What are the Benefits of Blockchain in Global Trade and Commerce?
International trade is a $16 trillion market that accounts for the exchange of capital, goods, and services across international borders or territories. It is broadly split into two categories:
- 75% various goods typically shipped by shipping containers or ground transportation
- 25% commodities
From a shipping and transportation viewpoint, the trade and financing industry primarily suffers from a lack of trust and coordination between exporters and importers, particularly within emerging to developed markets. Additionally, the industry maintains various operational inefficiencies due to the complex nature of operational processes in the international trade of goods and commodities. For instance, shipping and trading still heavily rely on human resources and are affected by manual and paper-based processes which are very costly, slow and error-prone.
Exporters and importers face challenges to finance or guarantee their transactions, which stymies growth and limits the benefits from globalization. Historically this space has been very resistant to advances in technology and digitization although some technologies like Commodities Trading & Risk Management (CTRM) solutions have proved useful.
Over the past 10-15 years, many start-ups and technology companies have attempted to develop products with mixed success— until the emergence of blockchain technology for which international trade is identified as a primary use case. The potential impact of blockchain technology on international trade finance has spurred many companies and consortiums to update their outdated technology. Beyond ushering in the era of digitization, blockchain enables the tokenization of existing documents, letters of credit, and more. Smart contracts will improve coordination between exporters and importers through the automation of agreements, business events, and other manually intensive processes. The global adoption of blockchain technology will create even greater benefits for cross-border coordination, trade settlement, and standardization.
Covantis initiative announces technology partner ConsenSys
The founding members of the Covantis initiative, which aims to modernize global trade operations, have announced the selection of ConsenSys, a market-leading Ethereum blockchain technology company, as the lead technology partner to develop its transformative platform.
Codefi Assets allows asset managers to create, issue, and manage the lifecycle of digital assets, associated markets, and digital financial instruments on public or permissioned blockchain networks.
Commodities trading represents 25% of international trade and is comprised of
- 40% energy
- 30% base and industrial metals
- 30% agriculture and soft commodities
More than half of commodities trading is financed by banks and other financial institutions or funds. Software and new technologies have emerged to serve this industry over the past 2 decades with varied successes, particularly CTRM.
But like the international trade of container goods, commodities markets remain affected by operational inefficiencies and costs including:
- Fraud: The widespread use of paper documents increases opportunities for malicious behavior (double financing, etc.).
- Delays: It takes 90-120 days to book the shipping of a commodity, request trade financing, collect documents, provision the documents to buyers, and facilitate payments.
- Loss of income and opportunity: These fractured processes and high operational costs hinder innovation for the entire industry and cause billions of dollars worth of annual losses in income and opportunity.
Blockchain technology provides the capability to reduce fraud through a distributed and immutable ledger where information cannot be manipulated without notifying all parties involved. The entire history of transactions is easily accessible utilizing the inherent properties of distributed ledger technology.
Additionally, blockchains native ability to create and transfer digital assets enhances various existing commodities trading processes outlined above. The real-time data and transactions enabled by smart contracts has the potential to reduce delays and automate manual processes. The inefficiencies throughout the commodities trade industry result in a loss of income and opportunities for businesses. As blockchain technology grows in adoption, it will help firms, investors, and the other parties involved in commodities trading realize greater gains and increased profitability.
Based on estimates from $4.4 trillion commodities markets, approximately 30% of the benefit from trade financing is claimed by banks, financial institutions, institutional investors, or funds. The Asian Development Bank highlighted the potential for growth of the global trade finance market by identifying a $1.6 trillion gap between supply and demand for trade finance, particularly for trade flows to and from emerging markets. This gap stems from know-your-customer (KYC) and compliance issues as well as poor profitability due to labor-intensive costs (operational, KYC, due diligence).
Blockchain technology, such as Ethereum can be implemented to overcome the various issues that occur throughout the KYC and regulatory compliance process. The historical record and transparent ledger provided by blockchain networks provide near real-time monitoring of transactions for multiple parties involved. Regulatory agencies can gain access to permissioned blockchain consortiums improving AML or auditing. Finally, blockchain has the potential to facilitate greater access to trade finance on both the supply (alternative investors) and demand side (SMEs from emerging markets)
See Citi’s Global Head of Commodity Trade Finance explain how some of the world’s largest institutions are coming together to build an end-to-end blockchain solution for commodities trade financing.
komgo: Bringing Commodity Trade Finance into the 21st Century
A blockchain-based open platform that is bringing commodity trade finance into the 21st century by optimizing financing processes and accelerating industry operations with digitized transactions and a trusted source of documents to reduce fraud.
