Unlocking the potential of trade finance using blockchain

Trade finance facilitates the 90% of world trade carried by seaHow far did your purchase travel to get here? We now buy California avocados in a British supermarket or even Bangladeshi-manufactured shirts at an Australian retailer. Our modern world is characterised by products that flow across borders, 90% by sea, between buyers and sellers. However with more than $15 trillion worth of exports in the global market, stakeholders have traditionally been exposed to financial risk and slow processing of documentation. Could this now be changing? A combination of trade finance and blockchain is challenging this established model to create a new one based on efficiency and trust.

Risk mitigation through trade finance

The main issue with trade is that it takes time and creates a gap between shipment of products and releasing payment. During this time, the seller is at risk of not getting paid, whereas the buyer risks not receiving their product if they pay upfront. It is an age-old issue of trust. Supply chain trade finance steps in to plug this gap. It introduces a third party who will take on the associated risk and pay for goods on confirmation that they have been dispatched, enabling the trade cycle to flow. This means that a third party becomes the trusted actor in the transaction.

Using blockchain to build trust and automate the process

Traditionally, for a third party to absorb risk and release funds, cumbersome documentation confirming that goods have been shipped is required. With trade finance being used for between 80-90% of world trade – this is an issue. For that reason, it’s proving to be one of the most exciting platforms for blockchain disruption. Blockchain can provide a single source of truth for this documentation (by being recorded on decentralized public database), introducing trust and transparency for all stakeholders. It can then speed up this process using a smart contract – essentially a mechanism that automatically releases funds if the contract terms are fulfilled, i.e. as soon as the documentation is approved then the payment is released.[caption id="attachment_4731" align="aligncenter" width="690"]

Blockchain would automate the above through a smart contract and making the documentation transparent[/caption]

Sustainable incentives for Malawi tea smallholders

Provenance and our partners, including trade-finance specialists Halotrade, are currently working on a project to look at how it could work for Malawian tea farmers. This is focused on unlocking financial incentives in the supply chain to reward sustainable farming practices. [quote from Shona@Halotrade]By receiving timely finance, it could introduce long-term stability for their activities. This could lead to stronger relationships with their buyers, reducing dependency on high-rate, short-term loans from banks and allowing more money to be invested in sustainable initiatives.

A growing movement

This project is not the only initiative in this breakthrough area – there are several other businesses exploring solutions:- Centrifuge are leveraging the immutability of blockchain to create efficiencies in documentation exchange. - We.Trade are focused on introducing trust specifically targeting SMEs, and through smart contracts they have completed live payments on the blockchain in July. - Marco Polo’s vision is to create a seamless business network to remove the inefficient data silos in the trade-finance flow, engaging other partners from insurers to logistics. - Komgo is a venture seeking to digitise the trade and commodities finance sector through a blockchain-based open platform.- AXenS is a secure and curated digital marketplace to provide both liquidity and efficiency to the import-export supply chain.The benefits of blockchain in trade finance are starting to be realised. Our project in Malawi is part of a growing ecosystem of solutions that could change the speed, trust and value delivered through trade. This means all businesses across all industries have an opportunity to capitalize on this new model in their own supply chains. Do you see the potential for blockchain-backed trade finance in your industry? Get in touch with our blockchain team.