Milk products exported to Seychelles, flowers sent to Kenya and Japanese equipment dispatched to Australia – these have one thing in common. These transactions were all executed through trade finance has done on the blockchain. Digitization is a challenge especially in the case of cross border transactions that involve a lot of variables. These could be documentation, country of origin and specification of the products. And, due to these factors, some transactions may appear uneconomical (Lee & Pilkington, 2017). For such reasons, DLT (Distributed Ledger Technology) like the blockchain enables transaction among the parties involved without the presence of reliable authority.
The major benefits of blockchain use in trade finance are – they help to reduce the processing time, the use of paper is eliminated and costs less. Additionally, it provides trust, security as well as transparency.
Figure: Key benefits of Blockchain Technology in Trade Finance
(Source: Yoo, 2017)
Given below are a few cases of blockchain use in trade finance:
- The LC (Letter of Credit deal between Ornua and Seychelles Trading Company. This transaction happened over a platform that was developed by a start-up called Fintech Wave based in Israel. This was a huge benefit since it was a paperless trade. This resulted in cost reduction, almost zero error in documents and a quick transfer of the original papers to customers all over the world.
The transaction had secured the transfer of almost USD 100 thousands of butter and cheese between the Seychelles Trading Company and the Irish Agricultural Food Co-operative. There was a huge time saving by the process. A transaction that usually took about a week to 10 days was executed in less than four hours.
- Trade Transaction between Japan and Australia using the blockchain or the DLT. The transaction was executed by Sompo Japan Nipponkoa and Japanese Conglomerate Marubeni Corporation. In this particular deal, the whole process right from the issue of letter of credit to the delivery of the transactions papers were done through IBM Hyperledger Fabric based on blockchain
DLT. The benefits of this transaction are as given below:
The delivery time of the trade papers was reduced. Things happened in just a couple of hours whereas it took multiple days. The time, labour and the cost involved for transmitting the papers were reduced because of digitization of the documents. There was total transparency in the process since the details of the transaction was shared with the participants involved.
Figure: Trade Transaction (Source: Lacity, 2018)
- IBM and Maersk – Both the parties decided to use the blockchain technology for transforming the cross border supply chain process at the global level. The huge transaction that happened every year, 90 per cent of it was completed by the ocean shipping industry. Both the parties decided to come up with a global trade digitization solution by involving ports, customs authority, shippers and freight forwarders in the process (Hofmann, Strewe & Bosia, 2017). The benefits, in this case, were the elimination of fraud, removal of errors, less time in transit as well as in the shipping procedure, improvement in the inventory system and overall reduction of cost and waste. IBM and Maersk gave a demo of the process to show that the whole thing was concluded in just over 3 minutes. The cost involved was reduced to one-fifth of the cost for a physical transaction. There was no room for any lost or misplaced document.
Therefore, it is evident that with the application of blockchain technology in the finance sector, there would be a lot of reduction in the complexity and an increase in efficiency. The trust that is built between corporations, service providers and other networks would take the finance industry to a new level.
Hofmann, E., Strewe, U. M., & Bosia, N. (2017). Supply chain finance and blockchain technology: the case of reverse securitisation. Springer.
Lacity, M. C. (2018). Addressing Key Challenges to Making Enterprise Blockchain Applications a Reality. MIS Quarterly Executive, 17(3), 201-222.
Lee, J. H., & Pilkington, M. (2017). How the blockchain revolution will reshape the consumer electronics industry [future directions]. IEEE Consumer Electronics Magazine, 6(3), 19-23.
Yoo, S. (2017). Blockchain based financial case analysis and its implications. Asia Pacific Journal of Innovation and Entrepreneurship, 11(3), 312-321.