How Blockchain Technology Impacts on Trade Finance: Deep Research

Trade finance has been a complex web of transactions involving multiple parties, including exporters, importers, banks, shipping companies, customs agencies, and regulatory entities. This intricate network often faces challenges such as lengthy processing times, high costs, lack of transparency, fraud, and the risk of errors due to manual data entry.

Blockchain, a database technology without a single control center, can solve these problems. In this brief, we will consider blockchain's key benefits to trade finance, including transparency, security, accessibility, and more. Readers will also learn what to expect from this technology, and blockchain enabled trade solutions in the future. Let's get started!

As was said, trade finance is a complicated process involving multiple stakeholders, including exporters, importers, banks, truckers, shippers, customs agents, and regulators. Each entity necessitates thorough checks and validations throughout the process. The interconnectedness of these entities relies on the successful completion of preceding phases and the availability of accurate information.

Trade finance involves providing financial assurances for the successful transfer of goods. In international trade deals, parties seek tangible guarantees from each other before fulfilling their obligations. Consequently, the importer's bank issues an LC (letter of credit) to cover the exporter's budget expenses for the shipment of goods. This letter represents a commitment to pay the full amount owed once the importer acknowledges receipt of the goods and signs the bill of lading upon their arrival.

Upon receiving the signed documents, a third-party bank disburses the full payment to the exporter, allowing the importer to access the shipped goods for further distribution. In this manner, a third-party financial institution manages both payment and supply risks in international trade agreements.

In a typical trade finance transaction, two banks are commonly engaged – the initiating bank representing the seller and the receiving bank representing the buyer. These banks act as the primary recipients of funds and manage the documentation throughout the trade finance journey, ensuring that all parties fulfill their respective obligations.

What is blockchain? It is an immutable chain of blocks that comprise records of transactions. In contrast to conventional databases, you cannot modify or delete records, you can only create additional ones. Blockchain technology can potentially address many of the longstanding challenges in trade financing. But first, let's consider these issues, and you will understand why blockchain enabled trade in the finance area is so essential.

• Lack of transparency: Traditional trade finance processes often lack transparency, leading to inefficiencies, delays, and disputes. 
• High costs and inefficiencies: Trade finance processes are often time-consuming and costly due to manual paperwork, redundant checks, and the involvement of multiple intermediaries. 
• Fraud and counterfeiting: Fraud and counterfeiting are significant concerns in trade finance, leading to budget losses and reputational damage for ventures. 
• Limited access to financing: Medium-sized and small businesses often struggle to access trade finance due to limited credit history or creditworthiness. 
• Regulatory compliance: Trade finance transactions are subject to strict regulatory requirements. These requirements include AML (anti-money laundering) and KYC (know-your-customer) regulations, which vary across jurisdictions. 

Further in our article, we will talk about blockchain, a technology that helps overcome these problems and improve the system in many ways.

Blockchain development for finance projects provides many key benefits. Firstly, blockchain enables transparent and reliable transactions without intermediaries. This approach eliminates the risks of fraud and reduces transaction costs.

Secondly, blockchain allows for fast transactions. Since transaction information is stored on a distributed network, there is no need to wait for verification from a central party, which speeds up the transaction process.

In addition, the blockchain allows the creation of “smart contracts”—program codes that are automatically executed when specific conditions are fulfilled. This accelerates and simplifies the process of concluding contracts and automates the fulfillment of transaction terms.

When combined with trade finance, blockchain can significantly improve the efficiency and security of any transaction. For example, thanks to the use of blockchain, it is possible to easily track the origin of goods, make fast and reliable payments for goods and services, and reduce the risks of insufficient funding or late payments. 

Below, you can see the process of trade finance using blockchain. The interconnection of blockchain and trade finance reduces the number of intermediaries and helps to conduct secure transactions between buyers and sellers.

Let’s consider some examples of blockchain use in the trade finance domain. How is the process of blockchain-based cargo delivery structured? The consignee establishes document requirements, which the sender uploads to an online repository, with a reference to the data storage location subsequently appearing in the distributed ledger. Special software is utilized by all participants. Every operation throughout the goods' transportation stages is recorded.

Confirmation of goods delivery is authenticated by a warehouse or customs office staff member, each affixing a unique signature. Similarly, the recipient acknowledges receipt with their signature. Each process participant possesses a private key for sender and recipient identification, with both the signature and key encrypted. Through blockchain, cargo interception via rewriting to another party becomes unfeasible.

Another domain where blockchain finds utility is in real estate transaction accounting. Following a logistics-like framework, documents are uploaded onto the blockchain, transactions are logged and unanimously ratified by all stakeholders, including the registering authority.

More and more established financial systems, such as stock exchanges or banking institutions, apply blockchain services to control online payments, accounts, and market trading. For example, the investment holding company Singapore Exchange Limited, which provides trading services throughout Asia, uses blockchain technology to facilitate more efficient interbank settlement. 

All these examples suggest that blockchain is almost universal in application and can help many traditionally complicated industries. Implementing blockchain technology has solved many key problems in trading finance.

