How Blockchain-based Solutions Could Benefit International Trade Finance
Trade finance has traditionally been an intensely manual process that has not significantly changed for centuries. Chasing paper documents has kept thousands of people gainfully employed in banks and corporations the world over. Although letters of credit and bills of lading may now be in electronic form, they are still not easily accessible to all parties to a trade, and each party keeps independent records of the transaction. Tracking the progress of shipments and relating them to payments remains complex, cumbersome and open to error and fraud.
But that could change with blockchain. Blockchain enables all parties to a trade finance transaction to share information securely. At each stage of the transaction, the relevant participants can update the blockchain, and that information is almost instantly available to all the parties to the trade. This could eliminate costly documentation delays, speed up settlement times and prevent funds being tied up for lengthy periods of time. It could also improve access to credit, as the transparency of blockchain transactions may encourage credit providers to look more favorably on trade borrowers.1
Last year, an article on this blog reported that blockchain-based trade finance could still be some time away, but that “it is worth keeping an eye towards the very rapid developments occurring in the space.” Since then, things have moved on apace. Here is a roundup of current initiatives.
Recent Developments in Blockchain Payment Systems for International Trade Finance
- A large British bank has partnered with cryptotechnology startup Wave to execute a blockchain-based global trade finance transaction. A letter of credit transaction between an Irish exporter and a Seychelles importer was recorded end-to-end on Wave’s platform, with funds transferred via SWIFT.2
- Using the Corda platform built by the R3CEV consortium of 51 banks, a large Australian bank has successfully used blockchain’s "smart contracts" to execute invoice financing documents and letters of credit in partnership with 14 other global banks.3
- A giant American bank and a British bank with a large franchise in the Far East have joined forces with a Singapore government agency to prove the concept of blockchain use for letters of credit trade finance transactions on Linux’s open-source Hyperledger blockchain platform.4
- Supported by the Dubai government, IBM is at proof-of-concept stage with a complex multiparty trade finance transaction encompassing companies in several countries and multiple transportation providers. The transaction will be managed end-to-end using Hyperledger and smart contracts. But this experiment goes far beyond blockchain and smart contracts. It also includes real-time shipment tracking using advanced telecommunications linking “Internet of Things” devices, with data validated by artificial intelligence.5
- A major American retailer is using Hyperledger blockchain to track shipping information for pork deliveries from its Chinese suppliers, including farm origination details, batch numbers and storage temperatures. As well as helping the company to streamline its cash flow and procurement, this development could also improve product safety for consumers. The retailer is now considering extending blockchain use to track shipping of other products.6
The use of blockchain, smart contracts and artificial intelligence in trade finance is set to increase as the initiatives currently at proof-of-concept stage go mainstream. Importers and exporters may see significant changes in the way supply chains are managed around the world, potentially resulting in considerable efficiency gains. However, there are still hurdles to be overcome, particularly regarding regulation of this very new technology.
- Applying cryptotechnologies to trade finance, European Banking Association; https://www.abe-eba.eu/downloads/knowledge-and-research/EBA_May2016_eAPWG_Applying_cryptotechnologies_to_Trade_Finance.pdf
- "The blockchain revolution in trade finance", Barclays Bank; https://www.barclayscorporate.com/insight-and-research/trading-and-exporting/blockchain-revolution-in-trade-finance.html
- "CBA trials blockchain for trade finance", Australian Financial Review; http://www.afr.com/technology/cba-trials-blockchain-for-trade-finance-20160811-gqpw5i#ixzz4YaDHIz6y
- "HSBC and Bank of America Merrill Lynch Use Hyperledger Project For Blockchain-Based Trade Finance", IB Times; http://www.ibtimes.co.uk/hsbc-bank-america-merrill-lynch-use-hyperledger-project-blockchain-based-trade-finance-1575269
- "IBM’s Biggest-Ever Blockchain Trade Finance Trial Could Go Global", Coindesk; http://www.coindesk.com/ibms-biggest-ever-blockchain-trade-finance-trial-go-global/
- "Walmart wants to apply blockchain to other products beyond pork", Coindesk; http://www.coindesk.com/walmart-blockchain-product-supply-chains/