How Blockchain Can Revolutionize Trade Finance

Introduction

Trade finance has been the backbone of the world economy for many years. However, recently, due to globalization and the increased use of the internet, it is flourishing at a greater pace. The volume of goods and services exchanged across borders has increased, leading to a rise in banks and companies lending money for these transactions. The whole process of this distributive trade not only requires a trader and seller but also involves a large number of intermediaries.

Challenges in Trade Finance

On the flip side, the participants of the process are vulnerable to trade and business risks emerging from various factors, which include delayed processes, differing regulations across geographical locations, less fluidity in documentation and payments, and logistical hurdles (Kenton, 2020). The banks that finance such companies are also exposed to risks, leading to increased costs and eventually unfavorable contractual terms. This dark cloud of inefficiencies, risks, and legal problems looms over the trade finance market, seriously affecting global commerce.

The Potential of Blockchain Technology

With the advent of Blockchain in the recent era, banks and companies are investing millions to reap the benefits of this technology. Blockchain, which started as the underlying process of Bitcoins, now holds the potential to streamline businesses by processing real-time data, reducing logistical hurdles, and almost eliminating any charges from third-party intermediaries (Nakamoto, 2008).

Due to its security, distributed ledger technology, and open consensus system, Blockchain can revolutionize the trade finance market. Time, being a very important asset in the finance market, can be drastically reduced by using this technology. With real-time review of the required documents, Blockchain can significantly reduce the time taken to complete the entire process of shipment and receipt of goods. The entire process of documentation by banks and other companies, which takes nearly a week, will be reduced to seconds when participants upload their documents, and checking is done in real time.

Security and Fraud Prevention

The coded security it provides ensures that all trade transactions are recorded and maintained without fear of theft. This technology creates a tamper-proof database, as data once entered cannot be modified later; any new record inserted will carry a hash code from the previous block, making it very difficult to change any previously entered data (Yaga et al., 2018). A private key encrypted database can also be implemented for more security, accessible only by specific personnel.

Blockchain will help fight fraudulent practices by keeping a check on the double entry of the same goods, prohibiting consumers from falsely claiming poor quality of goods. The consensus mechanism in this technology will prevent any single entity from having full control over the process, eliminating any kind of manipulation risks.

Cost Efficiency and Process Improvement

The transaction charges levied by banks and other merchant sites will be completely waived, resulting in more favorable contracts that benefit both the trader and the seller. Blockchain would also play a crucial role in advancing the businesses and processes that form the back end of trade finance, such as identity authentication and contractual management, including financial, legal, insurance, and other regulatory bodies.

Conclusion

In a nutshell, Blockchain will play a key role in enhancing business processes by reducing complexities and eliminating middlemen. Blockchain can have a profound impact on trade finance in the long run, potentially leading to a complete transformation of the entire process. As businesses continue to explore and implement this technology, the trade finance landscape will evolve, becoming more efficient, secure, and cost-effective.

References

Kenton, W. (2020). Trade Finance. Investopedia. Retrieved from https://www.investopedia.com/terms/t/trade-finance.asp

Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved from https://bitcoin.org/bitcoin.pdf

Yaga, D., Mell, P., Roby, N., & Scarfone, K. (2018). Blockchain Technology Overview. NIST. Retrieved from https://csrc.nist.gov/publications/detail/nistir/8202/final