E dan.marjanovic@simmons- E damian.adams@simmons-
simmons.com simmons.com

Matthew Cox, Partner Mohammed Reza, Partner


T +65 6831 5637 T +65 6831 5582
E matthew.cox@simmons- E mohammed.reza@
simmons.com simmons-simmons.com

Calvin Tan, Partner Amanda Lees, Of Counsel


T +65 6831 5631 T +65 6831 5635
E calvin.tan@simmons- E amanda.lees@simmons-
simmons.com simmons.com

Beijing

Yongmei Cai, Partner


T +86 10 8588 4502
E yongmei.cai@simmons-
simmons.com

Hong Kong

Richard McKeown, Partner Jolyon Ellwood-Russell, Partner


T +852 2583 8252 T +852 2583 8298
E richard.mckeown@simmons- E jolyon.ellwood-russell@
simmons.com simmons-simmons.com

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