Reports of a Blockchain Revolution in Trade Finance Are Greatly Exaggerated

Abstract

The term “blockchain” describes technologies that selectively incorporate some design elements first popularized by the Bitcoin cryptocurrency. Belief in the potential of blockchain (or “distributed ledger”) technologies to revolutionize financial markets appears in some quarters to border on religious fanaticism. Trade finance (i.e., financing cross-border transactions in goods and services) is one major global financial market burdened with anachronistic business models and obsolete technologies, and thus ripe for disruption. But that fact alone does not demonstrate that that blockchain will be the engine of digital transformation when it finally occurs. Magical thinking about technology that cannot live up to the hype about it can usually be distinguished from the early stages of the success of a disruptive new technology merely by asking 1) whether what is being discussed is a pilot project (in which case it can be ignored for the time being); and if not, then 2) what share of the relevant market the commercialized version of the technology has achieved (anything less than 1% may be considered still a pilot no matter what its promoters claim). By 2019, the only blockbuster success for blockchain remained the speculative cryptocurrency markets that originally spawned it a decade earlier, but the hype surrounding blockchain has been intense enough to overshadow any serious discussion of its lack of success. A pragmatic approach to the challenge of transforming trade finance starts by acknowledging the bewildering variety of business contexts and immense diversity of local interests that any new global trade finance system would have to accommodate. Furthermore, blockchain enthusiasts appear oblivious to the progress that parties engaged in cross-border trade have already made in updating trade finance systems. The eventual triumph of countless local instances of incremental innovation over the hubris of ill-informed evangelists of disruption may be obscured by “blockchain washing,” however, if blockchain enthusiasts manage to affix the label blockchain to whatever solution ultimately emerges.

Keywords: bitcoin, blockchain, distributed ledger, disruptive innovation, trade finance, letter of credit