Will Other Banks Follow Barclays Africa’s Pioneering Blockchain Trade Transaction?

Written by Dana Sanchez

Johannesburg-based Barclays Africa and Israeli fintech startup Wave recently completed the first global trade transaction using distributed ledger/blockchain technology, and they want other banks to adopt the process, which they say saves time and money.

The transaction shortens a process that normally takes seven-to-10 days to less than four hours.

The deal was executed using a blockchain platform developed by Wave, one of 11 startups that went through the Barclays Accelerator program in New York in 2015, Reuters reported in HaAretz. The Israeli company has been working with Barclays’ trade and blockchain team in South Africa and the U.K.

Barclays is not the first bank to to experiment using the technology for trade finance, but says this is the first such trade transaction to be executed “in the wild,” rather than in a lab, HaAretz reported.

In August, an HSBC and Bank of America Merrill Lynch venture and fintech firm R3 said separately that they had found ways to simplify trade finance processes with blockchain.

R3 is a New York City blockchain tech company that leads a consortium of 60 financial companies in blockchain research and development for the financial system. Barclays Africa became the first African company to join R3, AFKInsider reported.

The pioneering Barclays transaction resulted in the export of $100,000 worth of butter and cheese from Irish agricultural food cooperative Ornua — formerly the Irish Dairy Board — to the Seychelles Trading Company, a customer of Barclays Africa.

Blockchain technology creates an electronic record and transaction-processing system that allows all parties to track documentation through a secure network without third-party verification, HaAretz reports.

This contrasts with the current paper heavy process, which is cumbersome and time consuming.

The technology originated with the digital currency bitcoin, and proponents say it makes transactions faster, more reliable and easier to audit because it does not require manual processing or authentication through intermediaries.

Blockchain has the potential to fundamentally change the way certain businesses operate, said James Scott, head of digital at Barclays Africa’s corporate and investment banking division, in a statement.

More pilot projects using blockchain technology could be on the cards following the success of this one, HTXT reported.

“We have been taking a leading role in helping to develop products and investigate technologies that will bring efficiencies and cost savings to Africa,” Scott said.

Paul Nel, head of open innovation for the Barclays Africa Group, talked to AFKInsider about why the lender seeks to be a leader in blockchain collaboration.

“There is so much research and development happening in this space, and it is a collective collaboration,” Nel said. “We feel that (by) bringing all those who are interested in the blockchain together through open innovation and co-creation with banks and entrepreneurs, we will collectively reach a level of development that will make the most of this technology and that adds real value to our customers’ lives.”

Banks are rushing to adopt blockchain to cut costs, but unprecedented transparency of transactions sits uneasily with financiers, Financial Times reported. Technologists and business people have to make drastic changes to force the radical technology to fit the norms of the banking world.

Blockchain is shared among many users, which makes it difficult to shut down or hack. Transactions are irreversible — a problem is you have “Fat Finger Syndrome” and type one to many zeroes in a transaction — and it is transparent, allowing trades to be seen and verified by anyone using the system.

While the benefits may appeal to financial services companies, they may be difficult to put into practice, Financial Times reported:

The unprecedented transparency of transactions sits uneasily with the privacy needs of secretive bankers, whose plans for blockchain diverge from the aims of bitcoin’s advocates.

“The problem they were trying to solve is central bank money,” says Simon Taylor, co-founder of fintech consultancy 11:FS and former blockchain lead at Barclays. “But if you’re a bank or central bank that’s not your ideology.”

The prevailing “ideology” in banking today is efficiency. Tighter regulation, new competition from technology companies and the low central bank interest rates, which seem likely to persist, have forced the banking sector to look seriously at reducing costs wherever they can.

The hope is that using shared database technology like blockchain can help increase the speed and reduce the cost of activities such as settlement and clearing by automating back-office functions with systems that would be shared across the banking sector.

Technologists have to overcome several problems, Financial Times reported. A shared system for executing transactions could hurt competition, allowing bank rivals to spy on each other’s activities.

There’s potential for unexpected losses when a database is immutable and a transaction cannot be reversed.

And then there’s the possibility that getting bigger could slow the system down. If data are replicated across all the banks using a shared settlement system — the bitcoin model — it potentially becomes too cumbersome, according to Financial Times.

“You get something called bloat, and the more bloat you get the slower the system goes,” said Peter Randall, CEO of Setl, a London-based company building a blockchain and distributed ledger system for financial services.