The Singapore Government has turned to blockchain to prevent traders from defrauding banks.
It is using a digital ledger that will record trade invoices and raise alerts for duplicate invoices across banks. This will ensure that banks do not lend money for fake invoices.
The Infocomm Development Authority completed a proof of concept using blockchain technology with Standard Chartered and DBS banks in December. “We are looking to roll out the platform and for more participant banks to join us,” Shue Heng Yip, Director (Services Sector), IDA told GovInsider.
This is “the world’s first application of distributed ledger technology to enhance the overall security of trade finance invoicing”, a government announcement said.
A problem no single bank can solve
The project is seeing a “huge amount of interest” from local and international banks. IDA is speaking to at least 8 to 10 banks, he said, adding: “The numbers are not that small, but I’ll stick with a conservative number”.
“When we first spoke with the two banks, we wanted to tackle a problem that none of the banks can solve by themselves,” he said. As a trading and financial hub, Singapore saw opportunity in bringing the two sectors together. Banks typically lend to traders based on paper invoices – these are easy to duplicate and hard for banks to verify.
Standard Chartered lost nearly $200 million from a fraud in China’s Qingdao port two years ago. Companies used duplicate invoices for the same goods to get hundreds of millions of dollars from banks.
Testing with blockchain
Part of the problem is that there is no single source of information for banks to verify invoices. “Banks are not allowed to share data, either through competitive reasons or by the secrecy acts for various reasons,” Yip said. This means that “fraudsters can go to each bank and get [duplicate] paper invoices and defraud them enlarge”.
IDA, DBS and Standard Chartered developed TradeSafe, a blockchain platform to share data confidentially between banks. The platform was tested with 60 mock invoices, and passed through 20 user scenarios, he said.
Blockchain creates a unique cryptographic hash of every invoice. It is that unique key, rather than the raw data that is shared by the banks. If another bank tries to register an invoice with the same details, the system will be alerted.
An open ecosystem
Banks alone cannot verify whether an invoice is genuine. IDA wants “third-party verifiers” like shipping lines, customs and port authorities to come on board. They can validate whether the trade underlying an invoice is genuine.
“Everyone has a little bit of knowledge about that piece of invoice and they sort of give some insights as to whether it’s not bad or not,” Yip said.
IDA is working with the Singapore Customs, for instance. Equally, authorities from foreign countries could join the platform too. “If you have a cross-border global situation, you tend to think that you need help to verify something because the nature of business in a trade environment is so large”, he said.
The more the merrier. As other banks come on board with the government, the better it can prevent trading frauds.