Blockchain in Trade Finance
Trade finance includes everything related to domestic and international trade and commerce. Banks usually act as intermediaries and make these transactions possible. Trade finance exists to reduce risk, provide credit and enable exporters and importers to participate in international trade. It is a central part of the global financial system, but it often works with outdated manual and written documentation. To date, many trade finance activities involve time-consuming manual processes and paperwork. Many trade finance activities rely on invoices, letters of credit, and other documents. Blockchain offers an opportunity to streamline and simplify the complex world of trade finance, saving importers, exporters, and their financiers billions of dollars each year. Exporters and importers can use smarthi contracts and cryptocurrencies to set rules that mandate automatic payments.
Although the presence of blockchain technology in trading programs has increased over the years, its mainstream role in bills of lading and loans has only recently begun to take shape. Like many industries, the trade finance market has long suffered from logistical setbacks caused by outdated, outdated and uneconomical manual documentation processes. A physical letter of credit issued by one party’s bank to the other party’s bank is still commonly used to ensure payment is received. Blockchain technology, which allows companies to securely and digitally prove the country of origin, products and transaction details (and all other documentation), will increase transparency about shipments in transit, making exporters and importers more secure. It helps build a high level of trust. pipeline.
In traditional trade finance systems, each participant is responsible for maintaining a database of documents related to the transaction. And all these databases should always be compared with each other. An error in one document can be replicated in copies of that document in other databases. There is no need to store multiple versions of the same document using blockchain. Information can be combined into a single digital copy that is updated in real time and accessible to all network participants.
One of the biggest risks for trading parties is the risk of fraud, especially due to lack of confidentiality and oversight of the flow of goods and documents. This opens up the possibility of the same shipment being mortgaged repeatedly. This is an unfortunate occurrence so common that commodity trade finance banks write it off as a cost of doing business. With blockchain technology, payments between importers and exporters could be made in tokenized form upon delivery or receipt of goods. Through smart contracts, importers and exporters can set rules that allow automatic payments and eliminate the possibility of missed, expired, or reinsured deliveries.
The advent of blockchain technology in trade finance gives buyers better insight into where goods came from and when they were shipped. In traditional systems, this information is often
incomplete. But blockchain keeps consumers informed about all stages of the transaction, further increasing trust and transparency.
Examples of improved Trade finance system through blockchain
It may be time for blockchain in trade finance, as several companies and banks look to find a permanent solution. Standard Chartered and HSBC are two banks that have joined a syndicate promising to use blockchain technology to handle trade finance. One such consortium is Voltron, which operates a blockchain platform for digitizing paper letters of credit and was run by R3 and CryptoBLK. After conducting pilot projects in 14 countries and having over 50 companies and banks participate in global trials, the L/C processing time has been reduced from 5 days to less than 24 hours. . In 2020, it rebranded itself as Contour and launched a digital trade finance network backed by R3 and several other banks.
In October 2020, DBS and Standard Chartered partnered with 12 other banks, including ABN Amro, Deutsche Bank, ICICI Bank and Lloyds, to work on a blockchain-based trade finance platform called Trade Finance Registry. The platform should help detect fraud and double funding in real time in a single transaction.
However, the project eventually abandoned blockchain. After a pilot created by Dltledgers, Trade Finance Registry chose his MonetaGo to build the platform. Instead of blockchain, MonetaGo opted for sensitive data processing to prevent fraud, saying blockchain is not efficient enough for its needs on a global scale. This is a prime example of how blockchain projects tend to fail to move from theory to practice. Meanwhile, fintech companies like Israeli Wave have developed platforms that allow financial groups to offer their letter lending business as a blockchain solution. In 2016, Wave partnered with Barclays to provide a blockchain solution for Ornua and Seychelles Trading Company. This has allowed us to streamline our supply chain, reduce transaction costs and documentation errors, and transfer documents faster to our customers around the world. In this case, from letter of credit issuance to approval, the transaction process for cheese and butter worth about $100,000 took him less than four hours, a significant reduction from his traditional seven to ten days. A Mediterranean shipping company and Hapag-Lloyd also use Wave’s electronic bill of lading solution. According to the Digital Container Shipping Association (DCSA), the shipping industry could save more than $4 billion annually if 50% of shippers implemented an electronic bill of lading solution like Wave.
Blockchain and DLT have also enabled trade between Australia and Japan, facilitating trade-related processes from issuing letters of credit to delivering commercial documents. Here the Hyperledger Fabric trade process, built by the Linux Foundation, was executed and secured by IBM. While all of these projects focus on creating simpler processes for securing trade finance, it is also important for financial institutions to complete due diligence on each client and transaction. And blockchain technology has proven to be able to help with that.