DC Velocity - Digital 2018

Special Delivery

T he last two years or so have been like a rollercoaster ide in the land of blockchain. Both existing and new players have been considering and evaluating the opportunities and the downsides of this important technological development.

The blockchain concept originally was developed as an efficient and secure way to manage and register transactions made with cryptocurrencies (for example, Bitcoin). Until now, it has mostly been of interest to individuals and financial institutions. But with its distributed-ledger technology (DLT) and smart contracts, blockchain has great potential to benefit all companies across the global supply chain—not just banks. This article will briefly explain what blockchain is, and then discuss why it is important for all parties involved in global trade transactions to adopt it.

BEYOND BANKS

Blockchain is a new computing infrastructure that emerged
to power the Bitcoin digital currency application. In
essence, blockchain provides the opportunity to have a
connected, secure world with a distributed ledger that
centralizes data for the involved parties and the ability to
run automated checks and processes—called “smart code”
or “smart contracts,” depending on the legal implications
of the code—that trigger all kinds of events (for example,
payments).

The distributed-ledger technology component of blockchain allows each counterparty to have its own copy of the same ledger, similar to the way a Google doc allows multiple parties to view the same information at the same time. The database is built to be immutable, which means there is inherent security. Blockchain also allows for smart contracts to be coded and connected in such a way that the contract automatically executes an event if certain preconditions are met. An example would be a (near) real-time payment when goods are delivered.

Banks that deal in trade finance—those that would, for example, give importers or exporters a loan to finance their global trading activities—are viewing blockchain as a technology that can provide these entities with a single view of the trade finance transactions in real time. But what about the other parties involved in trade finance? In addition to traditional banks, non-banking participants (for example, shipping companies, insurers of the goods, and credit rating agencies, among others) and entities that fulfill the role of importers and/or exporters are all part of the trade finance chain. They already play a role in traditional payment methods, such as the commonly used letter of credit (L/C) described below.

For a trade finance blockchain to be successful, it requires

If global supply chains are to gain the full
benefit of this technology for managing
payments and related data, all parties that
play a role in global trade must be involved.