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Blockchain booster: Singapore eyes commodity fintech firms
[SINGAPORE] Singapore is aiming to position itself as a hub for blockchain development in commodity trading, with start-ups looking to boost access to trade finance and eliminate the opportunity for fraud.
Several firms launching in coming months will offer digital "smart contracts", which use blockchain rather than traditional paper agreements. The technology offers potential cost savings, and could open up new sources of funding, such as private wealth or from investors outside the major currencies.
At the same time, proponents say the public ledgers used by blockchain will boost supply chain transparency, reducing the opportunity for the sort of warehouse fraud seen in the metals industry where parcels of metal have been sold to multiple buyers.
The moves come as global demand for trade finance faced a US$1.5 trillion hole last year as banks pull back from the capital intensive sector due to stricter regulatory requirements, the Asian Development Bank said in a report this month.
About 40 per cent of the shortfall was in Asia Pacific and the biggest gaps were faced by companies in emerging economies and small and medium-sized firms, it said.
"A lot of the shortfall in trade finance is from the Asia Pacific. There's no shortage of money here - but a lot of it is trapped within local currencies in the region," Yvonne Zhang, co-founder of Aquifer Institute, which is launching a digital trade platform.
Banks also tend to favour larger players with bigger balance sheets who are chasing larger deals, she told Reuters.
"The smaller guys tend to get put into a corner ... yet they are overcharged for what financing they can get."
While the possibility of saving billions of dollars a year by scrapping millions of paper documents is enticing, the secretive commodities industry may take some persuading to move to a common platform.
Hurdles to be ironed out include common legal standards, links between different dealing platforms and persuading all participants in the supply chain to take part.
Singapore, like other centres, has set itself to attract fintech firms across a range of industries, offering funding and non-financial support, but commodities is a key enterprise for the trading hub.
"Many commodity traders have been experimenting with, and implementing company specific initiatives around big data, traceability and block-chain," Amreeta Eng, a director at IE Singapore - a government agency promoting international trade - said at a metals conference this month.
Blockchain, which is best known as the system underpinning bitcoin, is a public online ledger of transactions maintained by a network of computers on the internet.
Financial firms hope that the nascent technology can reduce the cost and complexity of burdensome processes such as international payments and securities settlement.
Aquifer wants to use its platform to connect Asian institutional and private capital with firms seeking trade finance, offering more pathways for financing, faster turnaround of capital and lower risk of fraud.
Swiss-based Lykke, capitalised at about US$440 million, is building a series of decentralised marketplaces that will list and trade cryptocurrencies and trade tokens, that could represent a commodity by grade and delivery point, for example.
"The plan is to work with people that want to build the markets that suit them, or we'll build them into our own marketplace," director Seamus Donoghue told Reuters.
Lykke aims to tap private wealth markets in New York and Singapore for funds to provide market liquidity.
It has applied for securities licensing in several major jurisdictions and plans to become a regulated market operator in Singapore.
Tradecloud, a supply chain trading platform for miners and manufacturers will launch in Singapore next month.
However, industry sources said the changes might still be more evolution than revolution.
"The impact of blockchain on physical trading, even in concept, seems limited outside of tech circles so far," said a London-based source at a global trading house.