Blockchain will eliminate frauds and malpractices in trade finance

 

Blockchain  represents the most significant revolution to the trade finance  industry since the invention of letter of credits in the 14th century

Blockchain and Letter Of Credit

Blockchain was Bitcoin’s method of recording transaction publicly which started on 03 January, 2009.  While Bitcoin has attracted its fair share of critics in its bid to use  virtual currencies to replace physical currencies, it has been widely  accepted. Realistically speaking, Blockchain has the greater potential  to change our way of life than its parent Bitcoin.Blockchain  is the technology’s answer to the age-old problem of creating ledger  entries and its attractiveness lies in its immutability. This means that  once a record has been created on Blockchain, there is no way to change  its entry. Fraudulent behaviour would be eliminated and this builds a  new layer of trust in business not seen since the letter of credit was  created in the 14th century.The  letter of credit is instrumental to global trade because the seller of  the goods has to spend significant amount of money to ship goods across  continents to reach the buyer. If the buyer refuses to pay for the goods  that are in good conditions for various reasons, the seller will have  to incur extra cost to ship it back. Hence, the seller relies on the  credit of the buyer’s bank to make payment before they are willing to  incur the risk and cost of shipping.

Overcoming trade finance fraud and dispute with smart contract

The  letter of credit specifies the set of documents that the seller must  furnish to the buyer’s bank such as invoices, bill of lading (title to  the shipped goods), certificate of origins and so on. All this exists in  paper and this has been functioning for over 600 years since the 14th century. 

 In  today’s digital world where we can read our newspaper online, we  have not been able to digitise documents such as invoices and bill of  lading. There has been simply too much inertia and room for fraud with  the availability of photo editing software such as Photoshop. If real  money can be forged, there is no reason that a bill of lading cannot be  forged.However,  the availability of Blockchain means that there can only be one  accepted bill of lading and other documents from the seller. There can  be no fraud or double spending of the bill of trading once the payment  has been made.An  extension of Blockchain technology is a smart contract. This means that  the buyer is forced to pay the seller once he/she has received all the  proper documents that include evidence that the goods had been received  by the buyer.

IBM Blockchain efforts in Singapore

After  a thorough introduction of how Blockchain is perfect to disrupt the  traditional trade finance industry, we move from theory to see how we  are seeing concrete steps for Blockchain to change our industry.IBM had started a Blockchain centre in Singapore which has gained the support of various strategic partners such as the Monetary  Authority of Singapore (MAS), Economic Development Board, and PSA  Singapore Terminals (the largest container transshipment operator).Singapore  is one of the busiest trading hubs in the world. The participation of  MAS will open the door for Singapore banks to use Blockchain in future.  In fact, DBS and Standard Chartered Bank have already partnered with the  Singapore government to use Blockchain for trade financing in December 2015.In just seven months, both banks has successfully  created the proof of concept. DBS is even working to test the transfer  of documents digitally with international counter parties. All these  points to steady progress for Blockchain in trade finance in Singapore.

Impact of Blockchain

Trading  companies would embrace Blockchain in trade finance if the banks can  come up with the technical product. This would reduce the time and cost  involved in trade finance. Instead of waiting for one week for DHL to  courier the physical documents to you and incur hefty fees for the bank  to examine the authenticity of the documents, this can all be done  within a minute.The  buyer and sellers can also track the status of their shipped documents  in real time, as ports can note when the ship enters and leaves them on  the same system. This might even give rise to milestone payments for  high-end cargoes and lengthy shipments to improve cash flow. 

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