How Blockchain can Change Trade Finance
According to the International Chamber of Commerce (ICC), up to 80 percent of global trade relies on some form of trade finance.2 Traditionally, trade finance has been largely based on letters of credit, with multiple banks involved as financial intermediaries. One goal of trade finance is to eliminate transaction risks for both exporters and importers in international trade. For exporters, the risk is that they will ship goods but won’t get paid on receipt. Importers, however, may not wish to pay in advance because of the risk that the exporter won’t ship the goods. To address the risk for both companies, the importer’s bank issues a letter of credit that guarantees it will pay the exporter’s bank once it receives proof that the exporter has supplied the goods.
However, current trade finance processes are seen as cumbersome, expensive, error-prone, and in some cases susceptible to fraud.3 “Existing trade finance is often associated with high operational burden and cost, owing to a typically paper-heavy process and lack of cohesion between participants in the transaction cycle,” according to Rethinking Trade & Finance, a 2017 ICC report.4 Manually creating and transferring letters of credit among the parties involved can take five to 10 days, according to some experts.5 Problems can occur even when documents are maintained electronically, because information about a trade finance transaction is spread across the systems of multiple parties.6 Amendments to the documents, as well as errors and ambiguities, can lead to further problems and delays.7
Blockchain offers the potential to radically improve trade finance, according to the ICC, offering a secure, fully digitized process while reducing cost for each party involved. This could help make trade finance more available and affordable for small- and medium-sized enterprises (SMEs).8
Elements of Blockchain Trade Finance
The various blockchain trade finance initiatives vary in approach and scope, but they generally have several elements in common. These include:
- The documents required for the trade finance transaction are stored on a blockchain – essentially a distributed, shared database designed to be tamper-proof – that is accessible to all the parties in the transaction. Only a single, reliable version of the information exists, eliminating the potential for problems and delays caused by replicating documents or moving them between companies. When one party updates the information, it is immediately accessible to others involved in the transaction.
- Smart contracts are used to automate key steps in the process. These are self-executing software programs that automatically trigger specific actions when certain conditions are fulfilled. For example, a smart contract may initiate payment to the exporter’s bank once proof of shipment is provided.
Blockchain Trade Finance Initiatives
Several current blockchain trade finance initiatives are handling pilot transactions and approaching broader production use. They aim to replace traditional letter of credit trade finance processes, and in some cases they also automate other steps in import-expert trade.
- We.trade is a joint venture owned by nine European banks. The company offers a blockchain platform designed to facilitate and finance trade for SMEs. One of the founding banks said that it would make the platform available to some business account holders during July 2018, with wider availability later in the year.9 The platform connects buyers, sellers, and their respective banks. It provides a way for companies to find other companies to trade with, make proposals, and request trade finance services from banks to support those trades. The system automates payment when trade conditions are met. Other features include allowing buyers and sellers to rate each other online.10
- Batavia, a blockchain trade finance platform developed by a consortium of international banks and a large technology supplier, said in April 2018 that it has completed live pilot transactions with corporate clients. These transactions included trading cars and textiles between different European countries. The platform aims to help companies arrange, secure and finance international trade transactions; “smart payments” can be triggered by pre-defined events in the supply chain. After building a “minimal viable product” for the pilot transactions, the initiative said its next objective is to build a production-ready solution.11
- Marco Polo, an initiative involving a blockchain startup, a trade finance technology provider, and a group of banks, said in February 2018 that it is piloting its blockchain trade finance solution following a successful proof of concept. The initiative aims to add further banks as well as insurers, ERP and logistics providers, to expand the scope of the solution.12
- An Indian bank said in April 2018 that it had added over 250 companies to its blockchain trade finance platform for domestic and international trade. According to the bank, Indian companies have undertaken a variety of trade finance transactions through the platform, including payments to domestic vendors.13
- The monetary authorities of Hong Kong and Singapore said in November 2017 that they are linking up their trade finance platforms using blockchain technology to make cross-border trade and trade finance cheaper, safer, and more efficient.14
- A large bank used its blockchain trade finance platform to handle a shipment of soybeans from Argentina to Malaysia for a large commodity trader.15
Interoperability is a Potential Obstacle
One obstacle to the spread of blockchain trade finance is the potential lack of interoperability between the various initiatives under development. Digitization of trade finance requires communication among all parties, as the ICC points out in Global Trade — Securing Future Growth, a 2018 report on global trade finance. “Platform developers must be mindful of open standards and future interoperability,” according to the report. The ICC also says that the full benefits of digitizing trade finance can only be realized if a few important trade corridors go fully digital.
