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Trade Finance securitization and the Blockchain:
- Trade Finance has suffered from a funding gap, since large banks who are the primary providers of financing are loath to deal with SMEs (Small and Medium Enterprises), there is a $1.5 Trillion funding gap (ICC) and ADB.
- The gap is larger for women and minority owned SMEs.
- The “duration” of Trade Finance is shorter.
- Many banks hold TF on their books, requiring capital to be locked up
- There is a lot of money looking for a home due to low and negative interest rates.
- Trade finance can be securitized, but this can be an onerous process
- The secondary market is less developed due to lack of ratings which prevents investment by institutions
- Many Trade Finance blockchain consortia exist, but interoperability of these is an issue, solutions for these may include networks of networks (proposed by Marco Polo, and Unbounded- although by the rules we may be prohibited from mentioning specific products)
- Unlocking value is possible through a combination: increasing flow, creating mechanisms for easier and more accurate ratings (automatic rating schemes using AI or smart contracts or both), interoperating between consortia- all possible through increased access to higher quality information in a standardized way through Blockchain - this is our thesis (not in any of the references)
- This will have the effect of closing the TF gap, increasing trade finance especially for the smaller Enterprises, reducing capital requirements for banks by stimulating a healthy secondary market; allowing more capital to enter the arena (from Institutional Investors)