BUSINESS MODEL OF BLOCKCHAIN IN TRADE FINANCE

VALUE PROPOSITION

Trade finance can be defined as the provision of bank credit facilities and services to meet a
corporate’s needs in relation to their export and import activities. The key elements of trade finance
are:

 Finance to bridge the working capital gap, improving cash flow for exporters and importers.

 Transactional control to mitigate risk, such as country risk and counterparty risk.

 International payments and collections, as well as foreign exchange services.

Transactional control is one of the principal advantages of trade finance instruments. For example,
by requiring a full set of bills of lading in a documentary collection, the importer will not be able to
take possession of goods until he accepts or pays a bill of exchange, hence giving the exporter a high
level of confidence that this trade debt will be settled. Similarly, an importer using a letter of credit
(LC) knows that the bank will only pay away funds if the exporter presents specified documents,
which demonstrate that the required goods have been shipped, hence raising the degree of
certainty that the correct goods will be received.

International terms of trade are generally agreed by the exporter and importer when a sales
contract is negotiated. But the importer and exporter have naturally opposing views of risk, so that
terms of trade that are totally satisfactory to one party will involve high risk for the other party. 

TARGET CUSTOMER SEGMENTS

Trade finance operations teams need to process transactions quickly and reduce overheads from
daily operations, so that they can focus skill and experience on handling disputes.

Exporters and importers need to be able to apply for credit and ensure payment without
complicated agreements. They also need to track the status of a transaction at any point in time.

Logistics providers need to understand when goods can be picked up, shipped and delivered without
violating contractual terms set by their customers.

Self-service “à la carte” contracts: The platform provides an API for standard contract creation.
Exporters and importers can build their contracts through any website that uses the platform’s
openly available API. They can apply predefined templates or building blocks to ease the creation of
contracts.

Conditional payment & settlement gateway: The platform allows for financiers, logistics
intermediaries and bank operations to track and execute the transaction according to its contractual
terms. Any trade finance operational software solution can be adapted to use the new gateway

CORE CAPABILITIES

One of the main advantages of Blockchain, also known as distributed ledger technology, is
how it improves the transparency of the trade process, eradicating fraud. Since every
cryptocurrency has a unique identity, it makes tracking money within the blockchain network
extremely easy. It also prevents instances of double spending and cash back.

A blockchain is basically a decentralized distributed ledger spread across multiple nodes.

Sharing documents among counterparties, therefore, becomes quick and error-free with the
digitized data otherwise stored in piles of paper. Blockchain-based products for trade finance
automates business processes by the implementation of the pre-programmed protocol, smart
contracts. The smart contracting capabilities of the Ethereum blockchain platform validates
transactions and reduces costs of going through intermediary agents.

Blockchain lowers operating cost for financial organizations and the finance ecosystem. It has
achieved a breakthrough in providing corporates access to supply chain financing that was
previously unavailable to them. This leads to not only better working capital management for
businesses but also greater accountability to auditors.

From a security point of view, blockchain enables simple, secured share trade-related data
between different financial institutions. Each transaction is verified within the network using
independently verified complex cryptography. By making it easier to exchange trade-related
data and delivering financing to the entire ecosystem, blockchain could become the next big
game-changer for trade finance.

COST STRUCTURE

Forecasting a one-size fits all cost framework for a production scale implementation is currently
difficult, considering the emergence of new projects, update proposals released regularly, and
limited history of implementations to leverage. Taking a commercial blockchain solution cost, and
taking into account the key input factors as follows

1. Transaction volume
2. Transaction fee
3. Consensus protocol
Trade finance gaps will not be resolved until trade finance changes. This kind of thinking is not new.
But the technology to make it happen is. Blockchain will impact how trade finance is done. It will
become safer, faster, and more secure as banks and corporates move trade onto the blockchain.
Does this mean that blockchain will solve the trade finance gap? Not alone. As it spreads, its hard
coded features will improve the potential for trade finance to be more inclusive and available.

To take full advantage of the benefits that blockchain has to offer in trade finance, we need to
consider three questions while designing top of stack applications: can outside providers easily
contribute data, does it follow or reuse existing standards and contracts, and will it improve
information and data flow. 2018 is the year that proof-of-concepts are moving into pilots and
production.

As we have learned during the design phase, the problems in trade finance are going to be much
harder to solve than they look on the surface. As trade continues to evolve, it has become
increasingly urgent that financial institutions are equipped to deliver not only the types of financing
that are needed today, but the types of financing that will be needed tomorrow.