Blockchain and Trade Finance: how it could work

| 07-06-2018 | by Vincenzo Masile | treasuryXL|

 

How can trade finance operate leveraging a Blockchain based infrastructure to drive efficiencies, reduce cost base and open up new revenue opportunities?

It is vital that the international trade flow is smooth and transparent but this is not always the case for the below reasons:

 

Current Isues

1. Manual contract creation: The import bank manually reviews the financial agreement provided by the importer and sends financials to the correspondent bank
2. Invoice factoring: Exporters use invoices to achieve short-term financing from multiple banks, adding additional risk in the event the delivery of goods fails
3. Delayed timeline: The shipment of goods is delayed due to multiple checks by intermediaries and numerous communication points
4. Manual AML review: The export bank must manually conduct AML checks using the financials provided by the import bank
5. Multiple platforms: Since each party across countries operates on different platforms, miscommunication is common and the propensity for fraud is high
6. Duplicative bills of lading: Bills of lading are financed multiple times due to the inability of banks to verify their authenticity
7. 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 can help as follows:

Blockchain Advantages

1. 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
2. Transparent factoring: Invoices accessed on Blockchain provide a real-time and transparent view into subsequent short-term financing
3. Disintermediation: Banks facilitating trade finance through Blockchain do not require a trusted intermediary to assume risk, eliminating the need for correspondent banks
4. Reduced counterparty risk: Bills of lading are tracked through Blockchain, eliminating the potential for double spending
5. 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
6. Proof of ownership: The title available within Blockchain provides transparency into the location and ownership of the goods
7. Automated settlement and reduced transaction fees: Contract terms executed via Smart Contract eliminate the need for correspondent banks and additional transaction fees
8. Regulatory transparency: Regulators are provided with a real-time view of essential documents to assist in enforcement and AML activities

Part of the gain from digitization lies in cutting costs: transactional and overheads. Digitization should also free the flow of finance to firms starved of it, partly by helping banks’ compliance with anti-money-laundering rules.

Vincenzo Masile

Treasury Expert/Credit Risk Manager