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Application of Blockchain in Trade Finance: Opportunities and Challenges



Trade finance has ushered in significant development in recent years, especially under the influence of the epidemic, the trend of online trade finance business is obvious, and many countries are discussing the application of blockchain technology to trade finance business. Global trade finance (Trade Finance Global) is the world's leading trade financing platform, which has reached cooperation with more than 270 banks and other financial institutions. In November 2020, the platform published an article discussing the use of blockchain technology for trade financing activities potential benefits and highlights the significant challenges facing blockchain adoption. The Institute of Financial Technology of Renmin University of China (WeChat ID: ruc_fintech) compiled the core content-zce of the paper.

Traditional trade finance systems

Trade finance is used to facilitate transactions between buyers and sellers in different countries around the world, and has become the lifeblood of international trade. Trade finance provides the credit, payment guarantees and insurance needed to facilitate transactions on terms satisfactory to all parties. However, traditional trade financing has an important pain point, which is the use of a large number of paper documents. Most of the trade financing activities are carried out between importers, exporters, banks at the place of import, banks at the place of export, transportation companies, receiving companies, shipping companies, etc. Transfer of physical documents between parties.

Bank of America refuted the claim that the blockchain has no intrinsic value on the grounds of transaction fees: Golden Finance reported that Bank of America (BAC) pointed out in a research report that the blockchain and the applications running on it do have intrinsic value, and said it rejected claims to the contrary. In June, Bank of England Governor Andrew Bailey echoed negative sentiment towards cryptocurrencies in comments to Parliament, saying the asset class has no "intrinsic value." According to the report, the Ethereum blockchain generated about $3.9 billion in transaction fees this year and about $9.9 billion in 2021, a 1,558% increase in last year's total compared to the previous year. The report added that the bitcoin blockchain has generated about $93 million in fees so far this year, compared to about $1 billion for all of last year. For blockchains with strong user growth and development and clear use cases, cash flow in the form of transaction fees is expected to accelerate. (coindesk) [2022/8/3 2:56:37]

Figure 1 Data and documents required for trade financing

This reliance on documentation is often inefficient, consuming a lot of cost and time in preparing, transmitting and checking these documents. Paper documents can also be prone to errors and even forgery.

In addition, the outbreak of COVID-19 has profoundly affected the trade finance business, and many businesses that should be conducted offline have to be suspended or transferred online. Today, financial institutions around the world are trying to deploy their digital initiatives, and many banks are looking to create digital ecosystems to simplify the trade finance process and reduce costs.

Deputy Director of the State-owned Assets Supervision and Administration Commission: The current blockchain and other technologies are accelerating their evolution and are deeply integrated into various fields of society: Recently, the "Learning Times" published an article signed by Weng Jieming, Deputy Director of the State-owned Assets Supervision and Administration Commission, "State-owned enterprises should be the vanguard of promoting digital and intelligent upgrades ".

The article pointed out that at present, basic technologies such as cloud computing, big data, blockchain, artificial intelligence, and mobile Internet and cutting-edge hot technologies are accelerating iterative evolution, deeply integrating into various fields of society, and constantly bursting out innovation vitality. The leading force of development, the digital economy is becoming the core element of global industrial transformation and economic growth. All major countries in the world regard digital and intelligent upgrading as a strategic direction to seek new advantages in international competition. [2020/3/8]

Potential benefits of blockchain for trade finance

There is widespread optimism about the use of blockchain in trade finance. Many industry practitioners believe that blockchain technology can reshape the process of cross-border trade and related financial services.

Blockchain technology has the potential to transform business processes to reduce operational complexity and lower transaction costs. The blockchain combines a variety of computer technologies, including distributed data storage, point-to-point transmission, consensus mechanism and encryption algorithm. It is essentially a distributed database that can independently maintain a growing transaction chain. These transaction records are stored in the In units of blocks, each block contains a timestamp and a hash link to the previous block to prevent tampering. In a blockchain network, decentralized agencies or institutions can collectively record and maintain information without any single party exercising ongoing market power or control. The basic idea of blockchain technology is to decentralize data storage so that such data cannot be controlled or manipulated by central actors.

