Block 81 Ayer Rajah Crescent, #01-65, Jtc Launchpad@One-North, Singapore 139967
Utilising blockchain’s potential to increase international trade efficiency and connectivity
In this article, we follow the paper-to-digital trail, emerging technologies, and developments in cross-border trade transactions and trade finance operations.
The evolution of trade finance processes
Trade finance is a centuries-old industry that involves international trade or the exchange of goods as mediated by financial institutions. It bridges the gap between when an exporter ships a consignment and when the importer receives it. Banks or financial institutions shoulder the interim risk by charging a fee to guarantee this shipment. Traditionally, a bill of exchange was the most widespread document in trade finance operations, which was a written agreement or certificate passed between buyers and sellers that ask to pay a given amount on a specified date. Usually, this was done through a third party like a bank. However, this system did not protect trade players.
Therefore, trade finance evolved and adopted the ‘letter of credit’ as the standard financial instrument that is still used in the industry. Today, the credit letter is a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to cover the full or remaining amount of the purchase, the bank is required to pay the remainder. Currently, the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.
Complexities in traditional trade finance operations
Trade finance today is still largely a paper-driven business plagued with miscommunication, complex documentation flow, and the lack of transparency between otherwise independent parties. Tedious paper documents and trails have plagued the commodity trader and financier for centuries, with a trade finance deal for a single commodities cargo by sea said to require up to 36 original documents and 240 copies from as many as 27 parties (source: GTR).
The risk of fraud is also an ever-present, costly threat. In Singapore alone, the infamous Hin Leong, ZenRock, Agritrade and Hontop Energy trade finance frauds that occurred in 2020 amounted to a whopping $4.8 billion. The ICC’s International Maritime Bureau (IMB) too has already warned against pre-financing fraud, whereby false shipping documents are provided to unlock funds before goods are actually shipped. Even more vexing, are the various regulatory norms and compliance measures imposed by individual countries at entry/exit ports. All these challenges heavily strain the already inefficient $18 trillion trade finance industry.
COVID-19; a catalyst for trade finance digitisation
While the cross-border trade industry was already ripe for disruption, in early 2020 Covid-19 spread around the world, sending countries into full-fledged lockdowns. This majorly affected international trade. Courier services and the movement of paper documents slowed. Moreover, shipping routes and ports were disrupted causing delayed shipments. In some cases, consignments were stuck at ports attracting high detention and demurrage fees. To sum up, courier services carrying important trade finance documents had their operations delayed, this impacted the banks’ ability to issue letters of credit. At the same time, the people inspecting those documents were working remotely because of Covid-19 travel restrictions, which led to the paper-heavy world of trade and trade finance having to find a workaround.
As a result, all stakeholders involved in cross-border trade sought to digital solutions, such as electronic signatures, innovative technology, and platforms that offered digitised documents to ensure their trade finance deals and papers could be virtually connected.
Adoption of blockchain technology in trade finance
Digitising trade finance is the most common use case of blockchain technology. Blockchains permanently store records and transactions, using an inalterable, cryptographic technique. Some of the uses of blockchain technology in trade finance are:
- Secure data through blockchains
Blockchain trades are widely used in commerce as it keeps confidential information, records, and transactions in a permanent “block” that can only be decrypted by authorized persons through various cryptographic techniques. Unlike paper trade, that can be prone to fraud and identity theft, digital trade through blockchain technology has become reliable in terms of online transactions for digital commerce.
- Lowered trade costs
Transportation and logistics account for the highest costs in trade industries, including tariffs, workforce, repairs for cargo, shipment, transaction costs, and much more. Delays and uncertainty are also included in the accumulation of charges. But through digital trade, overall costs will trim down significantly.
There is also a reduced counterparty risk in digital trade. For instance, bills of lading are tracked through blockchain, thereby eliminating the potential for double-spending. Banks facilitating trade finance through blockchain do not need intermediaries or third parties to assume the risk. In sum, blockchains lessen the costs for correspondent banks.
