Tokenized Asset Location Swaps Could Create New Channels of Global Supply
The swapping of goods is one of the oldest and most fundamental forms of trade. However, over time, we have become less accustomed to swapping and bartering in favor of fixed monetary exchanges.
On a consumer level, the sharing economy has brought swapping back into the mainstream. Although the biggest names such as Uber and Airbnb involve transacting with cash, other websites have popped up that allow participants to connect directly for the exchange of goods and services. These cover the trading of clothes or household goods, to home swapping for vacations. However, for a business, bartering or swapping goods and services in the modern world comes with challenges.
Bartering Challenges for Business
One issue for any business wanting to engage in a bartering transaction is of establishing trust between the parties to the exchange. When operating across international borders, it’s difficult — if not impossible — for both parties to verify that the goods being offered on either side are of equal value.
A further critical issue is with accounting transparency. After all, commercial transactions of value must go through the accounting process. Even for private companies, the taxman will want to know about it eventually. For this reason, some observers have actively cautioned small business owners against engaging in bartering for the swap of goods or services.
These barriers mean that companies are entirely dependent on global supply chains to procure materials. Supply chain is a business in itself, with a market set to exceed $19 billion by 2021. Global supply incurs many external costs and dependencies, including trade tariffs and customs treaties, third-party shipping companies, and remote storage warehouses.
Moreover, effective inventory management requires careful planning and management, taking up further time and resources. One study estimated that removing barriers in supply chains could increase GDP more than six times compared to the value of eliminating trade tariffs.
Blockchain is often discussed in the context of global supply chains. However, blockchain introduces an entirely different solution for the supply of goods, using asset-backed tokens. In a globally connected marketplace, location swaps of tokenized assets can enable companies to acquire products where they are needed without physically importing global shipments.
How Do Location Swaps Work?
As explained in one of our previous posts, it’s possible to tokenize any asset using blockchain. So let’s assume two parties are participating in a global marketplace for the exchange of gold bars, using digital tokens which represent the gold bars as an underlying asset. The tokens give the bearer the right to claim the underlying asset in the location where the asset is physically based.
One party is based in Zurich Switzerland, but they hold tokens for gold bars which is located in Idaho. Now, this party decides they need their gold bars to be in Zurich so it can be used in manufacturing jewelries. This party goes onto the blockchain marketplace, offers up their Idaho gold bar tokens for the equivalent gold bar located in Zurich.
A second party is located in Idaho USA, with tokens representing gold bars in Zurich. The two parties connect on the marketplace, and simply exchange their digital tokens.
After the swap, our participant in Zurich has digital tokens representing gold bars in Zurich, which they use to take physical custody of the gold. Similarly, the participant in Idaho now has tokens for gold in their own location. They can either claim the tangible asset or sell or trade the tokens with a third party.
What are the Benefits of Location Swaps?
To a business needing raw materials for manufacturing and production, location swaps can offer significant cost savings. They reduce shipping and import charges, as the supplies are already present in the location where they’re needed. Furthermore, businesses can benefit from any advantage offered by procurement based on geographical arbitrage.
For a business, ordering supplies takes time. If goods are imported, shipping times can even stretch to weeks. At best, this generates significant forward planning which takes time and resources. At worst, delays in the shipping process may impede production, leading to lost sales or having to procure goods elsewhere, incurring more costs.
Delays in the supply of iPhone8 components caused Apple’s profit estimates to be slashed by $17 million in the second half of 2017. So, the potential cost and time savings of tokenized asset location swaps are considerable.
Trust and Transparency
Because each token has an underlying asset with an attributed value, businesses engaging in location swaps can easily verify that each party holds assets of equal value before participating in the exchange. This increases the mutual trust beyond that of a traditional bartering arrangement.
The ability to verify the transaction and its value means that a business can also create inventory and accounting entries for each swap transaction. If there is a regulatory or tax audit, the associated costs and inventory location of the outgoing and incoming asset are transparent and can be treated like any other bookkeeping entry.
The Bottom Line
Asset-backed tokens offer vast potential in the world of business, and we are only at the beginning of the exploratory journey. Location swaps enable parties to interact with trust, transparency, and security. These benefits mean that we could soon see a return of bartering to the economy, creating new and far more efficient means of procuring goods than has previously been possible.
This article is brought to you by CoreLedger.
As a prominent blockchain infrastructure provider, CoreLedger is making blockchain technology simple for businesses to use. With CoreLedger’s offerings, clients can readily tokenize their offerings with fast-to-implement resources that will allow them to modernize their services. Thanks to our in-house developed software solutions and experienced blockchain specialists, CoreLedger is ready to help you make your next move with blockchain technology.