The main pain points of trade finance today include manual processes, outdated tracking systems, multiple international platforms for trade, and money laundering and fraud prevention.
Distributed ledger technology, more broadly known as blockchain, offers solutions for several of these challenges 1. To begin with, contract creation and invoice factoring are currently manual process that require the trading entity to provide financials and other documentation to the bank, which must then be reviewed and validated. Blockchain can effectively record and validate contracts such that the manual validation efforts should be dramatically reduced along with the associated costs. Moreover, because the blockchain is decentralized and disintermediated, it can also reduce fraud risk, such as bills of lading, which can currently be financed multiple times.
A 2015 survey by the International Chamber of Commerce showed that almost 20% of banks reported an increase in fraud, driving the major international banks to evaluate blockchain for use in trade finance and other banking applications 2. In addition, tracking and validation of delivery can reduce the time delay in payment because blockchain can provide proof of delivery and ownership.
Finally, blockchain can help solve the issue of regulatory transparency for the purposes of anti-money laundering enforcement. This push to adopt blockchain has driven the world’s largest banks to form investible consortiums such as R3, which launched in May of 2017. R3 successfully launched its trade finance platform Marco Polo in partnership with TradeIX and seven major banks. A rival trade finance platform called we.trade has partnered with nine banks to offer a “faster-to-market” solution built on Hyperledger Fabric. Marco Polo is focused on ensuring that new systems can talk to each other in order to fulfill their promise to remove frictions from global trade created by the multiple platform problem. We.trade is focused on the need for speed in order to bring new banks onto the platform more quickly. This allows the platform to be more nimble.