Finance, with all its middleman, show great potential for blockchains. Commerzbank thinks so too and is thus experimenting with them. This post examines everything Commerzbank is doing with blockchains. Commerzbank is one of the largest finance providers for corporations in Germany and finances around 30% of Germany’s foreign trade.
Table of Contents
- Memberships and initiatives
- Blockchain-based trade finance platforms Batavia and Marco Polo
- Exploring supply chains and supply chains finance with Fraunhofer IML
- Blockchain-based issuance and trading of securities
So far, Commerzbank has conducted blockchain-experiments in regards to trade finance, financial transactions, reconciliations, and security issuances. Furthermore, they are members or initiators of several blockchain-related initiatives, consortia, and organizations.
Memberships and initiatives
Commerzbank is involved in the following initiatives, consortia, and organizations
EBA Working Group for Cryptotechnology for Trade Finance
This working group, established by the Euro Banking Association (EBA), analyzes the use of cryptotechnologies in transaction banking. Besides Commerzbank, other members include Accenture, IBM, and SAP.
Commerzbank opened their own Blockchain-Lab in 2016. It was co-founded by now VP of Corporate Strategy Paul Kammerer.
Commerzbank is a member of R3. R3, which collaborates with over 200 financial institutes, is working on the enterprise blockchain platform Corda. Besides Commerzbank, other members include Citibank, Accenture, and Deutsche Bank.
Commerzbank is also part of the Hyperledger initiative. Hyperledger, started by The Linux Foundation, is a collaboration between companies from various industries (e.g. finance. Internet of Things, and supply chains) working on cross-industry blockchain technologies. Besides Commerzbank, other members include MOBI, Medicalchain, and R3.
Enterprise Ethereum Alliance
Commerzbank is also part of the Enterprise Ethereum Alliance (EEA). The EEA is a non-profit corporation bringing together corporations, startups, and academics for collaborations around Ethereum-based enterprise use cases.
In the context of all this, Commerzbank has demonstrated several applications and platforms, including real-world examples. As mentioned, Commerzbank finances around 30% of Germany’s foreign trade. Through that, they are heavily involved in trade finance.
Blockchain-based trade finance platforms Batavia and Marco Polo
Trade finance (also referred to as supply chain finance) refers to
the optimization of cash flows of all participants involved in global and international supply chains (i.e. trade). The goal of supply chain finance is to ensure, through financing or risk mitigation, fund settlement (i.e. that buyers pay sellers) and to free as much working capital as possible. 1
As explained in “Using blockchains to solve issues in trade finance“, trade finance is an incredibly inefficient process. This is because trade finance consists of closed, monolithic, and proprietary solutions by a large number of diversified (centralized) entities (banks, corporates, regulators, governments, transportation, and insurances). Furthermore, many of the processes are still manual and paper-based. Moreover, many processes happen across borders thus involve different laws, regulations, and currencies. This results in slow settlements, a need for ongoing reconciliations, a lock-in of working capital, and slow/incomplete audits, among other things.
The post Using blockchains to solve issues in trade finance covers these and more issues in detail.
Read it here.
Commerzbank is combating these problems through blockchain-based trade finance platforms. Two of them are Batavia and Marco Polo. Marco Polo is based on TradeIX and the Corda blockchain (R3).
Batavia was created by Bank of Montreal (BMO), CaixaBank, Commerzbank, Erste Group, UBS, and IBM. In April 2018, together with AUDI, the first real-world transaction on Batavia took place.
Improving trade finance through blockchain-based trade finance platforms
Trade finance platforms aim at building open platforms that work across all relevant stakeholders such as banks, regulators, and insurances). Such cross-company platforms allow for real-time information and automatic payments. The location of all shipped goods is visible to all relevant participants in real-time and payments should be issued automatically and incrementally based on the shipment stage.
Moreover, trade platforms aim to create cross-company wide document management systems that make away with paper-based documents and manual information processing. These document management systems, built through smart contracts, allow further for the creation of automatically executed contracts that prevent fraud and disputes. Moreover, digital contracts in combination with one unifying transaction ledger decrease settlement times, ensure data consistency and remove the need for reconciliations.
Exploring supply chains and supply chains finance with Fraunhofer IML
Commerzbank is also collaborating with Fraunhofer-Institute for Material Flow and Logistics (Fraunhofer IML) in Dortmund in a research project exploring the interaction between physical supply chains and supply chains finance (trade finance). Physical supply chains and supply chains finance (trade finance)
are closely interlinked. One use case that combines these two are the above-mentioned automatic and incremental payments based on the goods’ physical location along the supply chain.
Improving supply chains through Proof of Location
Another technology that is closely related to supply chains is Proof of Location. Proof of Location, one of the Cryptoeconomic Primitives and blockchain building blocks, refers to open source maps and verifiable and tamper-proof geospatial data. In their most advanced form, Proof of Location enables tamper-proof geospatial data, in contrast to common navigation systems such as GPS, which is susceptible to spoofing. Supply chains, in combination with blockchain-based finance platforms and Proof of Location services, would enable even more robust trade systems.
Read more about Proof of Location in Proof of Location: Geospatial data on blockchains.
Read more about Cryptoeconomic Primitives and blockchain building blocks in Cryptoeconomic Primitives and blockchain building blocks.
Blockchain-based issuance and trading of securities
As explained in “Traditional security issuance vs. blockchain-based tokenization“, the issuance of securities and trading such as real estate funds is an essential but complicated part of the financial system. The major reason for this complexity lies in the amount of involved (centralized) stakeholders. Tokenization, the issuance of real-world assets using blockchains, removes a lot of that complexity.
For more on tokenization see Traditional security issuance vs. blockchain-based tokenization.
As the issuance and trading of securities is an important aspect of Commerzbank’s business, they have experimented in this area as well. For instance, by simulating a blockchain-based security transaction.
Issuance and trading of securities in cooperation with KfW and MEAG: real-time and middlemen-free
In cooperation with KfW and MEAG, Commerzbank has traded a Euro Commercial Paper (ECP) using R3‘s Corda. The Corda-based transaction was settled in real-time (instead of the usual two days) and, in contrast to the traditional way, without any middlemen such as a clearinghouse.
In contrast to this simulation, Commerzbank also piloted a real transaction via Blockhains.
FX trading with thyssenkrupp: real-time, reconciliation-free, and fewer middlemen
Together with thyssenkrupp Commerzbank traded a real FX Forward using R3‘s Corda. The Corda-based transaction was settled in real-time, with fewer middlemen than usual, and – more importantly – removed the need for reconciliations.