Transforming Trade Finance: How TLIP and MLETR Are Revolutionising the Industry
TL;DR
Tokenising key trade documents like Bills of Lading and Commercial Invoices can massively improve access to trade finance. Combined with the risk engine provided by TLIP on the historical behaviour of traders, the cost and availability of trade finance can further be improved to address the huge trade finance gap that stifles international trade.
Trade finance is the fuel that powers global commerce, facilitating transactions between buyers and sellers across different geographies. In sectors like maritime shipping, the mechanics of trade finance are crucial due to the extended duration between shipment and payment, amplifying the risk for sellers. Traditionally, this risk is mitigated by capital providers, such as banks, which issue letters of credit, guaranteeing payment and thereby taking on the risk for a fee.
Letters of credit are one of the many types of documents at the heart of trade finance. Other examples include Bills of Lading and Commercial Invoices, which we’ll explore further in this blog post. These documents serve to minimise the financial risk involved in trade; however, too often, they are prone to delays, errors and fraud.
TLIP aims to innovate the archaic processes of trade finance by not only digitising the related documents to streamline trade but also acting as a risk engine, injecting immutable trust into trade finance with trade data taken directly from the source.
Examples of Trade Finance Documentation
Let’s start by looking at two key documents in trade finance.
A Bill of Lading (BL) is a critical document in trade finance, especially in shipping. It serves as a legal confirmation that a particular party is responsible for the goods in transit and thus, bears the associated risks. The validation of a BL involves proving identity through original copies, ensuring document integrity with physical checks, confirming issuance by maritime operators, and verifying transactions with supplementary documents like invoices.
Commercial Invoice (CI) Factoring is another pivotal component of trade finance, providing capital and distributing risk more evenly between sellers and buyers. In this setup, a capital provider buys the invoices from a seller at a discount, providing immediate cash flow. The capital provider then takes on the risk of the buyer’s payment. This method redistributes some of the payment risk to the buyer. It also streamlines transactions by bypassing the complex, bank-mediated procedures of traditional letters of credit.
The Case for Digitising Trade Finance Documents
However, as with so many trade finance processes, these documents still use outdated, labour-intensive paper-based methods, which leads to significant costs and risks of errors. According to McKinsey, BL documentation alone accounts for 10–30% of trade documentation expenses, impacting global supply chain efficiency. These paper-based processes cause delays in transactions and information flow, leading to potential financial setbacks including port detentions and demurrage charges.
Digitising trade documents will be a game-changer. McKinsey estimates project staggering direct cost savings of $6.5 billion and unlocking $40 billion in global trade through the adoption of electronic BLs. This highlights the critical need for adopting digital solutions such as those advocated by the Model Law on Electronic Transferable Records (MLETR) to modernise and streamline these procedures.
What is MLETR?
The Model Law on Electronic Transferable Records (MLETR), adopted by the United Nations Commission on International Trade Law (UNCITRAL), facilitates the digital exchange of ownership documents. By allowing for the digital recognition of ownership transfer, MLETR supports the digitisation of crucial trade finance documents like BLs and CIs. This transition not only streamlines operations but also reduces the dependency on physical documents, which are prone to loss and fraud. For more background, dive into UNCITRAL’s whitepaper on MLETR here.
TLIP: Digitising and Tokenising Ownership Exchange
TLIP is uniquely positioned to leverage the opportunities presented by MLETR.
- Tokenisation: The upcoming TLIP 2.0 will enable the tokenisation of documents. This aligns TLIP with the singularity principle of MLETR, which involves making a regular electronic record — such as a digital Bill of Lading — unique through the process of tokenisation. This method binds a digital token to a regular electronic record; the ownership of the token can be transferred seamlessly and securely across the platform. These records will be maintained on a ledger that acts as a ‘single source of truth’, effectively preventing the duplication of an electronic transferable record without making any duplicate recognisable as such. This capability promises to revolutionise the security and efficiency of document transfer in trade finance.
- Risk engine: One of TLIP’s standout features is its potential to serve as a risk engine, utilising a comprehensive history of trade interactions between entities — data that traditional banks might not have. This engine can assess and verify the legitimacy of documents and transactions based on extensive prior records and real-time data analysis. Based on this information, capital providers can assess the level of finance they are willing to offer trade participants. For example, imagine a trade between a Kenyan flower farmer and a Norwegian supermarket chain. The consignment of flowers arrives at a warehouse in a Kenyan port; at this juncture, the risk transitions to the Norwegian buyer. With robust risk assessment mechanisms and behavioural insights gleaned from TLIP, based on previous trade transactions between the two parties, providers of capital can accurately gauge transactional risks and determine optimal pricing strategies.
- Authenticating documents: TLIP plays a crucial role in safeguarding against counterfeit goods by granting access to authenticating documents. By doing so, it effectively reduces the potential for fraudulent CIs, which attempt to procure payment for nonexistent products. Take, for instance, the Phytosanitary Certificate, which is only issued following a thorough inspection by an independent third party. Obtaining this certificate without such inspection is nearly impossible. TLIP can directly retrieve this document from its source, offering authoritative assurance of the legitimacy of both the certificate and its associated goods.
Bills of Lading and transforming them into financial instruments.
The Future of Trade Finance with TLIP and MLETR
The integration of TLIP with the guidelines outlined by MLETR represents a formidable advancement in trade finance. By reducing the reliance on intermediaries and leveraging IOTA’s distributed ledger technology for secure, transparent transactions, TLIP is poised to reduce costs, increase efficiency, and minimise risk across the board. As the platform moves towards implementing advanced features like tokenisation, the trade finance industry looks towards a more digital and democratised future.
Engage with Us
We invite you to join us at the forefront of this transformation. Reach out to us via our website to explore how TLIP can streamline your trade finance operations and provide you with a competitive edge in the global market. Together, we can redefine the boundaries of international trade.
