A Blockchain Technology Approach for the Security
and Trust in Trade Finance
Neha Jain
Research Scholar
Computer Engineering Department
Thakur College of Engineering and Technology
University of Mumbai
Mumbai, India
nehajain20683@gmail.com
Abstract— Majority of current businesses are interested in
building communities by collaborating with each other for
solving common business problems forming decentralized peer
to peer network. International trade is one of such industries
which is striving to work in collaboration. Multiple entities
involved like buyer, seller, service providers and regulators
want to work together but having major trust and security
concerns. Such applications are distributed in nature therefore
require distributed control and security mechanisms. The
current practical security solutions have centralized approach,
so they might be inefficient for these applications. The
blockchain technology is distributed in nature. Prominent
features of blockchain like distributed ledger Technology and
smart contracts makes it a promising solution for decentralized
and distributed cross border trade business. The aim of this
paper is to provide pain points of global trade system with
respect to security and trust, and to provide solution by
blockchain technology considering Letter of credit as a method
of trade finance. We propose a blockchain technology enabled
smart contract approach for ensuring the security of and trust
in the trade ecosystem.
Keywords— blockchain technology, smart contract,
security, trade financing
I. INTRODUCTION
Blockchain technology is a new innovation in technology
which can provide distributed processing of data in a
decentralized environment without any centralized entity in a
secured manner. A blockchain is a chain of blocks which are
secured through various cryptographic algorithms, and are
difficult to be tampered [1]. It utilizes the concept of
distributed computing.
Majority of current businesses are interested in building
communities by collaborating with each other for solving
common business problems forming decentralized peer to
peer networks. They face trust and security issues in such
types of collaborations. Our work applies blockchain to
provide security and prevention from frauds in such systems.
International trade is one of such industries which is
striving to work in collaboration. Multiple entities involved
like buyer, seller, service providers want to work together but
have major trust and security concerns. Banks provide some
sense of security as it works as an intermediary between buyer
and seller. Imagine a seller and a buyer entering into a contract
for the delivery of some goods. The current process can occur
in one of the two ways. Option 1: Open account, following the
meeting seller delivers the good, sends an invoice to the buyer
and waits for payment. Until the goods have been received by
the buyer, the seller has to wait with uncertainties, debt and
limited transparency throughout the entire process. Option 2:
The seller receives the letter of credit from the buyer’s bank

