International trade and global value chains are essential both for the prosperity of nations and for reducing geopolitical tensions. The distribution of production worldwide has driven globalization while gradually narrowing the gap between developed and developing countries. As a result, international trade has made the world more economically balanced and inclusive. However, more remains to be done, and the poorest nations continue to have a minimal share of world trade. Participation in international markets and value chains requires breaking down trade barriers and establishing seamless processes at the core of an effective and efficient cross-border ecosystem. Improving border processes and systems has become even more critical as trade growth has slowed from historical highs, limiting its potential contribution to jobs, opportunities, and economic development. Nevertheless, experiments have shown that the current situation could significantly improve at many borders.
Distributed ledger and blockchain technology guarantee to have far-reaching implications for global trade and supply chains. Providing increased transparency, effectiveness and combination throughout supply chains has been one of the most fruitful areas for blockchain testing. There is a high probability that most supply chains will be influenced by blockchain technology.
The trade finance disruption
Blockchain technology ensures a way for untrusted parties to agree on the state of a database without using an intermediary. By giving a ledger that no one manages centrally, a blockchain can provide certain financial services, such as payments or securitizations, without needing a central bank. For use cases that do not require high levels of decentralization, distributed ledger technology could benefit from better coordination. Blockchain technology and DLT have a tremendous opportunity to disrupt the global $5+trillion banking industry by disintermediating critical banking.
Table 1: List of essential banking services that can be disrupted by Blockchain technology
|Payments||By setting up a decentralized ledger for payments (e.g., Bitcoin), blockchain technology could enable faster payments with lower fees than banks|
|Clearance and Settlement Systems||Distributed ledgers can reduce operational costs and bring us closer to real-time transactions between financial institutions|
|Fundraising||Initial Coin Offerings (ICOs) are experimenting with a new funding model that unbundles access to capital from traditional fundraising services and firms|
|Securities||By tokenizing traditional securities such as stocks, bonds, and alternative assets and placing them on public blockchains, blockchain technology could create more efficient, interoperable capital markets|
|Loans and Credit||By eliminating the need for gatekeepers in the credit and lending industry, blockchain technology can make borrowing safer and offer lower interest rates|
|Bill issuing||By replacing the cumbersome, paper-heavy bill of lading process in the trade finance industry, blockchain technology can create greater transparency, security and trust between trading parties worldwide|
|Customer KYC and Fraud Prevention||By storing customer information on decentralized blocks, blockchain technology can make information sharing between financial institutions more accessible and more secure|
Banks typically facilitate international trade by financing buyers and sellers in trade finance. As Trade finance exists to mitigate risk, provide credit and ensure exporters and importers can participate in international trade. Like many industries, the trade finance market has suffered logistical setbacks due to old, obsolete and inefficient manual documentation processes. One of the most significant risks for trading parties is the risk of fraud which is more critical due to a lack of confidentiality and little oversight of the flow of goods and documents.
Table 2: pain points of today’s trade finance processes.
|Contract creation||The creation of the contract is manual. The importing bank manually checks the financial agreement provided by the importer and sends financial data to the correspondent bank in case the delivery of goods fails|
|Invoice factoring||Exporters use invoices to obtain short-term financing from multiple banks, adding risk if the delivery of goods fails|
|Scheduling of the phases||The schedule of the trade is delayed. The goods shipment is delayed due to multiple checks by intermediaries, and numerous communication points must perform AML checks manually by using the financial data provided by the import bank|
|The software platform used to support the trade||Multiple parts of the trade use different platforms. Since each party operates on different platforms in all countries, misunderstandings are common, and the possibility of fraud is high. Financial data is sent from one entity to another; there are significant version control challenges when changes are made|
Duplicate bills of lading. Bills of lading are financed multiple times because the banks cannot verify their authenticity. Multiple versions of the truth: As financial data is sent from one entity to another, there are significant version control challenges when changes are made
Delayed payment: Several intermediaries need to verify that funds have been delivered to the importer as agreed before disbursing funds to the exporting bank
Blockchain represents an opportunity to streamline and simplify the complex world of trade finance. Around 80-90% of world trade relies on trade finance, which could be streamlined using the technology. The use of blockchain and distributed ledger technology can support cross-border trade transactions that would otherwise be uneconomical. In contrast, the impact of blockchain on the market would be felt globally across all industries utilizing cross-border trade.
Blockchain technology allows companies to prove country of origin, product and transaction details securely and digitally. This could help exporters and importers give each other more insight into shipments moving through their pipelines. Through smart contracts, importers and exporters could set up rules that would ensure automatic verifications.
Banks can reduce their reliance on outdated manual processes and digitize critical business documents like letters of credit (LOCs) to reduce costs and improve efficiency. Others are trying to replace the process entirely with longer-term applications of distributed ledger technologies (DLTs).
The introduction of blockchain technology in trade finance could mean greater trust between trading parties. The technology could hide sensitive information such as prices and trade secrets when needed. It would also give shoppers better insight into where their goods came from and when they were shipped. With conventional systems, this information is often incomplete.
