Enabling MSMEs to participate in global trade
The over emphasis of most trade finance blockchains on open account trading needs to give way to documentary trade leveraging blockchain based electronic Bill of Lading as well as DLT based instant payment. The Delivery Versus Payment enables this, along with letter of credit and invoice discounting are mandatory to enable MSMEs to participate more in global trade.
The issue is that it is not enough, because liability insurance for blockchain based electronic bill of lading providers is too high and because most insurers do not yet understand this new technology. This makes trade finance as well as trade insurance expensive for MSMEs. There is a lack of support to MSME suppliers to identify and leverage global trade opportunities because:
- The marketplace to buy trade finance and insurance is too fragmented
- There is no cost effective pay as you go (per documentary trade) insurance covering
- cargo risk
- political risk
- directors and officers
- trade credit
- The process of onboarding MSME suppliers to trade finance blockchains and trade insurance blockchains are slow and expensive
Self-Sovereign Identity enables anyone with a smart phone to create and use a digital identity. Using a mobile app, the user is enabled to create a URL for themselves which maps to their public key stored on the Blockchain. Using this URL and key people can cryptographically verify that they own the identity. The mobile app also enables them to acquire digital credentials from trusted credential providers like Banks, which can be used to gain access to services from third parties who are willing to trust the credential providers and are able to cryptographically verify that the credentials were indeed provided by them. Using such mobile apps, bottom of the pyramid people can create identities, access, and use services and establish credit histories over time to gain access to the formal financial system
In our view, MSMEs can use SSI (Self Sovereign Identity) to:
- On board to global/regional trade portals, insurance blockchains like B3i, trade finance blockchains like Contour, Skuchain, eTradeconnect, IndiaTradeconnect, Komgo, Marco Polo, Minehub, PBC, Tradefinex, Tradewaltz, UAEtradeconnect, WeTrade, etc.
- Manage the life cycle of the digital asset (blockchain based Bill of lading is digital asset) on a separate chain integrated to trade finance chains and trade insurance chains listed above.
Self-Sovereign Identity enables unbanked people to have identities and thereby credit histories and bank accounts and thereby enable them to start enterprises and integrate to global supply chains as buyers and/or sellers. So, it is surprising that many large banks, financial institutions, fin-techs continue to focus on use-cases like open account trading which target only non-MSME buyers and sellers.
Open Account Trading is essentially an anachronism in this age of increasing climate change. Open account trading is the way the world operates today and that is the cause of the supply chain crisis, because it created a narrow base for global supply chains. But the writing is on the wall if you can see it.
Documentary trade is suitable for MSMEs and can create more broad-based global supply chains. But it is currently costly, risky, slow and require facilitating regulation (UNCITRAL MLETR), so I can understand trade finance blockchains using Open Account Trading use-cases to drive Blockchain node adoption with Banks. But Self Sovereign Identity, Electronic Bill of Lading on Blockchain (E-BL on R3 Corda), R3 Payment Cordapp, B3i Applications on R3 Corda can make documentary trade cheaper, faster, and less-riskier as I explain in my previous blog. Yet they are not moving towards documentary trade even in places where UNCITRAL MLETR is getting implemented.
I can only guess that big banks want to play only with the big corporations, and they are not genuinely interested in financial inclusion of MSMEs into global trade. Such people are forgetting that technology is levelling the playing field and they are leaving a blue ocean for others, where others can perfect a powerful proposition which will come back to bite them later.
I believe the above cohort of technologies is a magic wand to improve financial inclusion. While others focus on CBDC, I would love to work with people who want to enable MSME's to participate in global trade. If you would like to be part of the journey, get in touch.