Trade finance concerns both domestic and international trade transactions which relate to global trade and exists to reduce the risks involved in international trade transactions.
These transactions include export credit, insurance, lending, factoring, and issuing letters of credit. Approximately 80 to 90% of world trade relies on trade finance, meaning all of these transactions make up a colossal portion of global trade. However, there are copious limitations and difficulties involved with trade finance. This is where blockchain comes into play.
Blockchain set to dominate trade finance
Because international trades take place across borders, there are various exposures included. These include payment risks, country risks, and corporate risks.
For example, will the importer get the goods they asked for? Are there any exchange rate risks? Are there political and sovereign risks? Is there a lack of legal structures? These are just a few of the many risks involved with trade finance.
Decentralised benefits
At its core, blockchain relies on a decentralised database, which is known to be more secure and robust than the propriety of centralised models which are currently being used in trade finance. This means blockchain can create a much more safe and reliable system at a lower cost.
The technology is able to create a decentralised record of all transactions within trade finance. This allows for a substitution of one single master database. As a result of this, blockchain leads to the ultimate simplification, including cost reduction, security, and reliability.
Transparency
Because blockchain is decentralised, all involved parties are able to view the necessary documents over the life cycle of all transactions. This makes all transactions and the documents included available for everyone to view. With this, blockchain keeps a record of all past and present transactions, going back to the point of origin. This is an essential tool for trade finance as it allows for financial institutions to audit all transaction steps. This then plays a major role in reducing the risk of fraud as all involved parties will be able to review when a mishap has occurred.
Networks
Let’s take a look at some of the trade finance networks currently using blockchain to change and improve how the sector works.
Marco Polo
Marco Polo is one of the fastest growing trade networks in the world. The Marco Polo initiative has developed a solution for post-shipment trade financing. It is an open source trade finance network built with R3’s distributed ledger technology. They use these ledgers to manage data and enable smart contracts, with the end goal of being able to make trade finance more secure and efficient.
We.Trade
The joint venture incorporated under the name We.Trade includes nine founding banks as its equal shareholders. The platform is powered by the Hyperledger blockchain framework. It manages, tracks, and protects trade transactions between SMEs. By using the blockchain technology, it is able to connect all parties involved in trade deals, including buyers and sellers. We.Trade’s goal is to initiate new trading relationships and provide easy access to trading finance.
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Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.