Key to reducing frauds among buyers and suppliers — Smart Contracts
As urbanization picks up pace across the globe, more countries would be included in the global trade network. Though this sounds very promising and is generally positive with the new opportunities, increase in GDP and decrease in unemployment, the underlying technology available in the newer economies are not robust enough to prevent frauds and hence, losses occur in these economies.
Recently, we were discussing a trade situation with one of our clients. The story goes that a trader and a supplier had gotten into a trade for the purchase of goods through traditional trade instruments. Over the years, as the parties understood each other's trading requirements, capacity and supply capabilities, the trade grew at a healthy rate.
After 2 years of trade record, the trader approaches the supplier asking them that the trader’s eventual buyer would directly trade with the supplier as the trader wanted to reduce operational costs while maintaining the decision making on the sale price for the eventual buyer and communicating the same to the supplier. The trader would remove himself from the trade operations but still get their margin on the trade as an advisory fee.
Sounding like a win-win situation, the supplier agrees and signs the trade contract, sends the documents through the banking channel and the trade is executed with an additional credit insurance purchased by the supplier on the buyer.
At maturity, when the buyer should be making the payment, the buyer shares a copy of the document that shows that there has been an agreement among the three of them — the buyer, the trader and the supplier. According to the agreement, the buyer is not required to make any payments to the supplier until the trader makes a payment to the buyer for an earlier, completely unlinked trade.
So what happened here?
The trader fabricated the trade contract to save themselves and forged the supplier’s signature as they couldn’t show any email or other communication among the three of them where they would have circulated this document to be signed and the trader or the buyer could not retrieve the original. The buyer refused to pay and the insurance company too denied any payment obligations because they too sighted this document as a reason for the same.
This shows how a simple document that can be forged and used to create a severe loss for the unsuspecting supplier and in the end, they have to use their resources of time, money and manpower to prove that such an agreement had never been signed.
There are many such cases across the commodity trade and finance industry and is one of the key reasons why companies, especially SME segment, are reluctant to use trade finance for their business because though there is a lot of trust assumed in the process, fraud can still not be prevented as some of the data can be falsely created.
Newer technology like Blockchain and Smart Contracts, based on distributed ledger system can be used to transfer all contracts onto blockchain. The insurance companies and the banks have the means, finances and the motivation to do so and hence should be leading the race for the adoption of this technology into their daily workflow.
With the recent pace of advancements and innovation, it seems just a matter of time when Smart Contracts using blockchain technology will be used to preserve trust and prevent frauds.
About Arkratos Blockchain Solutions
Arkratos is a Blockchain lab based in Singapore. We provide end-to-end services related to Blockchain and Smart contracts product development, Tokenomics and Whitepaper advisory.
Our Flagship product KRATOS™ is a decentralized commodities trading platform. KRATOS™ is built on Ethereum and it uses smart contracts to remove the need for unnecessary middlemen and paper documentation, to enhance transparency and efficiency as well as to lower the cost and time involved in the trade process. Currently, in the beta testing phase, KRATOS™ will be released soon.
