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.
