Trade finance blockchain technology
Dit artikel is ook beschikbaar in het Nederlands. Trade finance is an activity that has been around for a while, but has not seen much innovation in that time. In fact, it is still a largely paper-based business. This makes it more error-prone, time-consuming and fraud-sensitive than it could be. Blockchain has the potential to change this. It provides an efficient and secure way of quickly settling trade transactions.
This brings down costs, lowers operational complexity, reduces risk and lowers working capital needs. In this publication we give a brief introduction of Blockchain and describe the opportunities of Blockchain for trade finance. We also look at the role of banks in facilitating and financing blockchain-driven transactions.
Blockchain is a distributed ledger technology. In plain English, it is a large, decentralized spreadsheet in which transactions are securely trade finance blockchain technology. Everyone in the network owns a replicated version of the ledger. Ownership and transactions are stored in data blocks, each of which trade finance blockchain technology secured by a cryptographic algorithm.
The blocks are then linked to each other, which is why the technology is called Blockchain. Although Blockchain can have a large impact on the way transactions and ownership are recorded, it is important to note that there are actually two types of blockchains: On a public blockchain, all parties engage with each other directly on a peer-to-peer basis and there is no intermediary.
There are also no barriers of entry to a public blockchain. Public blockchains are more resilient to cyber-attacks, but for many networks the lack of privacy is a real issue. We hence expect that most of the near-future applications of Blockchain relevant to trading will be either private blockchains, or a mix of both private and public trade finance blockchain technology.
When discussing the implication of Blockchain below, we describe the effects of private blockchains on which all parties to a trade are present e. To see the impact of Blockchain on the trading community, we look at the opportunities from the perspective of the three activities of traders: Current logistical systems are largely paper-based, and therefore vulnerable to inefficiency and fraud.
When a traders ships goods, he receives a paper bill of lading. In order to trade finance blockchain technology trade finance, for example through a letter of credit, this bill of lading has to be sent by courier to his bank. This process is relatively slow, but could be sped up if the process is digitalized, for example on a blockchain.
An added benefit of Blockchain is the ability to program smart contracts, which can execute payments automatically without human intervention. Another effect of the vulnerable paper-based process are regular cases of fraud with bills of lading.
Often banks have recourse trade finance blockchain technology traders, meaning that fraud is not only costly for banks but also for traders, even in an LC-covered transaction. We expect lower fraud losses for transactions registered on trade finance blockchain technology blockchain.
In that case, there can be only one bill of lading for a shipment, which is verified automatically by all the nodes of the blockchain. This means lower fraud losses. We also foresee a large reduction in compliance costs. Currently banks and corporates need to perform a thorough check on their customers these procedures are known as CDD customer due diligence and KYC know your customer to verify that a transaction does not result in money laundering, terrorist financing or export of restricted goods.
We know from surveys that, for example, onboarding a new client is so arduous that 30 percent of corporate respondents claim trade finance blockchain technology can take more than two months, while 10 percent answered it exceeds four months.
On a blockchain, rather than going through arduous CDD and KYC processes, a bank can verify that a certain party is currently on the blockchain, meaning that it will have undergone CDD by one the banks on the blockchain. This means it can confirm an LC instantly. The benefits we have described above will apply equally to banks financing trade transactions.
In a competitive market, this bring down the cost of trade finance. Fraud, as in the Qingdao case, usually revolves around multiple warehouse receipts being used in multiple trade finance transactions, extracting cash from banks via inventory financing.
A current problem is that multiple warehouse receipts can be generated, as warehouse receipts do not constitute title to the goods in question. Blockchain changes this situation as it can restrict the number of issued unique warehouse receipts.
Future integration of the digital and analog worlds may even enable the use of unique digital keys to open a warehouse. This ensures that only the owner trade finance blockchain technology the digital key has trade finance blockchain technology to the goods in the warehouse.
When it comes to processing, the benefit of Blockchain is that it stores the complete history of all transactions of titles and assets within a supply chain. This provides benefits for shipping, but also for food security, transparency on environmental and social sustainability, and certification of origin. In the past few years we have seen a number of food scandals and very recently the widely reported Brazilian meat scandal.
Being able to know instantly from which factory or warehouse each pallet or container originates can greatly improve damage control in case food security is at risk.
In addition, consumers are demanding ever more detailed information trade finance blockchain technology where their products came from. To be able to offer customers such detailed information, whether it concerns consumer foods, apparel or electronics, will trade finance blockchain technology a major competitive advantage for any global retailer, and therefore for traders too.
They will trade finance blockchain technology better able to serve their customers. A final reason to embrace supply chain traceability is the reduced cost for trade finance blockchain technology a certificate of origin.
Many firms shy away from doing the extensive paperwork necessary to qualify for a certificate of origin. When the origin of a certain product is immediately apparent by looking at the supply chain that was recorded on a blockchain, opportunities to reduce administrative costs are very large.
Blockchain will create more transparency in the market for financial services. This will intensify competition between banks and reduce prices of financial services. Some commentators have suggested that banks may become obsolete altogether, but we think this is not the case.
Banks have great capacity in risk management and pricing risks and this capacity will remain necessary to establish a market price for the risks that go with financing. As traders will continue to need financing to be able to ship goods, banks will keep fulfilling this role, albeit trade finance blockchain technology, simpler and arguably, even more secure.
Taking over this role is by no means easy, as banks play a vital role in Anti Money Laundering AML efforts and the prevention of terrorism financing and other fraudulent practices. Operating a private blockchain with traders, banks, shipping firms and warehouse trade finance blockchain technology has potential to speed up payments and document handling, reduce administrative costs and fraud, and improve traceability.
But Blockchain stands or falls with networks effects and will only be successful if it is adopted widely. Did you like this article? Could you maybe inform us trade finance blockchain technology you do not like this article? Could you maybe inform us why you like this article? Do you want us to respond to your remarks? If so, please leave your email address below. The basics Blockchain is a distributed ledger technology. Public and private blockchains Although Blockchain can have a large impact on the way transactions and ownership are recorded, it is important to note that there trade finance blockchain technology actually two types of blockchains: Opportunities for logistics Current logistical systems are largely paper-based, and therefore vulnerable to inefficiency and fraud.
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