Blockchain could provide a digital record of trade finance transactions Blockchain technology could radically shake up trade finance, one of the most archaic corners of the financial world, by reducing its reliance on paper documents.
On average, a cross-border transaction requires the exchange of 36 documents and 240 copies, says Kerstin Braun, president of Stenn Group, which provides trade finance.
By 2050, experts suggest blockchain could provide a digital record of transactions. This would streamline the paper trail and improve transparency between parties, allowing the introduction of practices such as “dynamic factoring”, where interest rates change as goods approach their final destination.
Trade finance bridges the gap between when an exporter ships a consignment of goods and the time an importer pays for it. Banks shoulder the interim risk, such as if the importer does not or cannot pay, and finance the transaction for a fee.
A letter of credit — a promise to pay for the goods if certain conditions are met — is sent to the exporter by the importer’s bank. This gives the exporter the green light to ship the goods. The exporter then presents proof of shipping to get financing from its own bank, which recoups the money directly from the importer’s bank.
At the moment, information is limited: the companies doing business are often in different parts of the world and may have little credit history. Information is also slow to reach the relevant parties as paper documents have to be physically exchanged. ‘Blockchain can provide detailed data on […]
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