Use of blockchain in trade finance

Abstract

International trade, which has proliferated since globalisation, due to its innate nature, depends on trade finance. More than 80% of all international trade transactions, amounting to more than $16 trillion in 2018, are dependent on trade finance. Trade finance employs a multitude of instruments to provide timely liquidity and working capital to both importers and exporters. The most common of this is the letter of credit. Apart from a Letter of Credit, structured finance instruments, factoring, and many more intricate arrangements make the industry an all pervasive one. In India, owing to a slowdown in growth of trade post the introduction of GST, the Government launched a one of a kind online market for exporters to auction off their receivables with ease, called the Trade Receivables Discount System, in October 2017. Despite many such initiatives in the field of trade finance, there remain several pain points which breed inefficiencies in the system. Moreover, since trade has linkages with nearly every primary, secondary and tertiary economic activity, these inefficiencies compound in the system. These inefficiencies range from banks still having to physically review documents prior to issuing a letter of credit, which lead to inordinate delays, and leave scope for human error, to regulators having to carry out multiple checks which waste not only time but also resources, to exporters and importers needing to be present on multiple trade platforms leading to multi-homing costs. There was a need for a decentralised platform for recording every aspect of a trade transaction to both streamline the process of extending trade finance but also reduce the regulatory burden. We, along with many other industry players, feel that the distributed ledger technology offered by blockchain, while not a panacea to all inefficiencies in trade, could alleviate multiple pain points within trade finance. Use of a smart contract, for instance, to record details of any trade transaction could make review of documents by banks easier and would also enable banks to stipulate conditions that would automatically trigger payment, in case of a Letter of Credit. A blockchain based platform would also enable trade participants to track the shipment, and would enable regulators to review transactions to prevent money laundering with more ease. While, at least in India, blockchain is still at an early adoption stage, more and more banks in India and abroad, have dedicated personnel and resources to identify gaps that are conducive to blockchain adoption. While issues such as red-tapism, corruption and getting trade participants to join the platform would potentially be roadblocks to adoption, more and more such transactions by trade participants within India indicate that widespread adoption may not be far. Thus, while blockchain is not expected to replace the status quo completely, anytime soon, if enough people are onboarded, blockchain could potentially be the single biggest disruption the trade finance industry would have seen in some time