In a session introduced by London Institute of Banking and Finance Relationship Director David Morrish on the first day of the World Conference of Banking Institutes 2019 at London’s Guildhall, Deutsche Bank’s Daniel Schmand, Global Head of Trade Finance and Chairman of the International Chamber of Commerce (ICC) Banking Commission was invited to address delegates on ‘Creating a new regulatory environment for a new global trade and finance reality’. This article is a summary of the main points of his talk.

“Thank you for the kind introduction and the invitation. I want to quickly go through three stages: first, what is the status quo of digital trade, where are we, and what are the constraints; second, what do I see as the next step for digitalising trade; and third, what is ahead of us and how this ties back to where we are now.

We have seen fintech initiatives mushrooming and nobody knows who is going to survive. Usually what happens with fintechs and some of the initiatives we have all seen is that people who have a very good technological understanding ask you, as banks, to pay money to basically help them to educate them and, in essence, hand over your intellectual property over to them. Then they will try to make a business model.

I have not yet seen any of the initiatives really taking off. Yes, we have blockchain and hyperledger in the mix, but if that is the best thing since sliced bread, why have they not been fully taken up and why are they not flourishing?

Let me come to the constraints. While we can talk about digital documents, there are still many countries where they have the mandatory rubber stamp and I have not seen anybody putting one of those on something digital. So we have fundamental disconnects between governmental organisations and their operating models. Don’t forget the labour issues as well. Some countries deliberately deploy an army of people to perform functions that could be digitalised because they need to create employment. Politicians have to work two roads.

Second, I have not seen any case on how this dispute resolution works for a digital document. In Euroland you are not allowed to use digital titles or documents in court and you have to present physically. So if you have digitalised a document and you have a commercial dispute, it is difficult right now to understand how this could be resolved. Those are just two very fundamental constraints.

Third point on the status quo: what are the rules and guidelines for digital contracts, and what is the applicable law? Whether it be English, German, French, Russian, at the moment we don’t have anything like incoterms for commercial contracts on a blockchain or a supply chain. We are not short of technology, we are not short of great ideas, but we are short on regulations and clear guidance on how to use the technology to achieve an acceptable outcome.

My second point is more around what is the best digital approach today. Most banks dabble with one or other initiative and then wait and see how it evolves. However there has been no announcement by anyone who has actually executed the first US$1m transaction. What you usually see in an announcement (and we have had a test case) is a live transaction running through the process with a lot of handholding.

Where are we today? I think today the biggest thing is we need to digitise first documents. I would argue we will not, even if it’s technically possible, go away from hard copy paper in the next five to ten years. It is about how we operate between countries, between geographies, and you need to have the ability to digitalise whatever you have got in paper form.

A best-case scenario with optical character recognition (OCR) is an accuracy rate of around 70% to 80% and you only get 100% on a fully standardised document with pre-agreed fields. What is the biggest issue for digitalising a document? A rubber stamp in the middle, that is data noise and then you need to clean up the data noise while you try to digitalise. While doing that and certain institutions are on it, it is possible to arrive at a shared understanding of common problems and identify what is holding back progress.

Why is it so important to digitalise documents? One advantage is operational efficiency and speed. Large banks have their eye on Know Your Customer (KYC) checks and anti-money laundering (AML) processes with all that transaction monitoring. Human checkers who look at documents might overlook something, and regulators also require you to check back along the whole transaction, so you had better have a fully automated system from an AML perspective to do your transaction monitoring in the most proper way. KYC efficiency is the biggest driver for digitalising on the trade side.

Let me now come to what is going on and where I see certain things working. Personally, and also from an ICC perspective, we think something like the Trade Information Network is an initiative which may or may not result in adoption but at least it’s the right approach. Why? The networks that will survive are those that are open and almost non-profit. These only work between 180 countries and billions of counterparties if it is open and – as much as possible – non-restrictive and inclusive.

What is now the next step and what areas do we work on? From an ICC perspective, we are working on something which is called DSI which is basically the re-branding of the Universal Trade Network (UTN) and we all like these acronyms so the DSI stands for “Digital Standards Initiative”. What we are really trying to do here is to find the smallest common denominator for invoices and other documents and use it to set out common standards.

Having said that, there is a reason why I am a bit sceptical, why I am fully supportive of the initiative: who are we as banks to tell buyers and sellers how to make up the invoices, packing lists or whatever certificates they have? We all agree if those things were thoroughly standardised, you could easily digitalise them. We need initiatives like this – lots of them.

While we are at a turning point right now, I believe we will have incoterms for blockchain and/or smart contracts because it needs to be clear who has what obligation and how to deal with that. What you need at the same point is something that goes through the United Nations and is regulated via UNCITRAL and adopted by as many countries as possible. We have UCP for letters of credit. Why does UCP for letters of credit work? Yes, we can say it is outdated, old fashioned, but it works. It isn’t law, but 120 countries have agreed on those standards. The only way you will have smart contracts, digital and blockchain all working just as well is the day 120 or preferably 180 countries agree and basically put it into international law, or alternatively in some of the supply chain or digital networks, in a closed ecosystem where three to five parties know each other and agree on the terms or it works on a national basis. Singapore has just set one of these up – they didn’t have a national network. Australia has something on the guarantee side – again, domestic and national because that is what you make rules for. The moment it crosses the border, you need to have an agreement as to how the ruling works.

Yes, there are many more fintechs and lots of clever algorithms, but as long as we do not have rules and as long as you are not clear how dispute resolution would work for digital contracts on a network, you are not going to see that network taking off. I also would say we will see certain networks and certain trades, more on the C2C side, where you then go straight to mobile payments and possibly cryptocurrencies.

And when you look at cryptocurrencies right now you have to apply the principle that we had with gold 300 years ago. Gold was stored under mattresses, and in vaults. Some people take the cryptocurrency on the token because they don’t want to keep it on the computer. If you leave it on the computer, it’s rather like leaving your wallet on the bar when you go to the bathroom and hoping it will be there when you get back. There is no real supportive environment for it at the moment. How do you exchange libra into euros? You go to an unregulated exchange…

We really need all hands on deck when it comes to agreeing and adopting standards and rules. There is no shortage of technology, ideas and initiatives. There are actually too many and people get confused. The issue is the business case for digitalising, grounded in commercial reality. 

Daniel Schmand was speaking at the World Conference of Banking Institutes 2019, presented by The London Institute of Banking & Finance in partnership with City & Financial Global, City of London, the Department for International Trade and the Global Banking Education Standards Board.
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