Blockchain offers tangible benefits to the intricate world of trade finance. We will consider them in more detail below.

Blockchain uses a distributed database, which allows you to save a complete history of all transactions. This allows all participants to view and verify every transaction. Changes to the blockchain database can only be made after confirmation from all network participants, helping to prevent fraud and unauthorized transactions.

Blockchain speeds up and simplifies the whole trade finance process. Traditionally, this requires a lot of paperwork, distribution, and verification. Blockchain automates these processes. This technology helps eliminate the need to manually fill out paperwork and lowers the risk of errors and delays. The result is reduced time and expenses associated with trade finance, making it more accessible to all participants. 

The report by the analytical company Juniper Research indicates that financial institutions will save up to $7 billion by 2024 on customer verification due to automatic user identification using the blockchain.

Blockchain offers helpful tools for risk management in trade finance. Participants can better control risks and prevent fraud thanks to its reliability and transparency. Smart contracts developed on the blockchain allow you to set automatic rules for transactions, increasing security and reducing the risk of default.

Blockchain can significantly expand access to trade finance, especially for small and medium-sized companies. Traditional financing methods require multiple intermediaries and additional checks, but this creates high barriers to entry into the market. Blockchain allows easier and more secure access to finance. This benefits businesses because the technology impacts their further development and promotes economic growth.

Discovering the applications of blockchain-based trade finance provides insights into how this technology can transform various trade finance instruments. Below, we will examine how blockchain impacts different aspects of trade finance, focusing on key tools.

An LC is a crucial document in trade finance. It acts as a guarantee of payment under specific conditions. Through blockchain-based trade finance, this document-heavy process undergoes significant transformation. 

The process begins with establishing a trade agreement between the applicant and beneficiary, which is stored securely on the blockchain network. The applicant then issues a purchase order, serving as the contract for the LC, which is digitally transmitted to the issuing bank. The bank processes the LC details and forwards them to the advising bank, which then advises the beneficiary digitally. This process ensures a secure contract between the exporter and importer and facilitates efficient trade transactions.

Forfaiting enables exporters to obtain cash by trading medium and long-term foreign accounts receivable at a reduced rate. Blockchain technology simplifies this process by providing a secure and efficient platform for transaction execution. 

A notable example involves a transaction between the Bank of Communications on the China Trade Finance Union blockchain trade platform and the HSBC holding. In this transaction, the Bank of Communications client sold paper products and received an undertaking to pay from their buyer's bank. Through blockchain technology, every document, including confirmation letters and transfer of rights, was made and transmitted digitally within a short time, showcasing the efficiency and transparency of blockchain in forfaiting.

It is a financing option where businesses sell their accounts receivable to meet short-term liquidity needs and also benefits from blockchain technology. Blockchain simplifies and streamlines the invoice trading process by tokenizing invoices under a non-fungible (NFT) model and executing payments through smart contracts. 

Blockchain-based platforms also help to conduct transparent and secure transactions between companies and investors, reducing dependency on traditional lending organizations and promoting mass adoption.

Those are just a few examples of blockchain-based instruments. Blockchain technology extends its influence beyond them, impacting trade chain management and supply chain optimization. By digitizing trade-related events and enhancing transparency, blockchain reduces document delivery times and minimizes errors and fraud. This technology improves overall efficiency in trade operations.

While numerous blockchain projects exist, not all are tailored for trade finance. If you are searching for companies that can help you by providing blockchain finance solutions, consider the following ones.

• Hyperledger: A collaborative open-source project, Hyperledger, supported by The Linux Foundation, offers features for distributed ledgers. With leading industry players from finance, banking, IoT (Internet of Things). Hyperledger can help you develop stable industry-specific applications and platforms in the finance area.
• Ethereum Enterprise Alliance (EEA): Formed in 2017, EEA unites startups, Fortune 500 firms, and technology providers to enhance Ethereum for enterprise use. Through its emphasis on open standards and architecture, EEA accelerates the adoption of Ethereum as a preferred blockchain solution for finance applications.
• Ripple: Created by Ripple, RippleNet facilitates the real-time exchange of digital and fiat assets atop the XRP Ledger. Ripple is a private organization, and RippleNet is its payment gateway. The innovative approach to liquidity management and settlement makes RippleNet a compelling choice for businesses seeking efficient and cost-effective payment solutions.

Whether it's creating industry-specific applications, accelerating blockchain adoption, or improving cross-border payments, these platforms offer great opportunities for innovation and growth in finance.

