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Blockchain solutions have the potential to help streamline trade finance.

The Fast Changing World of Blockchain Solutions for Trade FinanceARTICLE

By Frances Coppola

Banks, payment services providers and technology companies are increasingly interested in Blockchain solutions for international payments. Blockchain can potentially improve the speed and security of international payments and reduce their cost, benefiting businesses and consumers in many countries. But although it does not as yet get so much attention, there may be even more potential benefit from using blockchain to streamline trade finance.

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 Solutions for International Trade Finance

  • 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.2
  • 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.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
  • 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.5
  • 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.6

The Takeaway

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.

Bill Camarda - The Author

The Author

Bill Camarda

Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.

Sources

1. “Bitcoin and the Future of Blockchain in International Payments Systems,” FX International Payments ;https://www.americanexpress.com/us/content/foreign-exchange/articles/bitcoin-future-of-blockchain-in-international-payments-systems/
2. "We Must Regulate Bitcoin. Problem Is, We Don’t Understand It", Wired; https://www.wired.com/2016/03/must-understand-bitcoin-regulate/
3. The Bitcoin Market Potential Index, Garrick Hileman, London School of Economics;fc15.ifca.ai/preproceedings/bitcoin/paper_14.pdf
4. Ibid.
5. "Argentina Tops List of Countries with Greatest Bitcoin Adoption Potential",Cointelegraph; https://cointelegraph.com/news/argentina-tops-list-of-countries-with-greatest-bitcoin-adoption-potential
6. Ibid.
7. "Argentine small businesses turning to bitcoin",FT.com; https://www.ft.com/content/b2a8cca4-2c11-11e5-8613-e7aedbb7bdb7
8. "Can Bitcoin Conquer Argentina",New York Times Magazine; https://www.nytimes.com/2015/05/03/magazine/how-bitcoin-is-disrupting-argentinas-economy.html
9. "With Financial Restrictions Over, Bitcoin is to Unleash Full Potential in Argentina",Cointelegraph; https://cointelegraph.com/news/with-financial-restrictions-over-bitcoin-is-to-unleash-full-potential-in-argentina
10. "Economist suggests Bitcoin for Zimbabwe",Financial Services Monitor Worldwide; http://www.itwebafrica.com/home-page/e-commerce/703-zimbabwe/237060-economist-suggests-bitcoin-for-zimbabwe
11. "Backed by Bitcoin: Virtual currency may help Zimbabwe's women farmers", UPI;http://www.upi.com/Top_News/World-News/2016/12/27/Backed-by-Bitcoin-Virtual-currency-may-help-Zimbabwes-women-farmers/6651482867367/
12. "Growing number of Venezuelans trade bolivars for bitcoins to buy necessities", The Guardian; https://www.theguardian.com/technology/2016/dec/16/venezuela-bitcoin-economy-digital-currency-bolivars
13. Ibid
14. "Bitcoin is approaching new highs for the year because of India’s demonetization",Quartz.com; https://qz.com/859661/bitcoin-is-approaching-new-highs-for-the-year-because-of-indias-demonetization/
15. "How India's Demonetization Is Affecting Bitcoin Startups,"Forbes; http://www.forbes.com/sites/jonathanchester/2016/12/21/how-indias-demonetization-is-affecting-bitcoin-startups/#50e69c8f1d08
16. "BTC/USD (BTCUSD=X)",Yahoo! Finance (Retrieved February 2, 2017); https://finance.yahoo.com/quote/BTCUSD=X?ltr=1
17. Gartman: Bitcoin Is Nearly Incomprehensible At This Point, Yahoo! Finance;https://finance.yahoo.com/news/gartman-bitcoin-nearly-incomprehensible-point-153742481.html
18. "Can You Really 'Know' a Customer Who Uses Bitcoin", American Banker; https://www.americanbanker.com/news/can-you-really-know-a-customer-who-uses-bitcoin
19. Action Plan for anti-money laundering and counter-terrorist finance,HM Treasury (Home Office);https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/517992/6-2118-Action_Plan_for_Anti-Money_Laundering__web_.pdf
20. Report on the statutory review of the anti-money laundering and counter-terrorism financing act 2006 and associated rules and regulations, Australian Government Attorney-General’s Department;https://www.ag.gov.au/Consultations/Documents/StatutoryReviewAnti-MoneyLaunderingAndCounter-TerrorismFinancingActCth200/report-on-the-statutory-review-of-the-anti-money-laundering.pdf
21. Bitcoin for Merchants,Business Law Today, American Bar Association;http://www.americanbar.org/publications/blt/2014/11/02_middlebrook.html
22. "Isn’t Speculation and Volatility a Problem for Bitcoin?",Frequently Asked Questions, bitcoin.org; https://bitcoin.org/en/faq#isnt-speculation-and-volatility-a-problem-for-bitcoin
23. "5 Steps to Keep Your Bitcoin Safe,”,Due; https://due.com/blog/5-steps-keep-bitcoin-safe/
24. "Australia to regulate bitcoin under counter-terrorism finance laws",Sydney Morning Herald; http://www.smh.com.au/world/australia-to-regulate-bitcoin-under-counterterrorism-finance-laws-20160808-gqnne2.html
25. "Scott Morrison scraps GST on Bitcoin, cuts fintech red tape",Sydney Morning Herald;http://www.smh.com.au/business/banking-and-finance/scott-morrison-to-scrap-gst-on-bitcoin-cut-fintech-red-tape-20160321-gnn28r.html
26. "Bitcoin for Merchants",Business Law Today, American Bar Association; http://www.americanbar.org/publications/blt/2014/11/02_middlebrook.html

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