Phlo - commodity ecosystem

Key Benefits

The Phlo Platform allows SME’s to participate in the commodity trading market on an equal footing by providing them with a comparable legal and administrative infrastructure to the larger players which they can utilize to obtain more competitive financing. How the Phlo Platform works: Onboarding of Transaction Parties: Commodity traders and financers are on boarded onto the Phlo Platform following rigorous KYC and AML checks currently carried out by lenders such as banks. These checks are completed on each party by the Phlo Platform and will comply with industry best practices. Each borrower is allocated a credit risk score by Phlo’s proprietary credit rating computation engine Depending on the user profile, the Phlo Platform has a machine learning algorithm which will determine what kind of KYC documentation will be requested from the user. Banks on average spend $40,000 for each new customer’s KYC check in the CTF space, whereas the Phlo platform spends less than $100 (0.25% of banks cost) by using proprietary credit rating models utilising machine learning on alternative data. This will also determine what changes are required to be made in the legal documentation. Supply chain partners are on-boarded the Phlo Platform: All of the commodity supply chain trade finance parties/service providers are on-boarded onto the system. As trade commodities pass through the trade finance cycle, updates are given automatically via the platform to all parties. Lenders and borrowers will then be able to track the progress in real time through their respective dashboards. Borrower creates new trade finance opportunity: Parties provide the details of the commodity transactions, which they want to execute i.e. coffee bean supply contract from a plantation in Ethiopia. Financers can decide which commodity they would like to provide funding for plus other investment criteria (term, quantity, financing rates etc.) Middle Office reviews the loan opportunity: The trader’s finance request is broadcast to Satoshi’s ‘Middle Office’ professionals who check if the loan opportunity defined by the trader is a genuine opportunity. They also request any additional documentation required immediately such as original physical contracts with suppliers and banking arrangements. Finance structuring and loan agreements: A lawyer, from the Phlo platform’s dedicated law firm, Sullivan and Worcester, will use Phlo’s machine learning structuring engine (which uses historical deal structure data to determine a bespoke legal framework) and their commodity trading legal experience to create a blockchain smart contract between the borrower/lender. Independent Risk Manager prepares a risk report card: The Independent risk management service providers of the platform, Agroark, analyse counter-party, market and operational risks associated with the deal and submit a report. They fill in a standard template measuring 24 risk categories on a scale of 0-100, which is fed into Phlo’s risk engine, generating an overall risk score. The interest rate which the borrower pays is determined by the risk score (the lower the risk, the lower the interest rate). Lenders submit their bids against the loan opportunity: The loan opportunity is published to all lenders on the network, with borrowers having an opportunity to challenge the assessment and provide any additional information to support a better rate. Loan is executed: Payments are processed on the Phlo Platform, electronic documentation is completed, and money is transferred to commodity trader’s account. The payments and settlements will be made through distributed ledger technology using Phlo Corda’s ‘Cash on Ledger’ functionality. Quality Testing of commodities: Commodities are tested by a quality testing service provider on the Phlo platform who updates the rest of the platform on their status. Shipping of goods: Active tags are used to track goods, contained in biodegradable jute bags, which are then shipped to the end customer, providing updates and predictive analysis of their condition, with the help of Phlo platform shipping service providers. Economic Impact • According to research by the World Economic Forum and Bain & Company, blockchain is able “to fill in much of the $1.5 trillion-dollar supply-demand gap in global trade finance by easing financing for SMEs in emerging markets”. • It is difficult assess the true economic impact of trade finance gaps. However, 86% of businesses who participated in an ADB survey consistently reported that additional trade finance would enable their businesses to grow and generate more employment. It is estimated that 10% increase in trade finance would lead 1% increase in the number of workers employed. • Closing the SME financing gap by 5-10% will increase SMEs’ contribution to global GDP by up to 0.1-0.2% per annum. • There are not many avenues available for individual investors to apply for asset backed loans (except for mortgages). The Phlo platform will give more choice to such investors to allow for more players to participate in the market. • All stakeholders in the commodity trading supply chain will receive guaranteed payment for their work rather than relying on the commodity to be shipped to receive payment, helping their cashflow. Circular Economy: Where possible, commodities traded on the Phlo platform will be contained using biodegradable jute containers. Usually, when commodities are shipped to the end customer using traditional commodity trading methods, these jute bags are lost and may not be re-used. Satoshi will return these containers back to the commodity trader so that they can be re-cycled or re-used. The smart tags used in the bags to track their location and status will also be circulated back for usage. Increased financial security throughout commodity trading transactions: For the players involved in the trade finance sector, tampering with paper documents remains the most common type of fraud; either to legitimise a fraudulent transaction or to use bogus information to raise funding. For example, China Citic Bank was a victim of a $147m bill finance fraud. An employee at one of the bank’s branches conspired with others to fake trade finance bills, which were used as collateral to obtain a banker’s acceptance for cash to invest in the stock market. These were later sold several times at discounted prices, leading to huge losses for the bank. The three key features of blockchain, cryptographic security, distributed ledger architecture and a network consensus mechanism can overcome the major security issues involved in traditional commodity trade finance: Cryptographic Security enables information immutability and credibility. Trade transaction records stored on blockchain are tamper-proof, reliable and verifiable by all parties at any time. Data confidentiality and privacy are ensured through permissioned access rights for each participant in the supply chain. Distributed Ledger Architecture provides transaction transparency and traceability. It allows visibility into asset status for merchandise tracking, enables automated execution of contractual obligations through smart contracts, and ensures networks are resilient to downtime and manipulation risks. Network Consensus Mechanism provides a single source of truth for enabling native issuance of payment obligations. It also eliminates the associated problems of double spend, fraud and the need for continuous reconciliation between trading and financing parties in the transfer of these digital assets. Societal Impact: The Phlo platform will help to minimise the societal fears which surround the unknowns of AI and ML technology by proving its capabilities to serve the commodity trade financing sector.