Numerous occasions have arisen when enterprises applied blockchain technology within trade finance. Here are some successful use cases:

• Komgo: It is a blockchain-based platform that digitizes and accelerates the commodity trade finance process. It facilitates secure and transparent communication among participants, including banks, trading houses, and inspection companies. Komgo successfully processed numerous trade finance transactions, demonstrating the efficacy of blockchain in enhancing efficiency and reducing paperwork in commodity trading.
• Voltron: This blockchain-based platform was developed by a consortium of leading banks to digitize and streamline trade finance processes, particularly in trade finance letters of credit. In 2020, Voltron facilitated several successful trade finance transactions, enabling faster and more secure processing of LCs while reducing the risk of fraud and errors.
• We.Trade: This trade finance solution based on blockchain connects banks and small and midsize enterprises to facilitate cross-border trade finance transactions. We.Trade expanded its network and processed a significant volume of trade finance transactions, demonstrating the scalability and effectiveness of blockchain.
• Marco Polo Network: This solution digitizes trade finance processes, including supply chain finance and receivables discounting. Marco Polo Network successfully used blockchain to facilitate trade finance transactions. 
• TranScendr: It is a robust blockchain platform that revolutionizes trade finance by digitizing and optimizing the entire process. This project has witnessed remarkable success, processing many trade finance blockchain transactions with great efficiency and transparency. TranScendr eliminates the complexities and delays associated with traditional trade finance by seamlessly connecting banks, trading entities, and regulatory bodies. 

These unique use cases underscore the power of blockchain technology to offer unprecedented efficiency, transparency, and security to businesses worldwide.

There are some significant developments and trends within blockchain in finance that will need to be monitored closely in 2024.

The landscape of blockchain technology is diverse, with various non-compatible blockchains and networks where participants conduct transactions independently. This fragmentation could slow the adoption of blockchain in global trade finance. Therefore, a crucial upcoming trend involves consolidating blockchain systems and enhancing interoperability to enable seamless transactions for all participants.

While institutional players such as banks and global financial organizations are actively exploring blockchain, its widespread adoption remains uncertain. The further integration of blockchain into trade finance operations hinges on the pace and extent of acceptance by banks.

While blockchain isn't a cure-all for the challenges faced by the trade finance industry, it presents significant potential for document digitization. This digitization could reduce manual labor, document duplication, and bureaucratic obstacles in trade finance transactions. Such automation holds the promise of increased efficiency and speed in the trade finance area, even with only partial adoption of blockchain technology.

Since blockchain technology is in the early stages of development, appropriate legislation must be created. These legal frameworks are crucial to ensure the legal protection of transaction participants and establish reliability in blockchain-based transactions. Without clear regulations, stakeholders may hesitate to fully embrace blockchain technology due to concerns about legal uncertainties and liabilities. Moreover, doubts can arise because scam projects, such as duplicate finance crypto and others, are possible in the blockchain field.

One of the significant issues facing blockchain technology is the lack of uniform standards across different platforms. This absence of standardization complicates communication and interaction between various blockchain platforms. Interoperability issues arise and hinder the seamless exchange of assets and data between diverse blockchain networks. 

So, it is vital to establish industry-wide standards to foster interoperability and facilitate the widespread adoption of blockchain in trade finance.

Blockchain technology may encounter scalability issues, particularly under heavy transaction loads. As transaction volumes increase, blockchain networks may experience overload, leading to slower transaction processing times and significant costs. 

Scalability limitations build a barrier to the widespread adoption of blockchain in financing, especially in domains with high transaction volumes. Developing scalable solutions is critical to ensure the efficient operation of blockchain networks in handling large-scale trade finance transactions.

Traditional financial institutions, including banks, may resist embracing digital transformation, including adopting blockchain technology. This reluctance, coupled with shifting priorities during global crises like COVID-19 or conflicts like the Ukraine war, further exacerbates challenges in advancing blockchain-based trade finance initiatives. Addressing these hurdles necessitates reimagining business models and fostering broader adoption beyond traditional financial institutions.

Despite the challenges, the prospects for using blockchain for trade finance are enormous. Understanding and addressing these challenges will encourage greater adoption of this innovative technology.

At Peiko, we have a skilled team and vast experience with the robust tech stack that enables us to provide top blockchain development services. Clients turn to us for blockchain consulting, the creation of smart contracts, and Web3 solutions, including crypto wallets, crypto exchanges, and more. Our specialists are profound in blockchain development for finance projects and are always ready to help you.

We are proud of Peiko’s portfolio of successful projects, including TopUp Balance. It is an online service that enables end-users worldwide to replenish their mobile operators’ accounts. Also, users can pay for different digital services using cryptocurrencies or fiat.

When creating TopUp Balance, we tackled various tasks and challenges. These are the integration of fiat wallets to transact with traditional currencies and the incorporation of crypto wallets. We also implemented multilingual support and localization features and a universal admin panel to streamline functionality management. 

In general, end-users obtain a user-friendly and seamless performing solution. TopUp Balance shows how blockchain technology can enhance convenience and accessibility in everyday transactions.

In this brief, we have discovered the challenges that traditional trade finance faces and which solutions blockchain technology offers. We also explored real-world applications of blockchain in trade financing, including its impact on letters of credit, forfaiting, and invoice factoring. 

The future of trade finance is undoubtedly intertwined with the development of blockchain technology. While the path ahead necessitates addressing current challenges, the future of blockchain in trade sector stays promising. This technology can change to better the way trade is conducted, providing a more secure, transparent, and efficient global financial ecosystem. 

If you want to create your own successful business based on blockchain technology, contact us. The Peiko team will create a reliable and modern blockchain solution that will exceed your expectations.