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Blockchain Use Cases in Trade Finance

20 Dec 2023 updated
11 min

Table of content

In the globalized world with borderless trade and a wide network of commercial partnerships, trade finance plays a key role in making trade transactions happen. It is an umbrella term covering a wide range of financial instruments and products that facilitate cross-border trade deals between commercial partners. Its major role is risk reduction and reconciliation of diverse exporter and importer terms and laws determined by their relevant jurisdictions.

Due to its complexity, the trade finance sphere has traditionally been reactive, slow, and problematic, yet unavoidable for most market participants. The present-day trade finance market exceeds $46 billion in volume, with a steady CAGR of 4.5% (see figure below).

However, as blockchain is gradually introduced in this conservative international business area, the sector is poised for further development and growth. The present-day predictions point to a $68+ billion market by 2032, with the lion’s share of that growth attributed to modernization and digital finance integration in the trade finance sector. All these developments point to the need for leveraging fintech and defi development services to secure the key players’ competitive advantage and overcome trade finance’s present-day bottlenecks. 

In this article, we will look at the major hurdles trade finance faces in its current form, as well as find out if the blockchain can handle these challenges and give the industry better efficiency, agility, and transparency vital for its expansion.


what is trade finance


What is trade finance?


Let’s start with the most important. Trade finance is a complex of methods, instruments, and mechanisms for financing foreign trade transactions of clients by attracting credit resources from international credit and financial markets by domestic banks. 


Banks play a central role in providing such resources. However, funds for financing can also be provided through a third party, for example, through an export agency, international trading companies, specialized non-bank financial institutions.


How does trade finance work?


In a nutshell, trade finance is a process of granting financial guarantees for the completion of the transfer of goods. No party to the international trade deal wants to fulfill their obligations without tangible guarantees from the counterparty. Therefore, the importer’s bank issues a letter of credit to cover the exporter’s expenditures for the goods’ transfer. The letter of credit is a financial obligation to pay out the full outstanding sum for the shipment once the importer receives it and signs the bill of lading for the actual arrival of the goods. 

Once the documents are signed and submitted to the third-party bank, the latter pays out the entire sum to the exporter, and the importer gets access to the shipped goods for their further commercial distribution. This way, a third-party financial organization handles the payment risk and supply risk in an international trade agreement.


There are two banks typically involved in the trade finance deal – the remitting bank on the seller’s side and the collection bank on the buyer’s side. They are the actual payees and documentation reviewers in the entire trade finance process, overseeing whether each of the parties has fulfilled their obligations.

Read more about blockchain technology in the food industry

The role of blockchain in trade finance


Trade finance has existed for many decades, since the times of trade globalization and the emergence of cross-border trade. However, despite its key role in fostering international trade deals, conventional trade finance processes are very slow, complex, and unnecessarily bureaucratic. According to the Rules of the International Chamber of Commerce (ICC’s publications UCP 600, ISP 98, and URDG 758), all trade transactions are hosted on the SWIFT platform and have to go through multiple banks in a semi-manual format, which makes the whole process costly and time-consuming. Besides, these transactions lack transparency and make the final incoming sum of payment a matter of guesswork. These broadly recognized shortcomings have caused the trade finance industry to seek better solutions that can guarantee the same level of trade deal security and, at the same time, avoid the SWIFT-related red tape and overheads. The solution was found in blockchain. 

The blockchain is a kind of Internet ledger that contains data about what belongs to whom. In this network, it is possible to carry out currency transfers and other values, control the process of delivering any product to the consumer. With its help, companies will be able to manage assets, determine the methods of carrying out their activities, and easily carry out personal identification. Many developments, in particular joint developments by Intel, CISCO, SWIFT, and J.P. Morgan are also designed for the banking system.

So, how can blockchain technology transform the entire process? The key to revolutionizing trade finance is in its decentralization and smart contracts, which offer a fundamentally new approach to trade finance arrangements.

As soon as trade finance operations migrate to blockchain, it will become possible to: 

  • Substitute slow, manual processes with automated, self-executing smart contracts. 
  • Avoid delayed payments and extended deal timelines resulting from multiple financial intermediary involvement. Transactions on blockchain are done on a p2p basis, removing the crowd of in-betweens and speeding up the entire process. 
  • Change the hectic invoice factoring procedure with quicker and no-risk smart contracts. 
  • Enhance the KYC/AML procedures via blockchain-based counterparty verification and authentication. 
  • Simplify the communication process by hosting all documents and trade deal updates on the blockchain platform. 
  • Avoid documentation duplication and bureaucracy with a single document storage and an effective validation process. 

This way, by using blockchain in trade finance, counterparties attain greater efficiency in their deals and preserve real-time access to all documents, communication data, and shipment tracking information. Blockchain’s transparency simplifies auditing processes and enhances the security of the whole trade deal. As a result, trade partners can acquire greater autonomy without the need to refer to correspondent banks and pay considerable fees for trade finance oversight.