News | The Ezhou Municipal Party Committee carried out collective learning, emphasizing efforts to make the blockchain play a greater role: Jinse Finance reported that on November 8, the Ezhou Municipal Party Committee Theoretical Learning Center Group carried out collective learning, in-depth study and understanding of the eighteenth collective learning Important speech spirit. The meeting pointed out that the important speech made a profound explanation of the significance and development direction of the development of blockchain from a strategic and overall perspective, and made important deployments for blockchain technology and industrial development, which is highly strategic and forward-looking and instructive. It is necessary to recognize the current status and trends of blockchain technology development, improve the ability to use and manage blockchain technology, and strive to make blockchain technology play a greater role in developing the digital economy and helping economic and social development. [2019/11/12]

Blockchain can potentially improve transaction transparency and traceability of supply chains. Practitioners in trade finance also said that the use of blockchain technology will make the trade finance business turn paperless, and quickly transmit error-free documents to customers, thereby reducing printing and verification costs. Additionally, since blockchain allows all authorized parties to access critical documents anytime, anywhere, it can reduce the manual synchronization process of paper records and bilateral emails.

Smart contracts are electronic contracts based on decentralized consensus and tamper-proof algorithms, which contain a series of digital agreements, including execution terms and constraints reached by both parties to the contract. Smart contracts can enable parties who do not trust each other to collaborate without the involvement of intermediaries like banks, and can trigger payment payments through preset events, reduce the risk of errors or fraud, and promote the efficient flow of funds.

360 launched the EOS super node security solution or a prelude to entering the blockchain business: Today, the 360 security team discovered a high-risk security vulnerability in EOS. After the vulnerability verification, the vulnerability can be exploited to remotely execute arbitrary code on the EOS node, and can directly control and take over all nodes running on EOS through remote attacks. The panic in the market was severe, and the price of EOS plummeted rapidly.

However, today evening, 360 announced that relying on the accumulation of 360’s security brain, 360 will launch the EOS super node security solution: defense deployment in six aspects: physical security, platform security, network security, system security, application security and data security. Industry insiders believe that this is the prelude of 360 entering the blockchain business. [2018/5/29]

Various studies have shown that smart contracts can reduce the cost of collecting and processing information, drafting and negotiating contracts, monitoring and enforcing agreements, and so on, allowing for more market-based governance structures in some cases.

Initiatives to apply blockchain technology to trade finance

From a development perspective, the application of blockchain technology in trade finance is still in its early stages of development and requires further research to improve its efficiency and security. Today, some commercial organizations have set up their own blockchain labs, or work closely with blockchain companies, and have published a series of studies on the topic.

Golden Finance Exclusive Analysis Blockchain may have become an important part of the reform and opening up and innovative application of financial technology in Guangdong Province: Today, the State Council issued a notice on further deepening the reform and opening up of Fujian, Tianjin, and Guangdong Free Trade Pilot Zones. Among them, Guangdong’s notice mentions that a regional equity market in Guangdong will be built, and Hong Kong, Macao and international investment institutions will be introduced to participate in transactions in due course according to the opening-up process of the capital market. Vigorously develop financial technology, and accelerate the research and application of blockchain and big data technology under the premise of compliance with laws and regulations. Before the "Notice of the State Council on Printing and Distributing the Plan for Further Deepening the Reform and Opening-up of the China (Guangdong) Pilot Free Trade Zone", Guangzhou and Shenzhen were already important places in my country's blockchain industry. At the same time, last week, Nanhai District of Foshan City issued the "Implementation Opinions of Foshan Nanhai District People's Government on Promoting the Development of "Blockchain +" Financial Technology Industry". The district's "block chain +" financial technology industry gathers and innovates. It can be seen that the blockchain has become an important part of the reform, opening up and innovative application of financial technology in Guangdong Province. [2018/5/24]

