Blockchain for trade finance: a network business
Today, the movement of goods, money, and credit in global trade is done using a broken model that relies on third-party, human intervention and antiquated, siloed, and still largely paper based systems. This has made global trade extremely complex, inefficient, risky, and exclusive.
Tomorrow, this highly inefficient market will be superseded by a smarter, better connected, highly automated, and far more open and inclusive trade infrastructure, enabling private sector growth, healthier economies, and entirely new business models. And much of that will be achieved by Blockchain because in theory it
- Reduces complexity and the number of intermediaries involved
- Reduces settlement, custodian and counter-party risk
- Manages credit risks better and more efficiently
Trade finance has become one of the top focus issues for blockchain technology use. The number of pilots and other trials that are looking into the opportunities of blockchain technology for trade finance and supply chain have dramatically increased in 2017 and intensified this year. The sheer complexity of trade finance is thereby reflected in the variety of potential solutions. Different parts of the ‘trade finance supply chain’ had their own blockchain initiative. A large number of these pilots however stopped or failed being too narrow in their set-up. These were mainly focused on certain — and limited — aspects of the trade finance chain.
The various parties who are involved in the trade finance and supply chain business however are increasingly becoming aware that stand-alone solutions are not the answer to the various challenges in the trade finance industry. The success of using blockchain in trade finance purposes stands or falls with networks effects and if it is adopted widely. They are increasingly convinced that as well as developing a platform and blockchain solution, a network must be in place that covers all the parties in the trade finance chain so that the full transaction can be completed on the blockchain.
As a result we have seen the upcoming of blockchain trade finance networks with exotic names like Batavia, Marco Polo, We.Trade and more are expected to follow.
Trade finance
A complex process
Trade finance is a complex process. Various parties from exporters, importers, banks, truckers, shippers, custom agents and regulators all require checks and verifications at various points along the chain. Each interlocking part of the chain depends on successful completion of the previous phase and on reliable information.
Banks thereby play a large role in the trade finance chain, notably in the supply of letters of credit and other financing mechanism. Letters of credit are the most widely used way of financing between importers and exporters, helping guarantee trade transactions. At the moment buyers and suppliers use a letter of credit typically concluded by physically transferring paper documents to underpin transactions. This process however creates a long paper trail and it may take between five and ten days to exchange documentation.
A network business
Trade finance is a network business. It is an activity that often involves multiple counter-parties in various and far-away parts of the world. Creating a blockchain trade finance ecosystem that combines all the different stages of trade from production to end-delivery is a must. For blockchain trade finance platforms to work in an optimal way this means on-boarding other banks, regulators, customs and all parts of the trade cycle. This asks for the setting up of blockchain-enabled trade finance platforms or networks with common standards enabling interoperability.
How it works
Powered by the Hyper-ledger Fabric blockchain framework, these platforms connect all the parties involved into trade to manage, track and protect trade transactions between SMEs. It connect all parties involved in a trade deal, including buyer, buyer’s bank, seller, seller’s bank and transporter in one place (online and via mobile devices), help SMEs initiate new trading relationships as well as provide easy access to trade finance.
These apps register the entire trade process from order to payment, displaying it in a flowchart and guaranteeing payment when all contractual agreements have been met. The platform is fully automated and available 24×7, so the order-to-payment process is much quicker than the traditional exchange of documents. It also requires far less back-office administration.