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What are the benefits of blockchain?


Now that the intricacies of blockchain’s work in trade finance are understood, we can summarize its benefits for the industry as follows: 

  • Reducing the cost of transactions.
  • Security of operations and, as a result, the trust of network participants.
  • Increasing the speed of data exchange.
  • The immutability and finality of trade deal transactions.
  • Transparency of operations, openness, and universal access to the content.
  • Low to zero commissions in the blockchain systems. 
  • No room for corruption. 
  • Mitigation of fraud and risk. 
  • Improved access to funding and loans for small businesses. 
  • Reliability.
  • Ease of conducting transactions.

Yet, despite a large number of benefits and strategic advantages of using blockchain in trade finance, this technology still poses some adoption challenges. Trade finance participants may find it difficult to address: 

  • A considerable learning curve for mastering the intricacies of smart contract generation and trade finance deal arrangement on blockchain. 
  • Regulatory concerns and compliance issues. 
  • The need for standardization and interoperability among the existing blockchain networks. 
  • The rising cybersecurity threats. 
  • Privacy concerns for sensitive trade deal information. 
  • Institutional resistance to blockchain adoption because of the banks’ financial gains from the traditional SWIFT-based trade deal arrangements. 



Also, the complexity exists on a psychological level, since many people associate blockchain with bitcoin, which is not so. Blockchain has nothing to do with cryptocurrencies, this is just another way of calculating.

It should also be pointed out that it is possible to understand the impact of blockchain technology only by combining the three most important components, which include: digital identity (i.e. a set signs of a network entity in the form of electronic records), legitimacy, and efficiency on the part of public administration.

At the moment, banks are only starting to implement blockchain, so its institutional-level adoption is a matter of the future, lacking widespread use that would allow its more confident application in trade finance. 

From this we can conclude that blockchain technology is undoubtedly promising, it should be actively considered for the trade finance industry. After all, this technology is capable of changing the digital economy, overturning the sphere of government regulation, finance, and other areas.


How trade finance can work using blockchain


Blockchain technology has gained prominence mainly due to cryptocurrency. However, this technology can be used in traditional businesses as well. Let’s remember that blockchain is a distributed database that records information about all transactions performed between the parties – participants in a process. The entries from the registry are visible to all participants in the process; they cannot be deleted or subtly modified retroactively. With the help of technology, it is possible to get rid of intermediaries in business, which means, to reduce costs, for example, for the execution of contracts, as well as eliminate fraud. Blockchain allows you to track all processes in real time and save on checks.

The financial sector has pioneered the use of blockchain. This is not surprising: the idea of ​​cryptocurrency transactions between wallets can be easily carried over to traditional bank transfers. Cross-border blockchain-based money transfers take minutes, while through the international payment system SWIFT, especially in the absence of correspondent relations between the sender and recipient banks, the transaction can take up to three business days. Blockchain can be used both for customer verification and, in the long term, for reporting to regulators.

A consortium of European banks led by Swiss UBS has launched a blockchain platform in line with new EU banking laws that came into force this year and require banks to disclose more data and conduct more thorough due diligence on customers and counterparties.

The greatest benefit of blockchain will not be for a company with a dozen verified counterparties, but for an enterprise with many suppliers, buyers, franchisees who need to be constantly monitored. One example of suitable industries is logistics. Together with the cargo, the supplier sends forwarding documents, which at each stage of delivery are checked by warehouse staff and customs officials. In sea transportation, there are often cases when documents take longer than the cargo itself, and the recipient is forced to wait for them to receive the goods.


blockchain process


What does the blockchain-based cargo delivery process look like? The consignee sets requirements for the documents, the sender uploads them to the online storage, a pointer to the data storage location appears in the distributed registry. All participants use special software, which at each stage of the transportation of goods records all operations in the chain.

An employee of a warehouse or customs office confirms the fact of delivery of the goods with his unique signature, and the recipient of the goods does the same. Each participant in the process has a private key that allows you to identify senders and recipients. The signature, like the key, is encrypted. Blockchain makes it impossible to capture cargo by rewriting it to another person.

Another area of ​​blockchain application is the accounting of real estate transactions. According to the same scheme as in logistics, documents are uploaded to the blockchain, transactions are reflected there and are accepted by all interested parties, including the registering authority.

All these use cases suggest that blockchain is largely universal in application and can aid many traditionally complex industries. Yet, the blockchain business is not done alone. Outstanding results can only be achieved together with like-minded people in consortia and professional communities.


Popular enterprise blockchains suitable for trade finance


There are many blockchain businesses and ideas for blockchain projects out there. However, not all of them are suitable for the trade finance niche. Finance is one of the critical use cases of blockchain technology and many businesses are now offering tailor-made solutions for trade finance blockchain platforms.