Authorized to:
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Dr. R.R. Sedamkar
Professor
Computer Engineering Department
Thakur College of Engineering and Technology
University of Mumbai
Mumbai, India
rr.sedamkar@thakureducation.org
before dispatching the goods. This method is safer but it
exposes the seller to do a lot of time consuming paperwork.
Trade Finance can be seen as the financial transactions of
both domestic and international trade that take place between
a seller and a buyer facilitated by intermediaries such as banks
and financial institutions. It includes : Lending facilities,
Issuing Letters of Credit (LCs), Export factoring (companies
receive funds against invoices or accounts receivable),
Forfaiting (purchasing the receivables or traded goods from an
exporter), Export credits (to reduce risks to funders when
providing trade or supply chain finance), Insurance (during
delivery and shipping, also covers currency risk and
exposure). Five popular trade products are Letter of credit,
supply chain finance, structured trade and commodity finance,
export and agency finance, trade credit and political risk
insurance mentioned in [2].
In traditional trading systems, the risks inherent in
transferring goods or making payments in the absence of
safeguards (like a trusted mediator) inspired the involvement
of banks and creation of instruments like the Letter of Credit
and the Bill of Lading. The World Trade Organization
estimates that 80 percent of global trade relies on trade
finance, credit insurance and supply chain finance [3]. Due to
lack of trust, the gap between the demand for trade finance
(obtaining LCs etc.) and the actual supply is quite high and
reached to $ 1.6 trillion [4]. As reported by WTO in 2018, 60%
of trade finance requests by SMEs were rejected [6].
Improvements in trade finance are especially important for
small and medium-sized enterprises (SMEs), which may have
difficulty accessing credit, and for firms in countries with less
developed finance markets. [6].
II. EXISTING SYSTEMS AND RELATED WORK
Traditional paper-based trade had their own difficulty in
terms of forgery and other security threats. Later on, banks
adopted SWIFT messaging and moved towards digitalization
of paper-based documents but it has not fundamentally
changed the game. The security factors like privacy and
confidentiality of trade documents, malicious alterations, trust
issues still exist in the current systems [7]. The other ways to
get a secured system is comparatively costly and includes
inclusion of multiple third parties.
[4] mentions that the rules and regulations for cross border
trades i.e. custom processes are very complicated with heavy
compliance requirements, corruptions and security breaches.
There is indeed a requirement for simplification of this process
by facilitating trade. The international shipping industry
carries 90 percent of the world’s trade in goods and still
largely relies on paper documentation [8].
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Blockchain seems to be a solution for these problems with payments which compromise the
its immutable ledger for keeping digital records and assurance confidentiality.
guarantees using smart contracts. Using blockchain as a 3. Malicious attempts which may cause Weak Data
security enabler gives a belief that the industry could be made fraud, alterations. Integrity and
protection
much simpler and more efficient, which would enable Centralized data manipulations which
companies of all sizes to trade more easily and securely across may suffer from cyber-attacks or
borders, helping to drive global economic growth. system malfunction.
4. No common authentication authority Authentication &
Recent Developments in Blockchain Payment Systems for for all the parties. Usually work on Authorization
International Trade Finance is listed in [4, 9, 10, 11,12,13]. A trust provided by third parties like issues
number of features that are very important from a financial banks.
application perspective as well as important regulatory 5. Difficulty of guaranteeing that a Repudiation /
requirements relating to account provisioning for financial contract will be enforced. Later trade fraud
asset reporting is described in [14]. Reference [15] shows that disputes
blockchain can also be used for asset transfer, know your 6. Denial of payments or delay in
customer (KYC) routines and anti-money laundering (AML) payments reduces trust in the system.
programs. Reference [16] has implemented supply chain 7. Banks have a common user ID for all Centralized and
types of swift messages, so any limited Access
finance using blockchain technology which is part of trade
authorized person may act maliciously Control
finance. Whilst the technology may not immediately replace at any point of time. [7]
the current financial ecosystem, its relative impact could be 8. Manual verification system for Manual
transformational and equally detrimental. authenticity of paper-based Verification
documents. Mechanism
The aim of this paper is to provide pain points of the global Steady rise in volume of errors leading
trade system with respect to security and trust, and to provide to poor risk compliance [20]
a solution by blockchain technology considering Letter of Manual Contracts between parties
credit as a method of trade finance. We propose a blockchain
technology enabled smart contract approach for ensuring the 9. Information transmission through Inefficiency
security of and trust in the trade ecosystem. [17] suggested that manual processing which takes the
expense of time, causing a lack of
the deployment should occur in a private blockchain since we
visibility, and overhead costs.
intend to build critical business processes such as issuing LCs.
Intensive paperwork for presentation.
For that reason, we are using Hyperledger Fabric 2.0 which is Time taking process for getting LC and
a permissioned blockchain platform. Majority of our BL.
identified pain points will be covered using this technology. Lengthy delivery across borders.
Although the dominating platforms like Corda [18], Ethereum 10. Ownership transfer traceability issues Lack of
also provides almost the same benefits. Increase in complexity as multiple Traceability
parties involved in the process
Starting with introduction of blockchain and trade finance Difficulty in tracking assets.
in Section I, this paper discusses global trade pain points with 11. Bank Payment Obligation (“BPO”) Lack of
respect to security and trust in Section II. Section III will Faces problems like lack of adoption interoperability
present the overview of the proposed system followed by and lack of interoperability. [21]
discussing the potential benefits obtained by the proposed
system based on blockchain in Section IV. Section V Table II provides the potential solutions that can be
concludes the paper. obtained by using a blockchain network to facilitate trade.
III. GLOBAL TRADE PAIN POINTS TABLE II. POTENTIAL SOLUTIONS BY PROPOSED SYSTEM
Table I provides some pain points related to security and trust Resolved Potential Solution by Proposed System
issues in the trade system. It also covers few pain points with issues
respect to efficiency. Trust Decentralized peer to peer system. Things are
Mechanism accessible to everyone at all times. Hence dependency
TABLE I. GLOBAL TRADE PAIN POINTS RELATED TO SECURITY, on banks is very limited.
TRUST AND EFFICIENCY Single source of truth.
S Global Trade Pain Points Issues Risk mitigation. Trust ensured through the use of
no consensus mechanisms.
1. Relying on an authorized central party Weak Trust Confidentiality Attachment of such documents through the use of
(e.g., banks) as intermediary to cope Mechanism cryptographic algorithms that help in the realization
with trade finance. [6] of integrity and the prevention of counterfeiting.
Transactions are risk-sensitive; Relying Direct payment process with no intermediaries.
on authorized third parties. Tokenization of assets.
Concept of private data.
Multiple versions of truth as multiple
changes are made by different parties. Less security and privacy concerns on consortium
[19] chain as the data is validated by peers before getting
stored. The actual data is not visible to other peers,
2. Documents are written in plain text so Lack of
they can only validate through mechanisms.
possibility of information leakage in Confidentiality
case of being seen by outsiders. Data Integrity Consensus mechanism to invalidate the transactions
and protection which are not validated.
Messaging services like SWIFTS
include a lot of intermediaries for the Keeping smart contract terms on blocks and
permanently recording alterations of contract terms
on a chain

