BFC 5916: International Banking and Finance
A blockchain is a time-stamped series of immutable data records managed by a cluster of computers not owned by any single entity（Blockgeeks, 2019). Most people know the concept of a blockchain that comes from Bitcoin. In October of 2008, Satoshi Nakamoto sent a white paper (Bitcoin: A Peer to Peer” Electronic Cash System) attached to an email to a small group of Cyberpunks and Cryptologists to introduce a new digital currency named Bitcoin (Thombs, M, and Amy, A.T 2018). In the past 10 years, the fundamental concept of Bitcoin (blockchain) has been a hot topic that continues to dominate headlines worldwide. However, after a long time, people realized blockchain could use in other areas. This assignment analyzes several aspects of introducing the major benefits of blockchain to current trade finance.
Blockchain refers to a specific type of digital ledger of economic transactions which is fully public (Carlozo, L. 2017) and highly elastic (Ganne, E. 2018); it was created as the basic technology used in cryptocurrencies, the most well-known example is Bitcoin (Tapscott A. & Don Tapscott D. 2017). In other words, not all Distributed Ledger technology (DLT) based Blockchain platforms can be introduced as Blockchain; however, all Blockchain platforms should be based on the Distributed Ledger technology (DLT) (Krishamoorthi S. 2018). Ledgers are one of the most famous concepts in the financial sector, which can be updated and maintained by trusted third parties. Moreover, Blockchain is considered one of the most popular products of conversation between technology leaders in today’s finance industry, and its innumerable users can update it continually, and it seems impossible to occur corrupt practice. More specifically, a Blockchain database includes only two categories of records, transactions, and blocks (Carlozo, L. 2017). It can be classified in several ways, for instance, public or private, controlled by a financial group of companies, and easily assessed by everyone.
Trade finance can be introduced as financial transactions, which can be both domestic and international, and also consist of global trade and trade receivables finance (Silitschanu P. N.D.); about 80 to 90 percent of global trade is based on trade finance. The main trade finance transactions consist of issuing letters of credit, insurance services, lending, and so on (Silitschanu P. N.D.). It can be described as mainly trust and paper-based huge industry due to its several complex processes and many paper documents that still play an important role in the information record stage; it is also very difficult to digitize. However, all parties involved in a trade finance transaction, like banks, third parties, and companies, are also indispensable parts of the Blockchain network. Blockchain can provide digitized trust to related financial parties; there are several factors that a Blockchain can manage in order to reduce compliance costs and simplify processes in Trade Finance. For instance, minimizing the time spent on the transaction process by sharing data among the involved parties and improving transparency for all parties, even the regulators can monitor every transaction process in the network and can be able to audit and regulate every step. Moreover, in trade finance, all intermediaries can be considered part of the network; this situation can be introduced as intermediation (Krishnamoorthi S. 2018).
Blockchain can provide a new opportunity in trade finance. Sen Ganesh, who is a partner from Bain & Company, said, by comparison to traditional financial services and products, some distributed ledger technology-based trade platforms have a fascinating value status to their clients, also creating significant revenue increase and providing excellent control of expenditure (Fintechnews Singapore, 2019). One of the key advantages of Blockchain is that it can strengthen risk mitigation by using faster and low-cost working capital financing, deal with tariffs issues and transaction costs, and play as a systematized method to meet whole trading needs, for instance, tracking, consultation, management and so on (Fintechnews Singapore, 2019). Even technology offers attractive opportunities by providing efficiency in whole processes and reducing costs. However, it is not the catholicon; users also need to carefully consider the relationship between benefits and costs (Ganne E. 2018).
It can not be denied that Blockchain and DLT will become the most important part on top of the process where Trade Finance can start, even though there are still some challenges, like security and cost, should also be considered (Tapscott A. & Don Tapscott D. 2017).
E-commerce and online payment technology have been growing fast over the past few years and have generally become a trend in globalization. E-commerce (EC) is constantly undergoing technological evolution with the emergence of new and convenient electronic payment techniques, which becomes a key contributing factor toward the rapid growth of EC adoption (Trappey, A.J C., Trappey, C. V., & Hsu, A.P.T. 2016). It means that more and more people prefer online payment, this type of convenient consumption method in global e-commerce. As figure 1 shows below, most people choose to use credit card, PayPal, or debit card payment methods.
