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Blockchain and trade finance

According to the 2020 Global Trade Survey from the International Chamber of Commerce, trade and trade finance are in a state of global uncertainty, in part due to COVID-19. While many banks surveyed expressed concern over pandemic-related declines in trade flows and revenues, the survey also found that lockdowns and working from home are hastening the shift to digital solutions in trade, including blockchain.

Fifty-four percent of banks surveyed say that transformative technologies like blockchain, digital trade, and online trade platforms are priority areas of development and strategic focus in the near term as they look to secure future growth. More than 50 percent also agreed that a growing number of document types used in trade could be paper or digital.



Proven benefits of a blockchain-based solution for trade finance

  • Pursue new revenue streams through new financing products and alternatives to letters of credit
  • Offer banking services to small and medium enterprises (SMEs) and companies that would traditionally use open account trading
  • Gain deep insights into client financial positions and transaction histories
  • Reduce operating costs by digitizing slow and cumbersome paper processes
  • Employ blockchain security attributes to demonstrate greater visibility and control of their transactions, thereby positively affecting the bank’s capital adequacy position
  • Speed financing approval processes and trading cycles

Blockchain and trade finance: How it works

Distributed ledger technology (DLT) makes it possible for documentation to flow transparently yet securely among banks, trading companies, and other network participants like Insurance companies. All transactions are immutably recorded on the blockchain with a timestamp and unique cryptographic signature. Everyone with the right permission can access the right or same information for complete transparency, which helps increase trust and prevent fraud.

A self-governing rulebook defines how banks and traders participate to conduct business, as well as defining risk and dispute management. Smart contracts capture the codification of the commercial and shipping terms of the agreement between parties. When specified conditions are met, such as the shipment of goods, the smart contracts trigger notifications for payment.

Through a simple user interface, companies can apply online for bank-guaranteed payment or invoice financing. The completely digital process simplifies transactions and reduces costs for all parties.

These are very exciting times for the trade finance sector, and blockchain is an attractive technology with a lot of potential. Professionals need to develop their knowledge of the different concepts to drive innovation in their organization and understand the benefits of joining trade finance networks.

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