If you are looking for the best trade finance blockchain companies to help you with your project, then you should definitely check out all the options below. We have selected the most popular and most suitable enterprise blockchain suitable for trade finance. So let’s see what it is:


Hyperledger


Hyperledger is a collaborative open source project created to advance blockchain technologies by implementing the features required for an open, cross-industry standard for distributed ledgers. This is an international project that encompasses leading companies in the fields of finance, banking, IoT, logistics, manufacturing and technology. The Hyperledger project is supported by The Linux Foundation.


Hyperledger is committed to developing open, distributed ledger technologies that will enable companies to build stable industry-specific applications, platforms, and hardware systems designed to perform specific business operations. The project has over 122 participants and spans a variety of industries, including finance, healthcare, IoT, credit card services, aviation and others.


Ethereum Enterprise Alliance


The Ethereum Enterprise Alliance (or EEA), formed in February 2017, brings together a variety of startups, Fortune 500 companies, technology providers, academics, and Ethereum experts to work on Ethereum as an enterprise-grade technology.


Key points:


  • The Ethereum Enterprise Alliance (EEA) is a member-led industry organization that aims to promote the use of Ethereum blockchain technology as an open standard to empower enterprises.
  • The EEA’s mission is to provide an open, standards-based architecture and specification to accelerate the adoption of Enterprise Ethereum.
  • The EEA provides its members with a community and access to educational materials, as well as a variety of technical and media resources.


Ripple 


Ripple is a private, commercial organization that created RippleNet to exchange digital and fiat assets in real time. The network runs on top of the XRP Ledger Distribution Ledger (XRPL) with the XRP token. At the same time, RippleNet is neither a blockchain nor a cryptocurrency. In addition, Ripple claims that they are legally and organizationally unrelated to XRP Ledger.


Therefore, one cannot say that Ripple and XRP are the name and ticker of the same cryptocurrency (like Bitcoin and BTC). Ripple is a company, RippleNet is a payment gateway created by Ripple, and XRP is a separate cryptocurrency. At the same time, if you believe the leadership of Ripple, then instead of XRP, they could use any other cryptocurrency, it is just this technology that suited them best. And the fact that Ripple owns 60% of all XRP money supply is just a “gift” from the blockchain developers of the open source XRP Ledger.

Blockchain Trade Finance Platforms

As blockchain use is gaining momentum in trade finance, many forward-looking businesses are offering ready-made DLT-based solutions for streamlining the trade finance deals among parties. Here are a couple of promising projects worth considering for trade finance optimization. 

1. Contour 

Previously known as Voltron, the rebranded Corda-based industry platform allows automated creation, exchange, approval, and issuance of letters of credit for trade finance transactions. The resource features a full-cycle workflow for letters of credit and gives the participants bank-compliant security protections. The project has gained support from leading international banks, such as Bangkok Bank, BNP Paribas, Citi, SEB, and many others. 

2. Trade Leaf 

This UAE-headquartered blockchain-based trade finance platform (developed in partnership with 4IRE) unifies numerous stakeholders of the international trade finance sector. It offers the full range of trade finance documents and smart contract technology for trade finance transactions, along with a p2p pending platform for trade finance SMEs seeking finance. The TradeLeaf platform is universally valuable for financiers, traders, and trade finance market participants looking for flexible and speedy solutions.  

3. EC3 Platform 

This Skuchain-owned project provides the full toolkit for supply chain and trade finance transactions among parties. It allows documentation sharing and storage, supports inventory control and finance (ICF) functionality, and enables supply chain financing via smart contracts. The project currently enjoys global coverage and facilitates trade finance transactions among businesses in the USA, Europe, Asia, and Africa. It is built on Hyperledger Fabric but offers ultimate interoperability with other Corda-compatible blockchains.  

4. eTradeConnect 

This project is a China-headquartered trade finance consortium operated and owned by the Hong Kong Trade Finance Platform Company Limited. It enables registered and verified participants to generate purchase orders, invoices, pre-shipment and post-shipment trade finance transactions, etc. The resource is used by many big names in the Asian trade finance sector.  

5. komgo 

komgo is one of the first fully decentralized blockchain platforms for commodity trade finance. It supports KYC/AML procedures, komgo user certification, and digital trade product generation. Its 150+ registered users can submit trade finance documents and apply for credit on-site. 

These and many other blockchain-based trade finance platforms bring the new technology closer to international trade participants and simplify cross-border trade transactions among parties. 

Smart contracts in trade finance

Smart contracts are at the heart of blockchain technology and can revolutionize trade finance processes in many ways. Their key benefits include: 

  • Transparency of the transaction’s real-time status. 
  • Speed of shipping initiation and a shorter trade cycle. 
  • Real-time review of the trade finance process by regulators. 
  • Transactions between untrusted parties without the need for third-party oversight. 

