Daml for structured trade finance
Editor's note: Ian Woodgate is a Technical Sales Engineer at Digital Asset
Global trade finance is a great example of an ecosystem wherein complex, multiparty workflows are operational.The parties involved include manufacturers, suppliers, banks, and certifiers. The ecosystem is worth some $5.2 trillion, with the gap in trade finance availability estimated at $1.7 trillion¹. Arranging trade finance often relies on time-consuming, manual, paper-based processes and, as a result, can be inefficient and prone to delay.
Manufacturers and suppliers are organized into often-lengthy supply chains, with commercially sensitive — and therefore confidential — bilateral agreements defining the relationship between each supplier and manufacturer.
Banks, as trade finance providers to suppliers, want to make financing decisions that include a consideration of the entire supply chain (e.g., knowing that the ultimate order came from a reputable retailer increases the likelihood of favorable trade finance being given to a supplier). This requirement for visibility is seemingly somewhat at odds with the confidential relationships between manufacturers and suppliers in the chain — but can be addressed.
Certifiers, often appointed by the organization at the top of a supply chain, validate that environmental, social, and corporate governance (ESG) standards are being met. For them to be able to do their job effectively, visibility of the entire supply chain is critical.
Daml, with its proven applicability to complex, multiparty workflows and built in permissions model, is perfectly suited to the trade finance space. It allows for the digitisation of the processes involved, providing visibility where it is needed, yet still provides for the confidentiality needs of the parties involved.
Digital Asset’s publicly available Structured Trade Finance Demo (also available in this video) illustrates how readily Daml can be applied to the trade finance space. The demo presents deliberately simplified scenarios of:
Supplier onboarding and the creation of a supply chain
Supply chain certification, where the top-level organization requests certification of the entire supply chain, and the certifier has visibility into all suppliers in the chain
Order flow through the supply chain that respects the confidentiality of commercial agreements between suppliers in the chain, and
Trade finance requests, where the bank has visibility into the supply chain hierarchy, which it can take into account when making a trade finance decision
The overall demo flow is shown below:
The value for participants
In any complex, multiparty scenario, one of the big challenges is in getting the parties involved to agree to use the same system. With Daml, this is simplified thanks to numerous deployment options, including fully decentralized/participant-operated, multi-participant shared, third-party operated, and ledger-as-a-service/Daml Hub. Comprehensive APIs ensure interoperability with existing line-of-business systems.
In a supply chain scenario, the top-level organization has some ability to mandate the toolset to be used, but there are intrinsic benefits for other participants in coming on board as well.
For all parties, the removal of manual, paper-based processes improves efficiency, reducing both time required and costs. With a Daml-based solution, the current state of the supply chain is appropriately shared, and the Daml ledger provides consistent views of the truth to all parties. This information is available in real-time and is always up-to-date. Furthermore, the Daml ledger provides an immutable, time-stamped, and real-time audit log of all activities, reducing potential for disagreements.
For the organization at the top of the supply chain, the visibility of the chain provided by a Daml ledger is the starting point for key operational activities, such as resilience analysis or supply-chain certification. When appointing a certifier, an organization can electronically share information on supply-chain participants. This provides the certifier with the complete visibility into the supply chain that they need. Once the certifier’s work is done, they can issue digitally signed compliance certificates on the ledger, thereby guaranteeing their authenticity.
Suppliers in the chain secure an additional benefit: Increased likelihood of obtaining trade finance at a favorable rate. This is because, when the supply chain is represented on a Daml ledger, lower-tier suppliers can present irrefutable evidence of the hierarchy of orders to a bank. Thus, a bank can take the supply chain hierarchy into account when making decisions to approve or reject trade finance requests. From the supplier’s perspective, the provision of that evidence increases the likelihood of favorable trade financing.
Finally, from the point of view of a bank, a Daml-based approach delivers two benefits. First, it provides assurance of the creditworthiness of would-be borrowers, since the supply chain in which the borrower is participating is now visible. Second, it increases the addressable market for a bank, since the details of all suppliers involved in a chain are stored on the Daml ledger, making it easier for a bank to offer appropriate trade-finance services.
For more information on using Daml for trade finance solutions, check out Digital Asset’s publicly available Structured Trade Finance Demo, or see the recording of our webinar: Trade Finance Transformation and Innovation with Daml.
¹McKinsey, ‘Reconceiving the global trade ecosystem’, November, 2021