A paradigm shift in Trade Finance
Imagine, instead of waiting days for someone to manually create a contract and then weeks to receive payment for goods, you utilize smart contracts to provide you with real-time review and automated settlements.
This is currently the situation with trade finance, an antiquated, still largely paper-based system that is ripe for the disruptive nature of blockchain technology.
Blockchain technology has the potential to radically transform the traditional practices of trade finance, a market worth US$10 trillion annually.
Blockchain technology allows certain permitted parties to link together and access relevant documents, reducing the overall time to initiate the shipment of goods. Blockchain refers to a growing repository of transactions organized in chronological blocks where the technology intrinsically makes changes to previous transactions functionally impossible. The benefits of greatly improved efficiencies enable disintermediation: contract terms executed via smart contract eliminate the need for correspondent banks and additional transaction fees reducing counterparty risk: bills of lading tracked through the DLT eliminate the potential for double spending.
Payment and delivery terms are documented in a letter of credit (LC), which can be automated and managed using smart contracts. These smart contracts capture shipment details, financial information and payment data in near real-time as the LC moves through the trade finance process. Payment is released as soon as the terms of the contract of sale have been fulfilled.
Improved transparency enables decentralised contract execution: as contract terms are met, the continual status is updated in near real time, reducing the time and headcount required to physically monitor the delivery of goods. It also provides for Proof of ownership: the title available provides transparency into the location and ownership of the goods.
Smart contracts help improve security and reduce fraud, and also enable regulatory transparency: where compliance officials are provided with real-time tools of essential documents to assist in enforcement and AML and customs activities.
In trade finance, where administration accounts for up to 20% of the cost of goods, Blockchain technology provides the possibility for huge cost savings of up to US$2 trillion annually.
All of these changes will pull down prohibitive barriers to entry and drive down costs to create new and exciting opportunities for new importers, exporters and lenders to participate within global trade networks.
The Author is Jonathan Charles, CMO Zemit