Digital assets, like Central Bank Digital Currencies and tokenisation, have the potential to make global trade more efficient, but it must happen alongside the digitisation of trade communication, which is at the centre of what Contour does.
The trade finance gap stands at a record $1.7 trillion and many industry players, including Contour, have made it their goal to narrow this gap. The reality, however, is that trade and trade finance is complicated.
To simplify the problem of digitising trade, we have broken it down into three pillars. The first pillar is communication, which has been our focus since we were founded to develop a global trade network of banks and corporates. The second pillar is the digitisation of documents that go alongside trade to support the physical movement of goods, and this continues to be an area of partnership for Contour for digital documents such as electronic bills of lading. But the third pillar is the biggest and where work is just beginning – the digitisation of finance.
A new era of inclusive trade finance
When it comes to how trade is financed, banks are mainly focused on originating new trade finance loans for their corporate clients. But because of the high friction and processing costs, regardless of the size of the loan, banks are incentivised to focus on larger transactions. The same is true with corporate and bank clients. Because of high fixed costs for KYC and other internal procedures, banks are incentivised to focus on larger corporate clients.
“Contour’s growing network is the foundation for a vibrant marketplace for buyers and sellers of digital trade finance assets, including corporate and bank risk assets. Our next phase is to establish Contour as a platform that supports a decentralised digital asset marketplace.”
– Joshua Kroeker
This is where SME corporates and emerging market banks get left behind due to their smaller transaction sizes, but this is also where most of the trade finance gap lies. An example is a typical letter of credit (LC) transaction, which is designed to help improve trust between two counterparties, or where one party is smaller or in an emerging market. In the case of a small importer of chemicals in an emerging or frontier market, the LC will likely be issued by a local bank, but because the bank itself may not have enough credibility with the seller, the transaction would then require a confirmation from the seller’s bank. This requires the seller’s bank to have a relationship and limits with the smaller issuing bank. Increasingly, this is not possible as maintaining limits with the small bank is not profitable for the larger bank. This leads to a stalemate among parties, and in some cases the transaction simply does not happen.
This is becoming a major problem. It is certainly contributing to the widening of the trade gap and is a big step back for financial inclusion.
Creating a decentralised digital asset marketplace
While there is no silver bullet, there is an opportunity for technology to reverse this trend.
Contour’s growing network is the foundation for a vibrant marketplace for buyers and sellers of digital trade finance assets, including corporate and bank risk assets. Our next phase is to establish Contour as a platform that supports a decentralised digital asset marketplace.
This is still being conceptualised, but the thinking is that in the primary market, a corporate can originate an asset, maintain it on their balance sheet or choose to sell it to a bank. While this is not a new concept and there is an active secondary market today for unfunded and funded bank risk, these transactions are heavily manual processes in a small, closed ecosystem and therefore, limited to high dollar value transactions. Using our technology to “mint” these assets on our network, we can track ownership and drastically reduce processing costs to make smaller transactions practical. In addition, there is the option for the bank to package, securitise and sell multiple transactions to an investor in the secondary market.
The first round of digital assets to be minted on Contour would likely be unfunded bank risk, or LC confirmations. As a corporate, you could use a marketplace to find an appropriate confirming bank quickly and easily without going bank to bank, one by one. Banks would also benefit from the marketplace, as they could set their demand parameters to choose the assets they want to hold and later, package and sell down the assets they don’t use.
There is demand among institutional investors and private money who want exposure to these trade finance assets, as they are short-term, self-liquidating and low risk. A tokenised digital asset representing bank risk – rather than a SWIFT message – can offer further advantages such as improved validity and lower transactions costs. The bottom line is that adding more funders and lowering transaction costs for secondary markets will increase the amount of finance available to exporters and importers around the world, reversing the trend of an increasing trade finance gap.
Connecting borrowers to new groups of lenders is already emerging as a big trend within decentralised finance or DeFi, and with Contour, we can bring this technology to trade finance.
Funding an inclusive future
As Contour explores this phase, we welcome collaborations to help us build a network solution, as our platform itself was designed through collaboration with the trade ecosystem.
This is where we see real potential to narrow the trade finance gap.
Addressing this gap is not just about throwing money at a problem. It’s about network inclusion and bringing smaller players and banks into a network to meet a variety of needs, which includes different risk profiles and different working capital needs.
If you would like to partner with Contour and explore the tokenisation of digital trade assets, drop us an email at email@example.com.