BFC 5916: Blockchain Technology in Trade Finance

Finance

Blockchain technology is continuing to dominate headlines across the globe. What are the benefits of Blockchain in trade finance?The assignment must be word-processed on A4 paper, printed on a single side, and presented in businessreport format. It should include in the following order: A letter (or a memo) of transmittal (addressed to the lecturer stating […]

Introduction

The fiat currency model works through a central authority’s ability to hold its currency value, mainly the central bank. The central bank’s disposition to honor obligation gives the currency its value. Additionally, the central bank holds the right to monetary autonomy, which the bank uses to fund its goals and obligation, affecting the money conditions in the domestic economy and, ultimately, the end-consumer. Currency manipulation by governments necessitated independent developers to develop a decentralized currency system, which would use blockchain technology to secure transactions.

Blockchain technology revolutionized trade finance transactions and security. At its core, blockchain technology enables immutability in append-only, cryptographically secure peer-to-peer distributed ledger due to its exclusivity in transactions among consenting peers (Bashir, 2017). Therefore, blockchain allows safe peer-to-peer trades without a principal trusted arbitrator. Most cryptocurrency transactions use this technology, which has proved reliable in safeguarding online transactions. Blockchain technology offers secure, efficient, transparent, and trustworthy transactions between entities, making it appeal to futuristic financial business undertakings.

Blockchain and Trade Finance

Blockchain technology, a platform initially created to record Bitcoin transactions, has come a long way in pushing and exploring the boundaries of its capabilities. It integrates a digital ledger of agreements, resources, and contracts, which must be substantiated, documented, and promulgated across multiple computers; therefore, it is known as a distributed ledger technology (DLT). Furthermore, the platform also presents a unique category of database that creates and sets out data in sequential blocks. Each block comprises minute pieces of data that validate the content of the previous block. Thus, the system detects any tampering or unsanctioned modification in its chain, making the ledger tamper-proof. Therefore, trade finance will significantly benefit from blockchain technology, enabling individuals, institutions, and entities to share data securely without fear of fraudulent transactions or ledger tampering.

Present-day trade finance still adopts outdated, paper-based, and prolonged methods making it sluggish, cumbersome, and expensive (Khatri, 2019). The agreement on the paper is exchanged, modified, appraised, and made manually. Furthermore, the manual processing of documents generates a scope of inconsistencies in bookkeeping or reconciliation and audit difficulties. The Trade finance sector is also more prone to human error due to outdated record-keeping and data maintenance methods. Manual bookkeeping is a cost-ineffective method as it increases the chances of data redundancy. More so, any past accounting errors need immense human effort and time for them to be spotted and fixed. Blockchain technology helps handle these inadequacies by limiting, enhancing, and digitizing the progression of trade finance, making it more convenient, economical, and transparent.

Blockchain enables the utilization of a solitary agreement between direct participants in the business deal: the financial entities and foreign traders. The technology applies digitized ledgers of title and supports reimbursement and implementation, providing stakeholders with better reflectivity and real-time apprise on the contract. The computerized payment device streamlines the cash sequence by minimizing operation expenses, thus simplifying trade peer-to-peer businesses easily, securely, and appropriately (Tolu, 2019). The reason therein is that the technology eradicates fraud by improving the transparency of the trade process. In brief, by providing a highly automated, transparent, and better-connected infrastructure, blockchain facilitates a more efficient trade finance process.

Blockchain technology ensures the secure sharing of information between organizations. The technology applies self-sufficiently substantiated multifaceted cryptography to authenticate each business within the system. More and more medium and small-sized organizations are getting involved in cross-border trading; trust in their overseas trading partners is one of the biggest challenges they face. Blockchain, in this regard, would establish an ecosystem for international trade, where trust is an integral part (“Nordea opens up,” 2019). Therefore, blockchain provides the technology and resources to transform how financial institutions serve their trade finance clients, thus enabling more convenient access to credit while increasing transparency and minimizing risk. Blockchain has the potential to change financial transactions by making it easier to exchange trade-related data.

References

Bashir, I. (2017). Mastering blockchain distributed ledgers, decentralization, and smart contracts explained. Birmingham, LZ: Packt.

Khatri, Y. (2019, April 25). Top 3 Japanese banks to roll out services on Marco Polo blockchain. Retrieved from https://www.coindesk.com/top-3-japanese-bank-to-roll-out-services-on-marco-polo-blockchain

Nordea opens up we: trade blockchain trade finance to clients. (2019, May 10). Retrieved from https://www.ledgerinsights.com/nordea-we-trade-blockchain-trade-finance/.

Tolu. (2019, May 03). IBM Blockchain elaborates on trade finance network we: trade and its real-world applications. Retrieved from https://bitcoinexchangeguide.com/ibm-blockchain-elaborates-on-trade-finance-network-we-trade-and-its-real-world-applications/


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