The emergence of blockchain technology has disrupted many industries, including finance. The trend of digital payments and decentralized finance has also taken a sharp turn towards trade finance. Integrating blockchain technology in Trade finance can drastically improve trust and reduce fraud issues. The overhead of managing the massive stack of papers and documentation will be removed, and the transactions will be faster with blockchain integration.
As per the reports, the worldwide trade financing gap could reach $2.4 trillion by 2025. However, by eliminating the barriers, distributed ledger technology is expected to provide a faster and more secure system to cover the $1.1 T new trade volume, significantly closing the gap.
Understanding Trade Finance & Its Key Components
Trade finance refers to financial services for the cross-border trading of goods. It facilitates cross-border payments and goods supply for importers and exporters. Traders are affected by various challenges associated with trade finance, such as currency volatility, international trading standards, and geographical concerns.
Trade finance involves several financial products, such as supply chain financing, letters of credit, documentary credits, and export credit insurance. These products ensure trust, on-time payments, and economic security.
Core Elements of the Trade Finance
The presence of all financial products related to trade finance facilitates smooth trading worldwide and eliminates various risk factors related to trade finance.
A Letter of Credit (LC)
The bank offers the LC document to the interested exporter, ensuring trust on the importer’s behalf. It is more like an agreement that ensures that the exporter will be paid by the importer when conditions are satisfied.
Export Credit Agency
Exporters get insurance for goods trading from public insurance organizations. These organizations also offer loans to interested parties and mitigate the chances of political uncertainty.
Insurance
The insurance covers cargo damage and other associated risks for international trade. Both parties, exporters and importers, get financial insurance.
Forfaiting
In international trade, when exporters want to receive all their money at once at the start, buyers intend to take a specific time to pay the exporter. The banks or any finance company agrees to pay the exporter the amount upfront and wait to collect the amount from the buyer.
Only the bank takes all the risks in this medium—to long-term credit. This process also supports cash flow and ensures no payment delays to the exporters.
Trade Finance and Blockchain’s Step-by-Step Working Process
Trade finance ensures that both trading parties work together to transport goods efficiently without any hassle or potential risks. Every party’s responsibilities and duties are carried out genuinely with complete assurances through following all the legalities.
Issuing a Letter of Credit
The bank issues the letter of credit (LC) on the importer’s side, which ensures reimbursement of the exporter’s amount for the items for trade. After collecting the letter of credit, the importer signs the bill of lading when they receive the goods.
Integration of Blockchain Technology
Unlike conventional Trade Finance, blockchain technology (Distributed Ledger Technology) is used to exchange documents securely and transparently between banks, trading parties, insurance companies, etc. Every transaction is time-stamped in blockchain verification and has a unique cryptographic sign stored on the blockchain network.
Every node present on the network can view the transactions based on the permissions. Blockchain in Trade finance creates a fraud-proof environment, leading to more efficiency and faster processing.
Implementation of the Commercial Terms
Officially, shipping and commercial terms and guidelines are written, which every party must agree upon to carry out the Trade finance. These terms are recorded by the smart contracts on Distributed Ledgers. This set of rules allows dispute-free Trade finance with each other and keeps it smooth throughout the trading operation.
What are the Benefits of Blockchain Technology in Trade Finance?
Blockchain for trade finance solves the complex problems of traditional trade finance, like paper processing, the role of intermediaries, and high cost. Introducing blockchain technology in trade finance speeds up the processes and reduces manual efforts, making it more efficient and transparent. Let’s unfold the benefits of Blockchain in trade finance:
Documents are Digital Assets
Blockchain technology digitizes various trade documents, such as bills, LC, and invoices. It can turn documents into unique digital assets securely transferred across the network. With Blockchain in fintech, processes speed up, and the manual work of handling mass documentation is eliminated.
Real-time Tracking and Verification
Every blockchain node on the network can track an item’s progress in trading. Position tracking of the trading items is effortlessly possible at every point of the trading operations. The traders can get real-time details about the shipment.
This also boosts the efficiency of the supply chain and clears the delays, leading to stronger trade finance relationships among the parties.
Better Efficiency & Decreased Cost
In the traditional trading finance sector, there are many bottlenecks, such as time consumption, document verifications, and the involvement of third parties like banks, shipping companies, and insurance companies. This overhead is removed with blockchain and trade integration. The development of smart contracts eliminates the inefficiencies of the conventional system.
Self-execution happens when the pre-written conditions in smart contracts are met. As administrative work is reduced, costs decline, and with blockchain technology, efficiency increases.
High Security & Transparency
As we said earlier, every node has the right to validate and verify the transaction, offering high transparency. Every transaction present on the network is visible to users. Blockchain in trade finance records all the transactions on the immutable ledger. Therefore, it prevents fraud and security vulnerabilities, as no single node can make changes without knowing the rest of the nodes.
Challenges in Implementing Blockchain for Cross-Border Payments
The widespread adoption of blockchain technology for Cross-border payments facilitates cost-effective, faster, and secure transactions. However, various challenges come their way when implemented in the real world. The following are the different significant challenges that need to be addressed:
Scalability Issues
Scalability is the ability to handle an increasing number of transactions, which must be very high to accommodate the growing traffic on the blockchain network. Another issue is the time it takes to complete and record the transaction on the blockchain network.
High latency can lead to delays in transactions that must be completed in the decided time. Also, with the rising volume of blockchain networks, they become congested, gradually slowing down the processing and increasing the fees. All these issues will be fixed with the evolution of technology.
Interoperability with Existing Systems
For cross-border payments in Trade finance, interoperability is the next big challenge. Different blockchain networks should work seamlessly with each other for cross-border payments. However, due to the lack of standardization across various blockchains, there is a problem with interoperability. Every blockchain works based on different consent mechanisms, protocols, and data structures, which makes it challenging to interact with two different blockchains with each other.
Regulatory Challenges
Financial regulations can be the most challenging part of implementing Blockchain in Trade Finance for cross-border payments. The financial regulatory system can differ from country to country, which can be a considerable barrier to blockchain trade finance. Finance companies should strictly adhere to the regulatory guidelines while using blockchain technology.
Technical Challenges
Technical challenges for implementing blockchain trade finance include scalability, security issues, and integration with other existing systems. Traditional trade finance systems are not seamlessly compatible with blockchain technology. Integrating the current system with the blockchain network can be expensive and complex, requiring huge investments and expert training.
Are you looking to Integrate Blockchain in Trade Finance?
Do you want to unlock growth opportunities in Trade finance with blockchain integration? The collaboration of Trade Finance and Blockchain technology speeds up the trading process and makes it more transparent for all the parties involved in trade finance.
We at WisewayTec offer cost-efficient and premium services for blockchain trade finance. You can reach our expert business consultants to discuss your project idea and get expert advice from our teams. We offer affordable blockchain finance trade solutions tailored to your needs.
Frequently Asked Questions
What is the future of Blockchain for Trade Finance?
The intersection of Blockchain and trade offers more efficiency and reduces transaction costs. It also removes the need for intermediaries and smooths trade finance globally, leading to promising future opportunities.
What is the Role of Blockchain in Trade Finance?
Blockchain stores every trading transaction in an immutable way. Every node present on the network can verify the transactions, and there is no need for a third party to validate them.
How can Wisewaytec help us with Trade Finance and Blockchain Solutions?
We can offer you top-notch solutions to automate trade finance operations through smart contract development. Contact us to learn about our services.