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Mitigating the tampering issue as ledger is immutable. The above process as shown if figure 1 can be executed with
Data is stored in distributed and decentralized ledger. use of smart contract between all of these entities in an
Authentication The identity of each user is validated through irrevocable and non-repudiable manner.
Authorization Membership Service Providing service. So once a peer
gets authenticated then only he is able to join the
There are 6 clients as shown in figure 2 responsible
system. to execute the transaction in the system. They use client SDK
to interact with the blockchain system. To restrict the direct
Non Execution of smart contracts streamlining interaction with blockchain, the client uses middleware. A
Repudiation administrative processes. front end is provided which invokes middleware functions
Use of signatures of transactions and blocks. In which in turn get the data from or write into the ledger.
addition to permanent databases such that
As shown in figure 3, there are four organizations
transactions cannot be denied later. Payment process
can be executed automatically. characterized by the type of clients. Each organization is
Access Control Access Control mechanism is applied to all type of having clients, local MSP and anchor Peers. Each org has one
organizations through MSP. Based on that they can or more anchor peers which connect with blockchain and
only execute the transaction for which they have maintain local ledger. The ordering service is responsible to
rights. arrange the order of the transaction.
Automated Digitized documents can be verified easily as they are
and digitized on a secured and distributed shared ledger without
Verification inclusion of third party.
Mechanism
Inefficiency Event-driven mechanism with smart contract settings.
Consensus mechanism with tamper-proof features.
Digitized operation and digital documents.
The communication is peer to peer with no third party
involved.
Reduced time of transfer and delivery, Blockchain-
based identification without presentation of physical
documents.
Traceability / Managed through smart contracts. Ledger is available
Provenance to all the participants to query the status of assets and
process.
The DLT ensures that all relevant parties have access
to the same information regarding trade deals at the
same time.
Undisputed ownership of invoice assets
Transparency Enhanced transparency ensures compliance with
current KYC/AML policies and regulations, facilitating
the work of bankers, lawyers and law enforcement Fig. 1. Process Workflow
officers.

IV. PROPOSED METHODOLOGY

To implement the trade scenario, we created a network of six
participants as: exporter, importer, exporter’s bank, importer’s
bank, shipper and regulator. Initially there will be contract
creation between buyer and seller which we can refer to as
trade deal when importers request goods from exporters.
Importer requests its bank to generate a letter of credit (LC) in
the favour of the exporter payable at the exporter’s bank.
Letters of credit (LCs) is a financial document generated by
importers bank as a guarantee that a payment will be received
and be on time from importers or else the bank will take the
responsibility for it. There are some terms specified in the LC
that must be fulfilled from exporters such as shipment of
goods. The proof that all the goods have been shipped is
obtained from the document called Bill of Lading (BL)
provided by the shipper. A regulatory authority provides an
export license to exporter to permit the export of goods. This
authority also audits the process. After getting the Export
license from the regulator, the exporter prepares the shipment Fig. 2. Block Diagram of the Proposed System
and supplies it to the shipper. The shipper validates the EL, Hyperledger fabric 2.0 uses raft as an ordering service
accepts the goods and provides BL to the exporter. The mechanism which is crash fault tolerant. Validators are
exporter’s bank then claims some part of the money from the committing peers which finally validates and writes the
importer’s bank as per the contract and once all the goods get transaction on ledger after getting it from orderer. We can
delivered within specified time, the exporter claims the rest of specify which peer is endorser or validator or both while
the money. writing the policy.

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A. Digital Documents involved are: Exporter’s acceptLC() getShipmentLocation ( )

Bank requestPayment() getBillOfLading ( )
Letter of Credit (LC): generated by unique identification getAccountBalance ( )
number for LC, date of issuance, date of expiration, issuing getTradeStatus ( )
authority, beneficiary, amount. To provide access control, this getLCStatus ( )
document can be requested by the importer to importer’s Importer’s issueLC() getLCStatus ( )
banks and accepted by exporter’s bank. Bank makePayment() getShipmentLocation ( )
getTradeStatus ( )
Bill of Lading (BL): generated by unique identification getAccountBalance ( )
number for BL, exporter name, importer name, description of regulator issueEL() getELStatus ( )
goods, delivery amount, destination. To provide the access getShipmentLocation ( )
control, this document is supplied by the carrier to the exporter getTradeStatus ( )
after shipment of goods.
V. RESULTS AND DISCUSSION
In the trade finance model that we have implemented, we are
able to get the solution for basic issues mentioned in table II.
We have implemented a chaincode (smart contract) which is
the only method for all the users to access blockchain ledger.
Once the channel is created, all the peers join the channel.
Chaincode is installed at each peer. As per the access rights
they can only invoke the methods as shown in table III. The
output of creation of channel along with genesis block (first
block of blockchain) is shown in Figure 4.

