EXECUTIVE SUMMARY

The trade finance industry has emerged as a key focus area for realizing the efficiencies of blockchain technology. Blockchain has the potential to disrupt the trade landscape by making it easier to reduce disputes and fraud to provide delivery and payment certainty, enable transparency of trade asset movement, and facilitate the flow of trade receivables.

The result: increased collaboration, automation and oversight in trade transactions. This white paper (the first of a five-part series) examines blockchain’s benefits across three areas of trade finance: payment method automation, trade asset tokenization and payment instrument digitization.

A Transparent Supply Chain Using Blockchain Technology

TRADE FINANCE LANDSCAPE

Trade finance by banks and other financial institutions is a vital function in international commerce, as it provides delivery and payment assurance to buyers and sellers, and it helps close the trade cycle funding gap for these parties. The growth and sustenance of the $16 trillion international trade market depends on the easy availability and robustness of financing mechanisms. For this reason, trade finance is often described as the fuel for global commerce. However, trade participants can be vulnerable to business risks and uncertainties stemming from several factors, including process inefficiencies, variance and fluidity in trade regulations and requirements across geographies, and the operational and logistical complexities that arise when a large number of entities interact. A recent survey by the International Chamber of Commerce reports an increasing trend in litigation and fraud related to trade financing over the last few years. Recent examples of trade and receivable financing fraud include the $1.1 billion lawsuit against Citigroup resulting from financing falsified receivables, and the loss of hundreds of millions of dollars to various banks in the Qingdao port metal financing fraud involving multiple invoices secured against the same collateral.

Other pain points include:

• Payment and delivery delays due to process overheads.
• A lack of insight into the movement of goods.
• The effort required for counterparty due diligence and contractual compliance processes.

For banks, these obstacles can increase both risk and costs, leading to unfavorable financing terms, especially for small businesses. It is estimated that almost 60% of trade finance applications globally from small and medium-size enterprises (SMEs) are rejected by banks. A recent survey by Asian Development Bank puts the total value of unmet trade financing demand at a whopping USD$1.6 trillion. Another study of informal enterprises by International Finance Corp. estimates the financing gap for global micro, small and medium-size enterprises at USD$2.6 trillion. These risks and inefficiencies have limited the size of the trade finance market, which currently stands at $4 trillion to $5 trillion, adversely affecting growth in global commerce.

PAIN AREAS TRADE FINANCE

• MANUAL CONTRACT CREATION : The import bank manually reviews the financial agreement provided by the importer and sends financials to the correspondent bank
• INVOICE FACTORING : Exporters use invoices to achieve short-term financing from multiple banks, adding additional risk in the event the delivery of goods fails
• DELAYED TIMELINE : The shipment of goods is delayed due to multiple checks by intermediaries and numerous communication points
• MANUAL AML REVIEW : The export bank must manually conduct AML checks using the financials provided by the import bank
• MULTIPLE PLATFORMS : Since each party across countries operates on different platforms, miscommunication is common and the propensity for fraud is high
• DUPLICATION OF BILL OF LADING : Bills of lading are financed multiple times due to the inability of banks to verify their authenticity
• DELAYED PAYMENT : Multiple intermediaries must verify that funds have been delivered to the importer as agreed prior to the disbursement of funds to the exporting bank

BLOCKCHAIN IN TRADE FINANCE

A better connected, highly automated and far more open infrastructure that will enable more efficient trade finance solutions for customers is the new goal for businesses. However, this can be achieved through the creation of trusted and permissioned interactions between corporations, B2B networks, service providers and other financial institutions.

The introduction of ‘smart contracts’ also allows businesses to automatically trigger commercial actions based on defined criteria. Once again, this will further boost efficiency by streamlining processes, removing time and the cost of transacting.

An indelible audit trail also provides improved traceability; one of the main benefits of blockchain in trade finance. The new verification levels automatically check assets for authenticity. As a result, businesses can reduce both fraud and compliance costs by ensuring that each transaction is recorded sequentially and indefinitely.

From a security perspective, blockchain allows simple, secured share trade-related data between different financial institutions. Each transaction is verified within the network using independently verified complex cryptography.

By adding some much-needed commercial transparency to the mix, old problems such as delays, and sharing data between parties are replaced with unprecedented levels of trust. Words such authenticity, transparency, and simplicity are rapidly becoming the new language in the trade finance market.

BLOCKCHAIN APPROACH

• Upon purchase, the agreement of sale between the importer and exporter is shared with import bank using a Smart Contract on the Blockchain
• In real-time, the import bank will have capability to review purchase agreement, draft terms of credit and submit obligation to pay to export bank
• Export bank will review the provided payment obligation and once approved, a Smart Contract will be generated on the Blockchain to cover terms & conditions and lock-in obligations
• After receiving the obligations, the exporter will digitally sign Blockchain-equivalent letter of credit within the smart contract to initiate shipment
• Goods will be inspected by 3rd parties and the customs agent in the exporting country - with all providing their respective digital signature of approval on the Blockchain smart contract
• During transit, goods will be transported from Country A to Country B
• Upon delivery, importer will digitally acknowledge receipt of goods and trigger payment
• Using provided acknowledgement, Blockchain will automate payment from importer to exporter via a Smart Contract

BENEFITS

• Real-time review: Financial documents linked and accessible through Blockchain are reviewed and approved in real time, reducing the time it takes to initiate shipment
• Transparent factoring: Invoices accessed on Blockchain provide a real-time and transparent view into subsequent short-term financing
• Disintermediation: Banks facilitating trade finance through Blockchain do not require a trusted intermediary to assume risk, eliminating the need for correspondent banks
• Reduced counterparty risk: Bills of lading are tracked through Blockchain, eliminating the potential for double spending
• Decentralized contract execution: As contract terms are met, status is updated on Blockchain in real time, reducing the time and headcount required to monitor the delivery of goods
• Proof of ownership: The title available within Blockchain provides transparency into the location and ownership of the goods
• Automated settlement and reduced transaction fees: Contract terms executed via Smart Contract eliminate the need for correspondent banks and additional transaction fees
• Regulatory transparency: Regulators are provided with a real-time view of essential documents to assist in enforcement and AML activities