AI, digital currency and blockchain: beyond hype and shaping trade finance’s digital future

Digital transformation is not new. There hasn’t been an industry that has avoided some form of digitalisation.

Yet the depth at which each sector has been on that journey does vary.

Part of the challenge is that people have different interpretations of what digital transformation means. To many, it involves doing things they did before but now with technology. Email is ultimately just sending a letter without waiting for the post.

There is value in that, but it is limited. Another way to look at transformation is to use technology to optimise and generate new processes.

Trade finance’s transformation moment

Look at trade finance. In some instances, we have seen the first steps towards transforming what has traditionally been a paper-based function. Pilots and projects in blockchain, AI and machine learning, and digital instruments have all been implemented and are generating results.

Yet, at the same time, several challenges need to be overcome. These include:

1. A global lack of standardisation: In some instances, such as electronic bills of lading (eBL), we see efforts to come up with a common standard, but other instruments critical to trade finance are missing that universal commitment. As a result, many players are hesitant to commit to one approach or another, in case they are left using a solution that no one else is on.

2. Legacy platforms: Much of what passes for digital transformation is just a very good front end, and not many people realise that most technology relies on legacy platforms. These can be challenging to maintain, particularly as those with that knowledge retire, and they weren’t designed to connect with newer solutions. Any fix requires considerable investment, which can be prohibitive.

3. Talent and experience shortages: There is an ongoing talent crisis, with many sectors struggling to attract and retain talent that understands and has experience in handling internet-facing and new technologies. This can impact multiple areas, from cyber security to change management and integrating new technologies.

4. Balancing multiple priorities: Many financial institutions spend much of their time focused on keeping the lights on; while they know they need to innovate, they also have to maintain exceptionally high standards of service. As such, drivers for change often come from external sources, in particular regulators.

That last point is possibly one of the most important. If things are going well, there is rarely an impetus for immediate change. But when regulators get involved, things do move quicker. Multiple regulations and law changes, such as MLETR, NIS2 and DORA, impact different parts of the financial services ecosystem. The implications these have are significant, and, in many instances, they will act as the biggest drivers for transformation.

How AI, blockchain, and digital currencies will trigger deeper digital transformation in trade finance

Of course, an external driver is, in many cases, pressure, but rarely is there detailed guidance that’s directly related to specific business needs.

Add to this the reality that technology is evolving quickly, with new solutions regularly appearing, and it can be hard to know where to focus. In my mind, trade finance teams need to be looking at three core areas:

• AI: AI will have a truly transformational impact on financial services. The problem at the moment is that it has become a catch-all term – predictive analytics, LLMs, machine learning, neural nets, and other terms are all being grouped together.

  Each of these has major potential positives; for instance, in trade finance, predictive analytics can decipher trends and guide where to deploy resources, while LLMs can query databases to support decision-making and neural nets can detect irregularities in data.

  The challenge lies in managing the hype, understanding where the different parts of AI can drive value and not discounting those parts that are working just because AI as a whole has not measured up to the hype.

• Digital currencies: Digital currencies are coming, and banks have to embrace them as more processes become automated. However, they also present opportunities; digital currencies will speed up certain processes (such as issuing letters of credit) and free up resources to be deployed elsewhere. Plus, they inject greater transparency, giving banks more information about any given business, minimising the variables in financing and, ultimately, helping to reduce operational risk.

• Blockchain – Blockchain is the foundation for trust. Without trust we can not have digital currencies, we can not have the safe and secure sharing of data, and documentation. Blockchain provides that trust and we are already seeing it in blockchain-based eBL. The experience that has been developed in helping to kickstart the transformation of paper-based bills of lading will enable an accelerated transformation in other forms of secure data and document transfer, including smart contracts.

Five predictions for the digital transformation of trade finance

It is easy to talk about emerging technologies in vague terms, with no concrete commitments or clear statements on what the world will look like if these solutions are implemented correctly. I believe that if we can integrate the right types of AI in the right way, if banks do embrace digital currencies, and if blockchain is accepted and integrated as the foundation of trust, then over the next ten years, we will see:

1. 27% of global trade finance transactions being fully digital by 2027

2. 97% of bills of lading being eBL by 2030

3. AI-driven trade finance reducing processing time from days to minutes, with most decisions automated and overseen by humans, by 2032

4. A global corporate digital identity framework, based on emerging standards, in place by 2033

5. The near obsolescence of paper-based trade finance by 2035

Taking transformation further

Is any of this guaranteed? Of course not. But the reality is that we’re rapidly approaching a point where digital currencies, driven by central banks, will be the de facto B2B payment model. More broadly, governments are pushing for deeper digitalisation and are prepared to deploy regulations to motivate that transformation. Add to this environment the establishment of global standards (which will happen, however slowly it seems to be moving now), and the predictions I made above are not far-fetched at all.

Let’s also be clear: a huge amount of digital transformation has already taken place, with the Middle East at the forefront. Much still needs to happen, but we are very much on the journey.

Ultimately, trust and transparency are the cornerstone of financial services digital transformation – if we can embed it at every step, we will be able to create and deploy new models that will help all parties evolve rapidly.