In 2016, Barclays cooperated with a financial technology start-up company named "Wave" to build a blockchain-based letter of credit project on the Wave blockchain platform and completed the first cross-border transaction based on blockchain. Border trade financing business. In 2018, HSBC announced that it had completed a trade finance transaction using blockchain technology to issue a fully digitized letter of credit. In this transaction, HSBC Singapore was the issuing bank of the letter of credit and ING Geneva was designated bank. In 2020, Standard Chartered and DBS Bank Ltd jointly announced that they had launched a project that will use a blockchain network to connect the trade finance transactions of 12 other banks, including ABN AMRO ( ABN Amro), ANZ, CIMB, Deutsche Bank, ICICI, Lloyds, Maybank , Natixis, OCBC, Rabobank, SMBC and UOB, while DBS and Standard Chartered announced that they will partner with Association Banks of Singapore has partnered further to expand blockchain trade finance registries globally to cover major trade corridors.

In addition to traditional financial institutions, some technology companies are also working hard for the application of blockchain in trade finance, and IBM is one of them. In 2017, IBM and Maersk collaborated on the Hyperledger Fabric project, and based on this, an end-to-end digital supply chain model using blockchain technology was built, involving trading parties as well as various ports and customs authorities. After that, several large banking consortiums cooperated with technology providers such as IBM Hyperledger or R3 Corda to develop blockchain products, and promoted the application of multiple projects.

Challenges of blockchain applications

Although the ultimate goal is to achieve full digitization and automation, it may take a while to achieve this goal. At present, the application and promotion of blockchain technology in trade finance is slow, mainly for the following four reasons:

1. Lack of standard protocols for blockchain networks

Even within the blockchain community, there are different coding languages, consensus mechanisms, and privacy protection measures, resulting in different blockchain platforms becoming isolated islands that cannot be connected to each other. Platform developers and participants should avoid fragmentation and instead enhance the interoperability and standardization of various blockchain platforms.

In order for blockchain technology to achieve the expected benefits in trade finance scenarios, all ecosystem participants (including trading companies, logistics and transportation companies, banks and customs, etc.) need to agree on a unified set of technical standards and business rules . The ICC Digital Standards Initiative, launched in September 2020 with the support of the Asian Development Bank and the World Trade Organization (WTO), is an important step towards building an interconnected blockchain trade finance platform.

2. Some digital files are not recognized by current laws

The great challenges facing blockchain adoption across the trade industry are also related to the uncertainty about the legal status of electronic documents in the legal system. Currently, most legal systems around the world may recognize paper documents for international trade, but many jurisdictions do not recognize electronic signatures and electronic documents used for trade activities.

The ICC Banking Commission conducted research on the relevant laws of ten jurisdictions including the United Kingdom, the United States, Germany, the Netherlands, the United Arab Emirates, China, Singapore, Brazil, India and Russia. The report shows that the legal status of electronic bills of lading is still relatively weak in many jurisdictions. Vague.

Therefore, legal requirements mandating the use of traditional paper documents appear to be a significant barrier to the development of blockchain technology in the trading industry. The potential of blockchain technology to facilitate international trade can only be realized if regulations continue to evolve and recognize the large-scale deployment of blockchain technology.

3. High cost of adopting blockchain technology

The cost of creating and maintaining a blockchain network has been cited as a barrier to widespread adoption of the technology. The high cost of blockchain is usually caused by several factors: First, blockchain networks rely on high computing power and therefore consume a lot of electricity to operate, and require huge computing power to verify and process transactions and secure cyber security. Second, each node (device) needs to synchronize with other nodes on its own copy of the data, which incurs costs. Third, the cost for companies to change the original system. In most cases, if they decide to use blockchain, they need to change their business process or information system design, which will bring higher costs.

4. Information transmission and privacy issues

Due to the design of the blockchain, some fundamental privacy concerns may arise. When applying blockchain to trade finance business, typically, trading parties (eg, carriers, exporters, importers, and banks, etc.) are able to share distributed ledgers for trade finance transactions. This means that every party that processes transactions and builds the blockchain has access to blockchain transaction data, which may contain some confidential information. Therefore, it appears that distributed ledger features need to be remodeled to allow restricted access to data, and only to parties authorized to view it.


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