These advantages can be achieved because of smart contracts’ automatic, self-executing nature. They work similarly to classical contracts, initiated based on the mutual agreement on a specific set of terms every party should fulfill on its part to consider the deal closed. Smart contracts are pieces of blockchain code programmed with these terms in their code logic; therefore, the smart contract is executed only when there is substantial proof of both parties’ fulfilment of contractual conditions. 

The main feature making smart contracts safe for trade finance parties is their immutability achieved via decentralization. All smart contracts exist on a specific blockchain, stored on multiple devices of the chain’s nodes, so it is technically impossible to manipulate their conditions, commit fraud, or execute duplicate financing of one bill of lading. Added advantages of smart contracts include the storage of all transaction data in a public ledger, which simplifies audits and makes it easier to streamline KYC/AML procedures in international trade operations. 

Trends and opportunities in blockchain trade finance

Though a transition to blockchain is already a massive move in the global trade finance industry, there are many trends and opportunities within this process to watch out for in 2024. 

Blockchain Consolidation 

Blockchain technology is not a homogeneous ecosystem. There are still numerous non-compatible blockchains and networks in which participants transact in an isolated way, which may become a major hurdle for blockchain adoption in trade finance on a global scale. That’s why an essential future trend is blockchain consolidation and interoperability enhancements that would allow the system’s participants to transact without risks and friction. 

Institutional Adoption 

Blockchain is actively explored by institutional players, like banks and global financial organizations, but its massive adoption is still a matter of the undecided future. For this reason, blockchain’s further integration in trade finance operations will depend on the speed and scale of banks’ acceptance. 

Documentation Automation 

It would be an exaggeration to say that blockchain is a panacea to all troubles of the present-day trade finance industry. Yet, it offers considerable potential for the digitization of documentation, which would allow minimizing manual labor, document duplication, and other forms of red tape in the trade finance deal’s process. These forms of automation promise greater speed and efficiency in the trade finance sector, even under the conditions of partial blockchain use in trade finance. 


Final words


Blockchain technology is a symbol of decentralization, the transfer of control over data to clients, who are now free to dispose of them themselves. IT leaders need to rethink their blockchain strategy in anticipation of a growing user base that won’t tolerate someone else owning its data.


In this article, we have described how the use of blockchain technology can revolutionize this sector. Obviously, blockchain technology is not perfect. However, it is much better than legacy systems. Only with the proper trade finance blockchain can we hope for a better international trading experience.

Though blockchain is not ideal and also needs to be approached with caution and awareness of risks, it is still a promising step forward in much-needed trade finance speed, efficiency, and transparency. 

If you’re one of the forward-looking businesses engaged in trade finance or are considering entering the niche with an innovative blockchain-based resource, 4IRE will be happy to become your trusted development partner in this project. We have 300+ qualified and talented blockchain specialists on board and can create a state-of-the-art trade finance platform that meets your technical specifications and business vision. Contact us today to start implementing your promising business idea with immense market potential. 

FAQs

How can blockchain benefit trade finance?

Blockchain adds the much-needed transparency, efficiency, and security dimensions to trade finance deals. Besides, the use of blockchain solutions speeds up the entire process of concluding the deal without unnecessary red tape and documentation complexities.

What role do smart contracts play in trade finance on the blockchain?

Its automated and self-executing smart contracts remove the need for costly intermediaries of the trade finance deal process and reduce the overheads of trade finance transactions. A smart contract allows two trade partners to complete a deal without banks and other in-betweens by stipulating the contractual terms in the code and allowing the smart contract to release the payment to the seller only after the buyer confirms the receipt of goods.

Can blockchain reduce the risk of fraud in trade finance?

Yes, blockchain is a powerful tool for fraud elimination from trade finance deals. It is an immutable, public ledger that cannot be changed, forged, or manipulated after the smart contract is signed. Therefore, all parties of the trade finance deal have access to real-time contract data, the status of the shipped goods, and the degree of fulfillment of contractual terms. 

What specific use cases does blockchain address in trade finance?

Blockchain simplifies the KYC/AML procedures in trade finance by keeping the data about verified participants in one database and allowing universal access to it for numerous counterparties. It also optimizes the process of documentation processing by minimizing the amount of paperwork with digital documentation storage and transfers. Blockchain also aids the post-shipment payment release procedures by removing the need for costly intermediary bank services.

How can businesses start integrating blockchain into their trade finance processes?

It is easy to benefit from blockchain in the trade finance business; existing trade-related businesses can register at the Web3 platforms and handle their deals with partners on those resources. They can view counterparty data, KYC/AML data, and documentation on the platform, exchanging all data and progress reports there to avoid the conventional – costly bureaucratic – process. Another option is to launch your own trade finance platform on blockchain and give other market players access to its features and services.

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