What are the Blockchain Use Cases in Global Trade and Commerce?
- Business processes and supply chain management
- Bulk commodity logistics
- Trade finance
- Post-trade settlement
- Marketplaces and asset tokenization
- Track and trace
How will blockchain impact business processes and supply chain management?
Blockchain can digitize, secure, streamline, and ultimately accelerate operational processes and supply chains across global markets. Transactions in international trade can take up to 120 days to complete. Moving away from paper-based processes towards digitally verifiable and legally enforceable documentation means more rapid industry operations and the reduction of fraud.
For gas & power, where problems center around reliable data sharing— blockchain will enable information alignment, quicker imbalance resolution and settlement processes, and also more efficient delivery practices.
For renewable energy, where problems center around reliable reporting of industrial carbon emissions or energy produced through renewable assets — blockchain offers increased trust through network transparency and governance systems that connect all stakeholders.
How will blockchain impact bulk commodities logistics?
The movement of huge volumes of basic materials that are needed to fuel and feed the world is complex. It requires multiple counterparties that lack effective coordination because many producers are found in remote locations and emerging economies. As markets become more efficient, commodity trading is evolving into a low-margin service business. Increasingly, traders make their living by providing a solidly reliable logistics service between producers and consumers. These facets inherently raise the risk of transactions, contributing to the limited access for new or growing companies. Blockchain’s cost-reducing capabilities will increase margins while its deterministic trust structure will drive accessibility within the market.
How will blockchain impact trade finance?
As an extension of international trade, trade finance undergoes the same cumbersome operations processes. Most rejections of trade finance requests submitted by SMEs in emerging markets to financial institutions stem from compliance problems, lack of trust, and low profitability. Blockchain solves many of these issues by authenticating documentation, streamlining operational processes, and facilitating coordination between multiple stakeholders. In addition, blockchain simplifies access to alternative investors through marketplaces, thereby increasing sources of funds for smaller players.
“When you decide to build on Ethereum, you need to be with the ‘best-in-class.’
ConsenSys holds this position. Over the course of the build of the platform,
we’ve seen huge engineering capabilities from the team.”
How will blockchain impact post-trade settlement?
Current practices around trading are commonly viewed as inefficient for having too many intermediaries involved (security trade brokers, custodians, and payment agents), for being prone to settlement risks, and for having settlement cycles that are unpredictable and time-consuming. Blockchain technology has the potential to dramatically simplify the chain of post-trade operations, guaranteeing and facilitating the consolidation of securities registers, all while enabling a higher speed of execution, reducing transaction costs, and enabling real-time settlement at T+0.
How will blockchain impact marketplaces and asset tokenization?
Across the above three categories – supply chain management, commodities logistics, and post-trade settlement – there is significant long-term potential to develop trade and finance-focused marketplaces in order to simplify access for both supply and demand parties, increase liquidity, stimulate competition, and heighten efficiency.
How will blockchain impact track & trace?
Blockchain technology offers greater transparency and a single source of truth for participants using supply chain networks. Intelligent track and trace of orders, goods, and delays via blockchain could expedite the sending and receipt of goods.
In particular, blockchain provides the following benefits:
- Digitization. Most non integrated supply-chains still rely on insecure and inefficient physical processes. By using blockchain, stakeholders digitize physical processes with smart contracts to address these issues and enhance productivity.
- Authenticity. Producers, manufactures, retailers and customers all face difficulties in verifying product’ authenticity. This boosts counterfeiting. With blockchain, products may be linked with non-fungible tokens at the moment of creation. These tokens may then be used as digital certificates.
- Distribution Control. Most brands and retailers cannot control distribution outside of their own channels. With blockchain, they can use smart contracts to define specific rules to manage distribution across multiple channels.
- Post-Sale Services. Many retailers are not able to provide comprehensive after-sales services— including recall, warranties, and maintenance— because they lack information about a product’s provenance. With blockchain, they can use product life-cycle information secured in smart contracts to develop additional after sales services.
- Transparency. Customers expect to have transparent information about products’ raw materials and manufacturing processes. With blockchain each stakeholder across the supply chain can provide verified information.
- Verified Ownership. Customers face difficulties in proving product ownership. This boosts theft and counterfeiting. With blockchain, customers can collect and manage non-fongible tokens, associated with physical products, and use these tokens to prove product authenticity and ownership, enabling safe secondary markets.
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