Figure. 1. Preferred online retail payment method worldwide 2017 ( statista.com, 2017)
However, those types of payment options require consumers to provide their private information to the platformer, such as an address, card number, and contact number. Therefore, consumers may take the risk of information leakage while shopping online. Today, people’s trade information is recorded in bookkeeping, and this information is isolated. They choose a third party they trust to facilitate and approve their transactions. This type of third party could be a bank, big social media company, or e-commerce platform; they centralize people’s private information, which can be a problem because they are “hackable.” In May 2014, the online auction giant (eBay) reported a cyberattack that it said exposed were names, addresses, dates of birth, and encrypted passwords of all its 145 million users (Taylor A, 2018). In July 2014, JP Morgan became a victim of a hack, leaking the data of more than half of all US households-76million-plus 7 million small businesses (Taylor A, 2018). Fortunately, discovering the concept of blockchain technology is the best way to solve this problem. Each trade is simply recorded on a blockchain that is secured by a unique cryptographic key. Each node is identified using the public key (Dorri, A., Marco S., Salil S. K., Jurdak, R. 2017). It is virtually unhackable. When a new record is written on the same block, everything about the previous record, including its content and key, will be put in a formula to generate a new cryptographic key for the second record. Then the third record that creates content and the key of the first two records will be put in the formula to generate a third key. Every node can verify a transaction by validating the signature of the transaction generator (Dorri, A., Marco S., Salil S. K., Jurdak, R. 2017). It means hackers need to do a lot of work attacking each node, which is virtually impossible. In addition. Blockchain is managed and distributed by the peer-to-peer network with a unique cryptographic key. It means preventing hackers obtain trade information by attacking large middle parties. This ensures Blockchain can achieve trustless consensus, meaning agreement between nodes can be achieved without a central trust broker (Dorri, A., Marco S., Salil S. K., Jurdak, R. 2017). Obviously, blockchain technology provides a safe environment for future trade businesses.
Nowadays, the sharp growth of global trade business means that cross-border payment will be frequent and complex. For economic transactions, almost all the fund transfers and payment relay to large intermediaries to settle. The fund transfer process might take a few days or even more, and there are services and proportional service fees. In addition, overseas consumption via credit card is immediate, but exchange rate volatility may result in higher repayment than you spend. How long a transaction is settled depends on how long the merchant’s bank holds an authorized transaction (Claire T, 2016). It means that the consumption is not immediately settled; exchange rate fluctuations will influence it. Fortunately, blockchain technology can settle a huge amount of work better and faster without the need for any intermediaries. Blockchain is a highly automatic secure, reliable system that reduces the need for intermediaries such as banks and financial service institutions, leading to their acceleration (Filipon, N 2018). Blockchain provides opportunities for improving the business process to be simpler and faster; it reduces a lot of paperwork, data tracking, and transaction process time (Filipon, N 2018). However, the technology is still in development, but most large financial institutions already pay attention to blockchain technology and apply it in their business area.
blockchain is helpful in improving transparency in trade finance. When a new block is created and added to a blockchain, it can be seen by everyone involved (Investopedia, 2019). As the above explains, all data, including date, participants, volume, and trade price, are recorded in the blockchain. This indicates that when this technology is applied in a transaction, both buyer and seller can view it at any time, and even other participants involved can easily access the whole information and thus are clearly aware of and understand the transaction process.
The increased transparency is definitely useful to enhance commercial trust, streamline third-party verification processes and reduce business delays. This is another reason that contributes to the high efficiency of blockchain technology, as discussed above. Transparency facilitates handling and approving documents, particularly in cross-border trading transactions (Live Bitcoin News, 2017).
(Source: Live Bitcoin News, 2017)
However, it is worth noting that the improvement in trade transparency also worries privacy. Due to the attributes of this technology, information is encoded on the network, not within a single institution responsible for auditing trade transactions and keeping records (Tapscott, 2016). This kind of efficiency and transparency brings about a further benefit of blockchain – cost saving. For example, TradeLens, a digital platform jointly developed by Maersk and IBM, was found that reduces thousands of dollars in cost by cutting the transit time of a supply chain in the U.S. by 40% during a 12-month trial (IBM, 2018). A reduction in transaction costs benefits trading parties and implies that more money is remaining in the local industry, which benefits local economies (Tapscott, 2016).
The last benefit of blockchain is its suitability. Let us review the formation of blockchain. When a new record is created into the same block, the whole information of the previous record will be used to generate a new cryptographic key of the following record; each transaction is sequential. This close relationship between adjacent two blocks not only makes blockchain more secure but also makes it auditable. This provides a trail for auditing assets. Records are standardized and verifiable; thus, it is traceable and easy for participants to query (Lewis, McPartland, Ranjan, 2017). This allows auditors to trace what happens with the initial transaction to the end of the publicly available blockchain without asking clients for some data or sending confirmation requests to third parties (Krishnan, 2018). Compared to the traditional audit process, cost efficiency will be significantly improved. Moreover, records are indelible and immutable, so the authenticity and reliability of auditing are highly increased. For example, during the examination of financial statements or for the purpose of compliance, companies will no longer be able to change their records or financial documents; on the other hand, blockchain provides an opportunity for auditors to audit all transactions, not just based on random samples (Krishnan, 2018). The increase in immutable audit objectives ensures audit results are more accurate and reliable.
The advantages of blockchain have broad application prospects that can bring unprecedented opportunities for development in trade finance. The application of blockchain can increase the security of individual private information, providing a safe environment for trade finance. The transparency of blockchain can enhance the trust in business among trading parties. It can also accelerate trading procedures, improving the efficiency of transactions. Due to transparency and efficiency, the cost of transactions will be reduced. The suitability of blockchain is significant for an audit because it can reduce costs and improve the reliability and authenticity of the audit. But the deficit of the blockchain remains the transparency of transactions led to the lack of privacy. In the future, these problems will eventually be solved with the maturity of blockchain technology.
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Published On: 01-01-1970
