Why Blockchain Is the Best Thing That Happened to International Trade
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There has been little or no innovation in the cross-border trade industry since forever. Global trade has conventionally been a manual process generating tons of documents such as letter of credit or product quality papers. After the start of digital transformation, even though documents related to bills and letter of credits are now maintained electronically but they are not always accessible to all the parties involved in the trade. Hence, they all have their own set of records. Tracking the progress of any shipment or associating them with respective payment is still a complex, bulky process prone to human error, fraud, trafficking or smuggling.
In recent times, since the introduction of Blockchain and AI technology, many companies have gained confidence that it is possible to have faster and efficient workflow in cross-border trade which can help in improving overall customer experience without compromising the safety of sensitive information. In 2017, the International Chamber of Commerce (ICC) had launched Intelligent Tech & Trade Initiative (ITTI), during the WTO’s public forum event. ITTI will concentrate on how global trade and government discussions on trade transactions can be benefitted by artificial intelligence (AI) and blockchain.
Many businesses are already thriving with their smart trade projects. For example, in Sept 2017, more than ten global banks declared that they will set up an open account trade finance system using a blockchain technology. Similarly, a Chinese tech company announced its plan to introduce a supply chain platform powered by AI and blockchain technology to minimize the cost involved in the manual processing of international transactions.
Since its launch, in 2008, Blockchain has got the most attention as a platform for cryptocurrencies such as Bitcoin. Cryptocurrencies are just the tip of the Blockchain iceberg. Blockchain can have significant influence at an international level when used in businesses and financial institutions as it provides a decentralized digital record that does not involve trust or coordination among organizations. Blockchain technology guarantees secure and standardized trade, even across borders, occurring instantaneously. Few businesses have started using digital smart contracts to eliminate third-party involvement in financial transactions to ease the audit process.
Numerous industry participants have launched plans to examine the use of Blockchain technology in cross-border transactions. Sooner than later, this technology will enable banks and organizations to abolish paper contracts, faster settlement of transactions, securing digital networks from cyber attacks and helping them implement cost-effective solutions.
Following are few benefits that verify the importance of Blockchain for International Trade
Elimination of Paper Contracts
Blockchains are irrefutably faster, economical, and more secure than other traditional systems available today. Blockchain smart contracts help in money exchange, real estate or share trading etc. in a transparent and authentic manner without any intermediaries. Hence, banks and governments have started to trust this technology. For example, a popular Australian bank has brilliantly used blockchain’s ‘smart contracts’ to process invoice financing documentation and letters of credit in association with 14 other international banks, using the Corda platform which was built by the R3CEV group of 51 banks.
Protecting Digital Systems From Cyber Attacks
Blockchain technology creates records of transactions in consecutive blocks forming encrypted data chain that can be shared among several participants throughout the supply chain. It also updates the records instantaneously without any danger of cyber attacks or data loss.
One of the examples of blockchain technology solution in trade finance is Hyperledger blockchain. A chief American retailer is using Hyperledger blockchain to keep track of shipping details for pork distributions from the Chinese contractors, including origination information, batch id and cold-storage temperatures. It also helps in streamlining cash flow and procurement enabling a more advanced way to improve product security for customers. This technology can be extended to other business functions also in the future.
Quick Settlement of Transactions in Cross-border Payments
Blockchain offers faster payment solutions in case of cross-border trade. For example, a popular British bank has collaborated with a crypto-technology start-up, called Wave, to process blockchain-powered universal trade finance operation. Letter of credit for a transaction between an Irish exporter and a Seychelles distributor was logged inclusively on Wave’s network, including the details of the funds which were transferred using SWIFT.
Reduces Costly Documentation Delays
As discussed earlier, blockchain enables businesses to maintain a digital record of all the transactions and hence removing the need for maintaining manual documentation. One of the great examples of this feature is Danish shipping brand – Maersk.
Maersk’s blockchain-powered method, which is developed with IBM, places all documentation into a single, standard workflow that starts recording the details as soon as the workflow is initiated. Maersk tracks the consignment of flowers from the Kenyan harbour of Mombasa to Rotterdam to compute the documentation on a normal business day. This transaction involves more than 200 messages among involved parties like farmers, ports, government, brokers, transporters etc. The communication starts to get logged into the template workflow as soon as the farmer submits the consignment details. No one party in the whole process can change, remove or add any details without the approval from other parties in the network.
The extensive acceptance of Blockchain in international trade will help in decreasing the friction in the international economy. It is expected to benefit specifically the importers and exporters as it will grant them access to the financial support in areas where the current financial arrangement is lacking.
Blockchain allows businesses to broaden their international trade opportunities by eliminating redundant methods and effectively limiting the costs associated with international transactions and processes. There are still some nitty-gritties to be taken care of while implementing blockchain solutions such as proper regulation guidelines for this reforming technology. However, regulators should try to get comfortable with these advancements as blockchain is enabling businesses to generate profits with simpler automatic workflows and smart contracts in trade finance.