FX International Payments
By Frances Coppola
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.
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.
With 17 years’ experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
1. 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
2. "CBA trials blockchain for trade finance", Australian Financial Review; http://www.afr.com/technology/cba-trials-blockchain-for-trade-finance-20160811-gqpw5i#ixzz4YaDHIz6y
3. "The blockchain revolution in trade finance", Barclays Bank; https://www.barclayscorporate.com/insight-and-research/trading-and-exporting/blockchain-revolution-in-trade-finance.html
4. "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
5. "Walmart wants to apply blockchain to other products beyond pork", Coindesk; http://www.coindesk.com/walmart-blockchain-product-supply-chains/
6. "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/