How Blockchain Can Revolutionise International Trade Finance and Supply Chains

November 20, 2023

Supply networks and financial dealings must be efficient and open to all parties involved in the complicated web of international trade. Traditional trade finance systems, packed with complexities and inefficiencies, have long been a roadblock in the seamless flow of products around the globe. Blockchain technology, a distributed and transparent ledger system, is entering the scene and radically altering the world of trade finance and global supply chains.

Challenges in Trade Financing and Supply Chain Management

International trade would not be possible without trade finance, which includes a wide range of monetary tools and procedures designed to ease cross-border transactions. The traditional trade finance system is built on paper-based documentation, such as letters of credit and bills of lading, which causes delays, inaccuracies, and a lack of transparency. Important links in the global supply chain, import and export procedures nevertheless confront hurdles including the inefficiency of paper-based processes and the possibility of fraud and inaccuracies.

Information asymmetries and inefficiencies are common in the global supply chain, a complex network involving various stakeholders from manufacturers to distributors to retailers. The lack of real-time insight into the movement of commodities can result in delays, greater expenses, and a higher likelihood of errors. These obstacles not only slow down trade but also put enterprises at serious danger financially.

The Blockchain Revolution

A decentralised and distributed ledger that records transactions over a network of computers is at the heart of the blockchain revolution. Although initially recognised for its role in the creation of virtual currencies like Bitcoin, the blockchain technology behind them has shown to have far-reaching ramifications outside the domain of digital currencies. Blockchain’s decentralised nature, transparency, and immutability make it a potential game-changer in international trade finance and supply chain management.

Blockchain’s distributed ledger structure removes the middleman from financial dealings. In the context of international trade finance, this means that parties to a transaction can communicate with one another in a fully automated way by using smart contracts. Since the parameters of the contract are public and cannot be changed, the time spent on transactions is cut down significantly, and the likelihood of fraud and disputes is reduced.

But what is a smart contract?

A smart contract is like an online deal that lives on a computer. It’s a computer programme that, when certain conditions are met, will automatically carry out, enforce, or check the terms of a contract. Think of it as a contract that follows its own rules, which are written in code.

If you have a smart contract, the terms of your deal are written in a language used for writing computers and saved on the blockchain, which is like a safe and open digital record. This makes sure that the contract can’t be changed and can be seen by everyone concerned.

Also, it’s fully decentralised and reliable: this means that the deal doesn’t need to be watched over by a third party, like a bank or a lawyer. The code itself makes sure that the agreement is followed, which makes the whole process more reliable.

An easy way to think about a smart contract is as a computer programme that does what it is told to do. When the agreed-upon conditions are met, it acts on its own. This makes agreements more safe, clear, and automatic.

Another area where blockchain can help is indeed trade finance and supply chain. The blockchain records all transactions in a distributed ledger that is accessible to all parties involved in the transaction in real time. With this level of visibility, all parties involved in the supply chain can follow packages as they travel from manufacturer to retailer. This not only decreases the danger of fraud but also enables speedier identification and resolution of issues such as delays or anomalies.

Because of blockchain’s immutability, once a transaction has been recorded, it cannot be changed or removed, adding another layer of security to the system’s decentralisation and transparency. The immutability of the blockchain means that all parties involved in a trade finance transaction can have faith in the data being presented to them.

Trade finance and supply chain management have the potential to become more efficient and transparent if blockchain is adopted. LC Lite, our sibling firm, is a blockchain-enabled platform that digitises global trade receivables finance using a unique token-powered transaction mechanism. For further information, sisit LC Lite website for more info.