Fig. 3. Detailed network showing all organizations

Export License (EL): generated by unique identification

number for EL, date of issuance, date of expiration, issuing
authority, beneficiary, amount. To provide access control, this
document is issued by regulating authority as requested by the
exporter.
An IPFS based database system can be used to store the copy
of the ledger and an off chain storage can be used to store
digital documents associated with the transaction data. [21]. Fig. 4. Generation of genesis block and creation of channel

B. Types of Transactions After this process we have 9 nodes running from which one is
orderer node, four are peers of each organization and 4 are CA
The chain code (smart contract in Hyperledger Fabric) can be
(MSP) associated with each organization as shown in figure
invoked by 11 Invokes and 6 types of queries can be asked
5.
from the ledger. The access control list decides which
participant can invoke which method is mentioned which is
listed in table II.

TABLE III. TYPES OF TRANSACTIONS AND QUERIES

Participant’s Invoke methods Query ledger

name
Importer requestGoods() getLCStatus ( )
applyForLC() getTradeStatus ( )
makePayment() getShipmentLocation ( )
getAccountBalance ( )
Exporter acceptDeal() getLCStatus ( )
prepareShipment() getELStatus ( )
requestPayment() getShipmentLocation ( )
requestEL() getBillOfLading ( )
getAccountBalance ( )
getTradeStatus ( )
Carrier acceptShipment() getTradeStatus ( )
IssueBL ( ) getShipmentLocation ( )
updateShipmentLocation getBillOfLading ( )
()
Fig. 5. Starting blockchain network

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Authentication is provided through MSP’s installed at each
organization. They will provide users to get the credentials in
that organization. Once the user is registered, he will be
allotted with a JWT token. The token must be preserved by
the user. Only through that token, he can perform the
transactions for which he is authorized to do.
Once the transaction is proposed by one peer, it is verified by
other peers in the network and once all the nodes send positive
response it is sent for ordering service and then the transaction
gets written to the ledger by committers. (see figure 6). Also,
once written it cannot be altered or deleted by any authority as
the ledger is immutable hence providing the trust.
Fig. 6. Verification from other peers for transaction proposal
All the network communication is done with TLS security
mode on. The transactions are stored in the form of hash.
The past transaction cannot be altered by malicious entities
because then there will be a change in hash of the previous
block field in the next block which will cause inconsistency
and hence it will be discarded by the network. As data is stored
in all the peers, chances of causing malicious change in one
place will not change the ledger of all the peers. So, the risk of
manipulation in centralized data is mitigated and integrity is
achieved.
Peers have to sign the transaction through their private keys
which can enable others to validate that the transaction is
performed by which peer and hence non repudiation of the
transaction is achieved. The execution of chaincodes (smart
contracts) streamlines the administrative process, so payment
and goods delivery are guaranteed automatically. Elimination
of manual tasks by atomizing the process is cost efficient as
well as reduced human errors increases the efficiency and
eliminates delays. The system is event based, so once the
conditions in contracts matches, an event is emitted and the
task mentioned is performed. At any point of time, the ledger
is available to each peer, so regulators or compliance can also
be able to audit the process in real time. Since, the need for
paper document exchange and review is eliminated from the
process, the time between shipment and payment is
significantly reduced.
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VI. CONCLUSION
It can be concluded that the above proposed system is able to
provide solutions related to security issues discussed in a trade
scenario. It can be stated that with the use of blockchain
technology the process of traditional trade can be simplified
and optimized. With the security features provided by
blockchain technology, it is capable enough to develop trust
between a network. It ensures the integrity of the exchanged
information and can help in monitoring the entire process.
There are lots of rules and conditions that must be applied to
ensure the lawfulness of the international trade. Using
blockchain can ease the auditability in international trade and
can have a significant impact on simplifying the goal of
protecting the society and economy. Blockchain technology
keeps security over performance, so it affects the scalability
of blockchain-based systems. But the concept of sidechain can
be a solution to improve the scalability of the network. The
biggest beneficiaries would be small and medium-sized
enterprises (SMEs), which may have difficulty to prove their
credibility and face problems to gain trust. We conclude here
by stating that blockchain is capable to bring revolutionary
change in the field of trade and trade finance.
ACKNOWLEDGMENT
We would like to thank Principal Dr. B.K Mishra and all the
research department professors of Thakur College of
Engineering and Technology, Mumbai, for their suggestions
and reviews in conducting this research experiment. We
would like to extend our sincere gratitude for Mr. Andrea
Frosinini, Chairperson for Hyperledger Trade Finance -
Special Interest group, for his valuable inputs in
understanding the process of trade pain points.
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