Why is trade finance a hot topic for Blockchain?
Let’s assume a factory owner in the US who wants to buy a machine from the company in Europe. Obviously the process of getting the machine constructed, shipped over to the US, unload and finally assembled within the factory is the long lasting and complex process and particularly involves the significant settlement risk for both parties involved.
Trade finance provides a couple of measures to help mitigating these settlement risks and on top of that it helps to build up trust which is naturally lacking between the two parties and that’s exactly the exciting spot for blockchain.
Blockchain by using security aspects, trust mechanisms and the fact that it’s decentralized platform can help to redesign the entire processes around trade finance – making the entire business easier to access better to monitor and ultimately cheaper for both players.
What would a real Blockchain Trade Finance solution look like?
I think we can compare a little bit with the invention of the iPhone back in 2007 – as much as the iPhone was more than just another mobile phone, Blockchain should be used for more than just the optimization of existing trade finance processes. If you for example with just automated creation of a credit note then we would not leverage the full potential of this technology.
Two features of Blockchain will play particularly an important role for such a solution. First of all Blockchain is a distributed platform which means all involves party has the same access to the same information at the same time. This by itself adds another level of trust to the entire system. Secondly Blockchain comes with built in trust mechanisms like smart contracts these contracts could be pre-configured at the beginning of trade finance transaction and execute certain things depending on certain events.
So coming back to the example that I introduced it would mean that all players the factory owner, the producer of the machine but also the logistic companies could follow the journey from Europe over to the US throughout the entire time and would exactly know where the process stands.
What should be considered for creating Blockchain Trade Finance Solution?
Obviously we are really just at the beginning, there are various aspects that require additional work. First of all the technology, Blockchain is probably today not yet ready to fully support an end-to-end solution for trade finance. That’s even more relevant are the organizational aspects – both regulations and laws need to be reconsidered in order to support such a solution.
Last but not least all players whether the buyer, the seller, insurance company, logistic companies and banks needs to come together to design and implement a solution of the future.