Blockchain for Global Trade and Commerce
What are the advantages of Blockchain for global trade and commerce?
Foreign trade is a 16 trillion dollar industry that allows for the exchange of money, products and services through foreign boundaries or territories. It is broadly divided into two categories:
- 75% of the different goods normally shipped by shipping containers or by ground transport
- 25% commodities
From a transport/shipping perspective, the commercial and finance industry is primarily affected, especially within emerging to developed markets, by the lack of trust and coordination of exporters and importers. In addition, due to the diverse nature of the operating processes of foreign trade of goods and services, the industry experiences numerous operational inefficiencies. For example, shipping and trading still rely heavily on human resources and are influenced by manual and paper-based processes that are very expensive, slow and error-prone.
Exporters and importers face financial or transactional obstacles, which slow down growth and restrict the advantages of globalization. While some innovations such as commodity trading and risk management (CTRM) approaches have proven to be useful, this area has traditionally been very resistant to advances in technology and digitalization.
In the past 10-15 years, several start-ups and development firms have sought to create products with mixed success — until blockchain technology has arisen, for which international trading is known as a primary use case. The potential effect of blockchain technology on international trade finance has caused many businesses and consortiums to upgrade their obsolete technologies. Besides ushering in the age of digitization, blockchain allows tokenization of existing records, letters of credit, and more. Smart contracts can enhance communication between exporters and importers by automating transactions, market activities and other manually intensive processes. The global adoption of blockchain technology will bring even greater benefits to cross-border coordination, trade settlement and standardization.
Trade in goods accounts for 25% of foreign trade and is composed of
- 40% energy
- 30% base and industrial metals
- 30% agriculture and soft commodities
More than half of the trade in commodities is funded by banks and other financial institutions or funds. In the past two decades, software and new technologies have emerged to serve this industry with varying successes, in particular CTRM.
However, like foreign trade in container goods, product markets remain affected by operational inefficiencies and costs, including:
- Fraud: The extensive use of paper records raises the likelihood of fraudulent activity (double funding, etc.).
- Delays: It takes 90-120 days for the goods to be shipped, trade financing is requested, documents are collected, buyers are given documents, payments are facilitated.
- Loss of income and opportunity: Such fragmented structures and high operational cost impede progress in the industry and generate annual losses in sales and investment worth billions of dollars.
The Blockchain technology offers a centralized and transparent archive for fraud reduction where information can not be manipulated without consent from all the parties concerned. The entire history of transactions using the property of distributed ledger technology is readily available.
Blockchains native ability to create and share digital assets also strengthens the various processes mentioned above. In-time information and transactions via intelligent contracts may reduce delays and automate manual processes. Inefficiencies in the commodity sector contribute to a loss of sales and market opportunities. When blockchain technology expands, businesses, investors and those interested in the commodity exchange will benefit from higher profits.
Based on estimates from $4.4 trillion commodity markets, about 30 per cent of commercial financing benefits are claimed by banks , financial institutions, institutional investors, or funds. By identifying a $1.6 billion gap between supply and demand for trade finance , especially for trade flows to and from emerging markets, the Asian Development Bank underlined the potential to broaden the global commercial finance sector. The disparity is exacerbated by know-how of the client (KYC) and enforcement issues as well as low productivity due to high labor costs (operational, KYC, due diligence).
Blockchain technology like Ethereum can be applied to fix different problems about the KYC and the regulatory enforcement process. Blockchain networks provide historic records and transparent headings to provide almost real-time transaction monitoring for multiple stakeholders. Regulatory agencies may gain access to approved AML or auditing blockchain consortiums. Eventually, blockchain has the ability to expand the access of both the supply (alternative investors) and demand (Emerging Market SMEs) to trade funding.
How does blockchain impact business processes and the management of the supply chain?
Blockchain will digitize, protect, streamline and eventually accelerate operations and supply chains across global markets. International trade transactions can take up to 120 days to complete. Move away from paper-based processes towards digitally verifiable and legally enforceable documents means smoother manufacturing operations and a reduction in fraud.
For gas & power, where issues center around accurate data sharing — blockchain would allow knowledge synchronization, faster mismatch resolution and settlement processes, as well as more effective delivery practices.
For renewable energy, where concerns center around accurate reporting of industrial carbon emissions or energy generated from renewable assets — blockchain provides enhanced confidence through network transparency and governance mechanisms that link all stakeholders.
How will blockchain affect the logistics of bulk commodities?
- The transportation of large amounts of raw materials required to power and feed the planet is complex. It requires multiple counterparties that lack effective coordination because many producers are located in remote locations and emerging economies. When markets become more competitive, commodity trading is transforming into a low-margin service sector. Traders are gradually making their living by offering a highly efficient logistics service between producers and consumers. Such factors inevitably raise the risk of transactions, leading to restricted access for new or rising businesses. Blockchain’s cost-reducing capabilities will raise profits, while its deterministic confidence mechanism will boost market accessibility.
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How is blockchain going to have an effect on trade finance?
As an extension of foreign export, trade finance is subject to the same sluggish operating processes. Many of the refusals made to financial institutions by SMEs in emerging markets stem from compliance issues, lack of confidence and low profitability. Blockchain addresses several of these problems by authenticating documents, streamlining operating processes and enabling collaboration between various stakeholders. In addition, blockchain simplifies access to alternative investors through marketplaces, thus increasing sources of funds for smaller players.
How is blockchain having an effect on post-trade settlement?
Current trading activities are generally regarded as inefficient in terms of having too many intermediaries involved (safety traders, custodians, and payment agents), being vulnerable to settlement threats, and having unforeseeable and time-consuming settlement periods. Blockchain technology has the ability to significantly simplify the chain of post-trade transactions, ensure and promote the consolidation of securities registers, while at the same time allowing quicker execution, reducing transaction costs and facilitating real-time settlement at T+0.
How does blockchain affect markets and asset tokenization?
Overall, there is considerable longer-term potential for developing commercial and financial marketplaces to promote access to supply and demand parties and improve liquidity, boost competitiveness and productivity in the above three categories – supply chain management, product logistics and post-trade settlement.
How will blockchain impact track & trace?
For those involved in the supply chain networks, Blockchain technology provides more transparency and a single source of truth. Smart tracking and recording, via blockchain, of orders, goods and delays could accelerate the sending and the delivery of goods.
Blockchain provides the following advantages in particular:
- Digitization. The majority of non-integrated supply chains are still focused on inefficient and unpredictable physical processes. Use blockchain, stakeholders digitalize and boost efficiency physical processes use clever contracts to solve these problems.
- Authenticity. Manufacturers, distributors and customers face challenges to verify the authenticity of their products. This enhances falsification. For blockchain, goods may at the time of production be associated with non-fungible toks. These tokens can then be used as digital attestations.
- Distribution Control. The majority of brands and retailers can not monitor their distribution through their own networks. Blockchain enables them to use intelligent contracts to create unique rules for the management of multi-channel delivery.
- Post-Sale Services. Most retailers can not offer robust services – including notification, warranties and repairs – because they do not have details about the source of a product. Blockchain can be used to build additional post-sales services using product life cycle information secured under smart contracts.
- Transparency. Customers demand clear information on raw materials and manufacturing processes in their goods. Growing stakeholders can provide validated information with blockchain throughout the supply chain.
- Verified Ownership. Customers have problems to prove their ownership of the product. This increases robbery and fake. Customers can collect and manage non-fongible tokens for physical goods via blockchain, and use these toks to demonstrate product authenticity and ownership, thereby allowing secure secondary markets.