A look at the intersection of trade finance and blockchain based solutions and the recent developments occurring in 2022.
Blockchain, the underlying technology behind cryptocurrency, is becoming popular in different sectors, including trade finance. Trade finance refers to businesses that finance global trade. It comprises a complex web of players such as exporters, importers, banks, insurers, customs, and carriers.
Let’s discuss how blockchain impacts trade finance in 2022, the major companies developing blockchain-based trade finance solutions, and some recent key developments in this space. But before that, let’s briefly look into the blockchain use cases for the trade finance market.
How blockchain could transform the global trade finance landscape
Blockchain technology can radically streamline the traditional, cumbersome process of the trade finance ecosystem, which is labor-intensive and document-heavy. Trade finance leverages blockchain to drive efficiencies in business processes, including document collection, tracing, verification, and financing, combined with higher security and reduced costs. Blockchain integration provides faster trade settlements by enabling better communication among the different parties involved in transactions, avoiding repetitive checks, and eliminating the need for manual review of documents.
Here are some of the key advantages achieved from the use of blockchain:
- Real-time review: Documents can be reviewed in real time without relying on couriers and fax machines.
- Decentralized contract execution: Contract terms can be met and updated on the blockchain network.
- Disintermediation eliminates the need for several intermediaries, such as correspondent banks.
- Proof of ownership offers transparency into the location and ownership of goods.
- Automated settlements: The use of smart contracts provides automated settlements at reduced transaction fees.
- Reduced counterparty risk: Blockchain eliminates the potential risk of double spending.
- Regulatory transparency provides regulators with a real-time view of essential documents to make enforcement and anti-money laundering (AML) tasks easier.
- Transparent factoring: Blockchain-based invoices provide a real-time and transparent view of subsequent short-term financing.
Blockchain can simplify different processes and use cases in the entire trade finance value chain, including the issuance of letters of credit, management of the supply chain, recordkeeping, and document verification.
Let’s take a look at the use of blockchain in the supply chain and understand how it’s transforming the entire process.
A typical supply chain flow involves the exchange of high volumes of documents, including product, shipping, and transaction details, among stakeholders such as importers, exporters, customs departments, ports, carriers, and banks. In the case of a centralized system, the exchange of information among different parties takes between several days and months because of the involvement of several intermediaries and the duplication of efforts. When the same trade is executed using a decentralized blockchain, all transactions are recorded in a single database and distributed in real time to the relevant stakeholders at different locations. This provides unalterable information, improved compliance, superior traceability, and reduced risk of fraud. Blockchain helps build trust among supply chain participants and ensures greater transparency and faster transaction execution.
What is the market scenario of blockchain in trade finance in 2022?
Over the years, research and investigation into blockchain applications in trade finance increased, with several players in the industry realizing its underlying potential. In 2018, the World Trade Organization marked blockchain as the biggest disruptor of the shipping industry and international trade after the invention of the shipping container.
Blockchain promised to be the ideal technology for addressing the traditional finance mechanism’s flaws and transforming the industry through its decentralized and immutable attributes. However, there have been setbacks in 2022, with we.trade, one of the largest bank-backed consortiums, winding down its operations and some fintech companies moving away from blockchain technology to other alternatives.
Failing to secure further investments, we.trade shut down its operations in June 2022. Twelve European banks and IBM owned the blockchain-based trade finance platform. Based on the Hyperledger Fabric framework, the platform enabled businesses to connect with their banks over a network powered by IBM blockchain technology. Contour acquired the rulebook and other associated legal documents from we.trade in September 2022.
