Of all the learnings from the pandemic, the realisation that digital transformation is no longer a choice is perhaps one of the largest – and global trade is no exception to this.
Recent challenges across the industry, such as the Suez Canal crisis and disruption to the supply chain at the height of the pandemic, have made the case for change stronger than ever.
There’s an obvious need for universally adopted, digital platforms and standards in trade.
Among the new technologies fit to deliver, blockchain could be the most effective platform because of its ability to drive collaboration on common, decentralised networks.
Sizing up the challenge
Trade finance is one of the most critical processes underpinning global trade, but today’s processes are anything but digital.
Take Letters of Credit (LCs) for example, a key trade finance instrument that provides risk mitigation and finance to traders around the world.
A bank, at the request of their customer, will promise to pay a supplier on the presentation of evidence that they shipped goods the buyer purchased.
This evidence, by a large margin, remains paper-based and stuffed into courier bags. Invoices, packing lists, insurance documents, and many others are printed, signed, stamped, and hand couriered to the bank that issued the credit.
They are checked, double-checked, and determined to be compliant or have discrepancies. This whole process takes at least a week, and even more importantly requires paper to be printed in offices and staff to be present to send and receive them.
Technology to help digitise these processes has only succeeded at a very small scale to date, and the reason is there is no standard connectivity between banks and corporates for trade finance-related communication and data sharing.
As a result, information sharing is ineffective, often resulting in paper documents being hand couriered to each party as the only common way of trusted communication, and in some cases, asset transfer through original documents of title (i.e. ownership over the goods onboard a shipping vessel).
The multiple parties involved – importers, exporters, banks, shippers, insurers, and so on – all need to be on a common network so that data flow between each party can take place quickly and seamlessly.
This is where blockchain is most effective as it allows every participant to collaborate on a common network – synchronising data across all transactions, giving buyers and sellers instant access and real-time visibility of their transactions.