Supply Chain Finance Reimagined on the Blockchain

Supply Chain Finance is a financial service that allows buyers and suppliers across markets to better manage their own cash flow.

This video will catch you up to speed:

In a Nutshell

  1. A buyer places an order with a supplier.
  2. The supplier submits an invoice to the buyer for X amount, due within a certain period of time.
  3. The buyer approves the invoice and uploads the details to a supply chain finance platform.
  4. The supplier is allowed to request early payment (at a discounted rate).
  5. If the buyer finances out the invoice, they must pay it to the funder when it comes due.

This is a great system that helps both parties a great deal. However, blockchain could be leveraged to greatly improve efficiency and open up some new opportunities. Here’s one possibility.

SCF on the Ethereum Blockchain

  1. A buyer places an order with a supplier.
  2. The supplier generates an Invoice smart contract for the buyer for X amount, due within a certain period of time.
  3. The buyer clicks a button to agree to the terms, and X temporary ERC20 compliant tokens are created and given to the supplier immediately.
  4. The supplier can then do whatever they please with these tokens (more on this in a minute).
  5. When the invoice is due, the buyer sends the correct amount of a stable token to the invoice contract. This executes a function that replaces all of the temporary tokens with the stable tokens.

That’s a bit technical, so let’s outline the mechanics and the benefits in clear terms.

When the buyer agrees to the invoice, temporary tokens are immediately given to the supplier. These tokens will be replaced with real-valued, price-stabilized tokens once the buyer pays off the invoice.

Whoever is holding the tokens will receive the real-valued tokens immediately when the transaction completes, regardless of who or how many people are holding them.

Let’s look at an example.

Suppose our supplier is a woman named Julie.

She receives an order from Massive Corp to send them a supply of cosmetics. Julie submits an invoice due on May 12th, 2018 for $10,000.

Massive Corp agrees, and then Julie immediately receives 10,000 temporary tokens in her Ethereum wallet. Let’s call these XYZ tokens for simplicity.

Since these XYZ tokens are ERC20 compliant, Julie can now do whatever she wishes with them:

  • Sell them for 90% of the mature value on a decentralized exchange (or any other %)
  • Pass them downstream as payment to her shipping companies
  • Pass them along as employee bonuses
  • Give them to her annoying nieces and nephews

Julie does a bit of the above, and she sells and/or trades 8,000 XYZ for $7,200 on day 1 that she can immediately put back into her business. She also still has 2,000 XYZ that she decides to hold.

On May 12th, Massive Corp pays their bill with 10,000 USDT. Julie’s 2,000 XYZ dissapear, and she receives 2,000 USDT.

Also, all of the other token holder’s XYZ vanish, and they are replaced with USDT. All of this happens for just a few dollars (or less) in transaction fees across borders worldwide.

Note: USDT is a “stable token” tied to the value of $USD. It’s has some shakeups in recent months, and its future is not certain.

Beyond the Basics

If we look into the not-so-distant future, we can see some other benefits of this system emerge.

It’s not hard to imagine a bundling mechanism for these tokens so that tokens in different risk categories can be grouped together and purchased in bulk — similar to an ETF.

KYC and AML issues aside for the moment, this could open up doors for smaller operations to receive financing — that they currently struggle to receive — at higher interest rates for riskier shipments based on diversification.

Also, if we look at the nature and direction of decentralized exchanges that are emerging, it’s not hard to imagine that these types of investments migrate outside the walls of the current world of SCF into the average investors portfolio.