Allowing the Use of Physical Assets As Collateral to Obtain Trade Finance
As the cornerstone of international trade, trade finance enables importers and exporters to transact business through trade while mitigating many of the risk factors, such as delayed payments. However, as we have flagged before, the access to trade finance is not a fair game, especially for small and medium-sized businesses that are not able to afford the lengthy and complicated loan processes required by financial institutions.
With our mission of advancing the role of freight forwarders in mind, last year we launched our TradeForward ™ platform to facilitate the process of finding a trade partner, securing financing, and completing a transaction. Today, we continue to research partnerships and innovations that could help us achieve our goal: to place freight forwarders at the center of trade finance.
With the intention of understanding more about the options available, we saw and admired the work of MakerDAO in the DeFi scene and reached out to its Head of Business Development in Europe, Gustav Arentoft, to learn more about how their advancements could be applied in logistics and allow the access of trade finance for freight forwarders.
Here's what we learned from Gustav:
1. Congrats on the launch of multi-collateral DAI. We understand it may allow the use of physical assets as collateral. Can you elaborate on how this could work in practice?
Gustav: Thank you. One of the major innovations with Multi-Collateral Dai is the potential to use multiple types of digital assets as collateral, including digital representations of real-world, physical assets. As a starting point, all the collateral types that are allowed into the Maker Protocol must be voted in by the community (those individuals holding and voting with MKR, the governance token).
Should the decentralized governance of the Maker Protocol decide to allow physical or legacy world assets, there will need to be a legal construct that enables certain actions for the collateral and specifies what the asset can be used for. From the Maker Foundation’s perspective, we have seen a number of early-stage solutions to these issues being discussed, with different projects launching pilots as well. For instance, Paperchain, a company focused on providing streaming-related data analytics for musicians, did their pilot late last year.
If a user has physical assets, they will need a custodial solution. With shipping, you don't actually need to put an asset somewhere else because you own an asset that is usually an asset is being transported from A to B. In those cases the user should make sure that they have legal representation or document that gives them a way to claim the goods.
One could also collateralize the payment, the future revenue of proceedings and possibly get trade financing. The options here are endless, and I am super excited to see what future paths the community chooses to follow.
2. At ConsolFreight, we have recently launched a Proof of Concept that mitigates the risk associated with trade finance, where forwarders hold custody of the goods being transported as they are used as collateral in order for shippers to obtain purchasing finance while the goods are in transit, how viable you foresee using these real assets with verified value as collateral on the Maker network?
Gustav: In the Maker system, MKR holders vote in all acceptable collateral types (and the parameters per collateral type). That said, I definitely believe that is a strong use case. Freight forwarders are looking for liquidity and have physical assets that they can use to get credit. With the right frameworks developed, Maker can facilitate specific actions within the financial system.
Normally you have a large inefficiency whenever you deal with invoice financing because the company supplying it either needs to borrow money from the bank or from someone else.
In the Maker system, people, assuming they have pre-approved collateral, can create liquidating directly. That means you don't really have a financial obligation to another entity, instead of based on the pre-set parameters that were set during the approval process, you can interact directly with the Maker Protocol’s smart contracts.
3. How would the percentage of the asset value be decided on if it will be included as a potential collateral type?
Gustav: Before an asset is approved for usage in the Maker Protocol it has to go through the system’s decentralized governance process.
The Maker Foundation’s interim risk team and members of the community perform risk analysis on the potential collateral types and report on their findings to the community, which votes on whether to allow the collateral into the system. If the collateral is accepted, the community also decides on different parameters for how those assets can be used.
4. How do you envision this type of opportunity provided by technology to benefit the freight forwarding industry and why should freight forwarders pay attention?
Gustav: Using blockchain is a big opportunity for freight forwarders. It creates efficiencies and access that is impossible in the legacy financial system.
As we see more things move onto the blockchain, it will also be easier to assess and value those assets. This will create more efficient systems, better finance options, and an overall stronger and more transparent supply chain.
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