- Convenience for users
Digital trade has provided different platforms for transactions between buyers and sellers. E-commerce established different payment methods for cross-border transactions, including mobile banking, cash-on-delivery, Paypal, Alipay, Bitcoin, etc. This innovation results in quicker processing periods with no additional costs. Blockchain technology aims to provide faster and efficient payment transactions without risking the customer’s security.
- Transparency and seamless connectivity
Most customers and clients always contact their supplier or their company regarding the status of their deliveries, documents, or financing. Blockchain technology promotes transparency in trade finance. Increased commercial transparency can reduce delays in financing trade. A trusting relationship is also built because of this added commercial transparency and sharing of trade details against commercial agreements.
Since financial documents and invoices are kept securely in blockchains, customers have access to real-time data for their subsequent short-term financing. Other essential documents are also viewed in real-time to assist in enforcement and other economic activities.
- Increased efficiency
Digital trade opened more business opportunities across the world. “Smart contracts” boost efficiency in the trade by reducing transaction times, the intervention of correspondent banks, and additional transaction costs. Blockchain trade also improves the tracking of goods and services to its destination. Verification levels check the authenticity of assets. Thus, fraud and theft are mitigated with this process.
The rise of blockchain platforms around the world
While there has been a rise in blockchain-based cross-border trade digtisation platforms all over the world, Covid-19 led to the mass adoption of these services. Mind Fintech has identified the 8 main blockchain platforms targeting trade finance in the world: we.trade, launched by European banks and mainly covers the European continent, Marco Polo and Contour, which have global ambitions, komgo, present in Europe, Asia and the United States, eTradeConnect, launched in Hong Kong, Bay Area Trade Finance Blockchain Platform (BATFB), developed at the initiative of the People's Bank of China, Finacle Trade Connect in India, and dltledgers in Asia.
dltledgers digitises cross-border trade transactions using blockchain technology for every stakeholder. It helps large enterprises digitise their operations, creates visibility throughout the trade flow, and reduces trade finance costs by 15-20%. It also facilitates real-time information sharing, creates an auditable record of transactions for all counterparties, and allows mutual, consensus-based connectivity throughout the value chain. dltledgers has recently launched its own supplier finance solution. This enables organisations to lead supplier financing programs for their suppliers, thus reducing service and inventory availability risks. It has also launched a sustainability tracking module that allows supply chain sustainability tracking, certification, and reporting. This supports enterprises in their efforts to meet year-end sustainability objectives, which are compliant with the United Nations' Sustainable Development Goals.
Banks and financial institutions benefit from using dltledgers’s solutions to offer better services to clients. Some include:
- Digital Trade Financing
- Factoring or Accounts Receivable Purchase (ARP)
- Interbank LC processing
- Accounts Payable Financing (APF)
- Trust Receipt Financing
Switching from paper to electronic Bills of Lading
Due to covid-19, the electronic Bill of Lading document started gaining traction. To this end, the dltledgers platform developed a blockchain-based, e-B/L solution for carriers/charters. It is in compliance with UNCITRAL/e-UCP regulations, is integrated with Trade Trust, and performs digital authentication, endorsement, and title transfers. This electronic bill of lading solution performs all the functions of a traditional B/L such as Title of Goods, Receipt of Goods, and Contract of Carriage. The dltledgers platform interfaces with Bolero, and can also work with EssDOCC, Wave, and TradeLens. It does this through APIs, which enable #dltledgers users to issue, authenticate, and transfer document ownership in a digital, secure network of blockchain nodes. Unlike traditional Bills of Lading, this document can never be lost or stolen in transition and is quickly processed without delays. Thus, dltledgers have made it possible to shift traditional paper documents online too. To know more about the platform visit the website.
The future of digital trade
While digital trade offers several benefits, new challenges arise with this advancement. For example, the mass adoption of blockchain technology for trade finance is a major hindrance and the lack of interoperability between multiple networks springing up in pockets around the globe will be a cause of concern. In a similar vein, compliance issues, the legality of smart contracts, governance protocols surrounding blockchain, liability issues in case of loss or damage for end-to-end digitsed trade transactions, etc. are all unchartered territory. Because the future of trade finance is digital, it is imperative for global organisations/policymakers to amend and adapt current international trade laws to improve digital-commerce between nations.