Table 3: Benefits of blockchain in the trading system.
|Real-time verification||Financial documents linked and accessible via blockchain are verified and approved in real-time, reducing the time to initiate shipment|
|Transparent factoring||Invoices accessed via blockchain provide real-time and transparent insight into subsequent short-term financing|
|Disintermediation||Banks facilitating trade finance via blockchain do not require a trusted intermediary to assume risk, eliminating the need for correspondent banks|
|Reduced counterparty risk||Waybills are tracked via blockchain, eliminating the potential for double-spend and potential fraud|
|Decentralized Contract Processing||When contract terms are met, the status on the blockchain is updated in real-time, reducing the time and number of staff required to monitor the delivery of goods|
|Proof of Ownership||The available title within the blockchain provides transparency on the location and ownership of the goods
Automated Settlement and Reduced Transaction Fees
|Contract terms executed via Smart Contract eliminate the need for correspondent banks and additional transaction fees|
|Regulatory Visibility||Regulators get a real-time view of critical documents to assist with enforcement and AML activities|
The introduction of blockchain technology in trade finance could mean greater trust between trading parties, increasing global business while hiding sensitive information such as prices and trade secrets when needed. Nevertheless, a blockchain could allow consumers to stay informed of every trade step, increasing trust and transparency.
Blockchain-enabled trade networks can benefit all stakeholders by reducing friction from logistical and operational inefficiencies across the trade finance value chain. The long-term implications of blockchain technology in trade finance would be more profound and could lead the way, according to researchers at the University of Bristol.
Trade finance has recently seen more successful blockchain pilots than other use cases. The starting point for developing a distributed ledger network is the DLT platform provided by DLT start-ups. One of the most common is Corda which is an Open source blockchain platform developed by R3, an enterprise blockchain software firm based in the US.
Standard Chartered and DBS are two banks that have joined coalitions committed to using blockchain technology to process trade finance. One such consortium is Voltron, operated by R3 and CryptoBLK, which runs a blockchain platform for digitizing paper letters of credit. In addition, DBS and Standard Chartered announced they were working on a blockchain-based trade finance platform called the Trade Finance Registry. For example, standard Chartered and HSBC are two banks that have joined coalitions committed to using blockchain technology to process trade finance.
UAE Trade Connect
UAE is located at the crossroads of the East and the West and is well recognized as a key player in global trade connecting importers and exporters across the globe. In addition to UAE being a key trading hub, it is also at the forefront of implementing new technological solutions to tackle issues faced globally. One such initiative is the implementation of ‘blockchain’ based solutions to confront fraud risks plaguing the Trade Finance market. e& (formerly Etisalat Group) in collaboration with along with 7 leading banks of UAE launched ‘UAE Trade Connect’ (UTC) in April 2021 to address one such problem of double financing via invoice de-duplication.
The USP of the UTC platform is its ability to offer real-time invoice de-duplication engine which connects participant banks over a private permissioned blockchain network while ensuring complete transparency and confidentiality.
About e& enterprise (formerly Etisalat Digital): e& enterprise is a business unit of e& group (formerly Etisalat group) helping to drive digital transformation. The unit focuses on providing digital solutions in various domains including Cloud, cybersecurity, digital marketing, mobile commerce, Internet of Things (IoT), and big data and analytics.
e& enterprise has the best industry digital experts, solutions architects, project managers and digital engineers as well as key digital assets and platforms including datacentre’s, cloud platforms, big data and analytics engines, digital and mobile payments platforms, security operations centres, Internet of Things Platforms and command and control centres.
Regional telco e& enterprise’s unique value lies in combining the scale, strength and robust network of the leading regional telco with the agility, skills and platforms of a digital player. The company has been working on offering solutions powered by blockchain technology to government and enterprise customers since 2017.
Evolution of UAE Trade Connect (UTC): e& enterprise along with 7 leading banks of UAE under the guidance of the Central Bank of the UAE, came together in 2019 to create UAE Trade Connect (UTC). The banks played a crucial role in bringing Trade Finance expertise which enabled the consortium to develop a tailor-made solution for invoice de-duplication. The collaboration aimed to provide a platform to detect genuine and non-genuine (tampered) documents in the banking and financial industry.
Journey of the platform so far: The UTC platform has successfully processed over 150,000 invoices totalling to over ~USD 9 billion up till April 2022. In addition, the platform has evolved from being just a platform to prevent duplicate financing, into a full-scale de-risking registry where all the participant banks play an active role in not just de-risking their portfolio but the whole banking ecosystem.
Key challenges addressed by UTC: UTC through its platform has successfully addressed the below challenges plaguing the invoice financing ecosystem in UAE,
- Creating a common interface linking banks to collaborate and share information without compromising the client confidentiality.
- Enabling real-time invoice de-duplication checks which in turn has helped the banks to de-risk their trade financing portfolio.
- Creating a registry to store, validate and analyse invoices for common red flags which in turn has enhanced the invoice financing process.
The road ahead: The success of first use case on invoice de-duplicate has enabled UTC to embark on new journeys with an aim to de-risk the trade finance ecosystem. These include,
- Enhancing the current use case to maximize its potential in undertaking de-duplication checks.
- Development of new use cases on other aspects of SME financing.
- Building a registry at the country level to undertake de-risking initiatives by all banks operating in the region,
- And many more…
In the longer term, DLT could enrich the trade finance market as it lowers barriers to entry and replaces outdated intermediaries. Before DLT can be deployed at scale, broader scalability, security and regulatory issues need to be addressed. DLT could enrich the trade finance market as it lowers barriers to entry and replaces intermediaries. If there is market fragmentation, the system will not work. As challenges could arise related to the interoperability of DLT projects. The early success of trade finance pilots coupled with the evident appetites of banks and regulators mean further investment and innovation are likely.
- CB Insight 2021, “How Blockchain Could Disrupt Banking” https://www.cbinsights.com/research/blockchain-disrupting-banking/
- BAI Executive Report, “The changing intersection of banking and technology.”
- World Economic Forum, 2019, “Inclusive Deployment of Blockchain for Supply Chains”
- Global Trade Review, 2020, “Trade finance blockchain consortia: where are we now?”